GMS(GMS) - 2023 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section highlights that the report contains forward-looking statements, based on current expectations and involving known and unknown risks and uncertainties, cautioning against undue reliance due to various factors like economic conditions, market cycles, and supply chain disruptions - Forward-looking statements are identified by terms like "anticipate," "believe," "estimate," "expect," and involve known and unknown risks and uncertainties beyond the company's control[10][11] - Key risk factors include the ongoing effects of the COVID-19 pandemic, general business and financial market conditions (inflation, interest rates, supply chain, labor shortages), dependency on cyclical construction markets, competition, product price fluctuations, and the ability to implement growth strategies and manage operating costs[11][12][15] - The company does not undertake any obligation to update or revise forward-looking statements, except as required by law[14] PART I – Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with detailed notes on business, accounting policies, and other financial details for the periods ended October 31, 2022 Condensed Consolidated Balance Sheets (Unaudited) The balance sheets show the company's financial position, with total assets increasing by 4.56% and total stockholders' equity by 11.22% from April 30, 2022, to October 31, 2022 | Metric | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :------------------------------ | :---------------------------- | :-------------------- | :------- | | Total assets | $3,245,945 | $3,104,399 | $141,546 | 4.56% | | Total liabilities | $2,062,006 | $2,039,901 | $22,105 | 1.08% | | Total stockholders' equity | $1,183,939 | $1,064,498 | $119,441 | 11.22% | Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) The statements of operations show significant year-over-year growth in net sales, gross profit, and net income for the three and six months ended October 31, 2022, driven by inflationary pricing and increased construction activity | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Net sales | $1,430,979 | $1,150,551 | $280,428 | 24.37% | | Gross profit | $464,500 | $371,870 | $92,630 | 24.91% | | Operating income | $153,280 | $111,936 | $41,344 | 36.94% | | Net income | $103,153 | $74,361 | $28,792 | 38.72% | | Basic EPS | $2.44 | $1.72 | $0.72 | 41.86% | | Diluted EPS | $2.41 | $1.69 | $0.72 | 42.60% | | Metric | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Net sales | $2,790,532 | $2,192,627 | $597,905 | 27.27% | | Gross profit | $899,221 | $707,703 | $191,518 | 27.06% | | Operating income | $287,872 | $205,974 | $81,898 | 39.76% | | Net income | $192,623 | $135,563 | $57,060 | 42.09% | | Basic EPS | $4.54 | $3.14 | $1.40 | 44.59% | | Diluted EPS | $4.47 | $3.09 | $1.38 | 44.66% | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) The statements of stockholders' equity show an increase in total stockholders' equity from April 30, 2022, to October 31, 2022, primarily driven by net income, partially offset by share repurchases and foreign currency translation adjustments | Metric | As of Oct 31, 2022 (in thousands) | As of April 30, 2022 (in thousands) | Change (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | | Common Stock | $418 | $428 | $(10) | | Additional Paid-in Capital | $477,558 | $522,136 | $(44,578) | | Retained Earnings | $740,600 | $547,977 | $192,623 | | Accumulated Other Comprehensive Loss | $(34,637) | $(6,043) | $(28,594) | | Total Stockholders' Equity | $1,183,939 | $1,064,498 | $119,441 | - Net income contributed $192.6 million to retained earnings during the six months ended October 31, 2022[22] - Repurchase and retirement of common stock reduced additional paid-in capital by $49.6 million during the six months ended October 31, 2022[22] Condensed Consolidated Statements of Cash Flows (Unaudited) The cash flow statements indicate a significant shift from cash used in operating activities in the prior year to cash provided by operating activities in the current year, with decreased cash used in investing activities and increased cash used in financing activities due to share repurchases and an acquisition holdback payment | Activity | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Cash provided by (used in) operating activities | $102,861 | $(77,095) | $179,956 | | Cash used in investing activities | $(23,394) | $(140,629) | $117,235 | | Cash (used in) provided by financing activities | $(55,140) | $110,103 | $(165,243) | | Increase (decrease) in cash and cash equivalents | $22,285 | $(107,702) | $129,987 | | Cash and cash equivalents, end of period | $124,201 | $59,310 | $64,891 | - Operating cash flow improved significantly, turning from a net use of $77.1 million in 2021 to a net provision of $102.9 million in 2022, primarily due to better inventory management compared to the prior year[24][143] - Cash used in investing activities decreased by $117.2 million, mainly due to a $122.4 million decrease in cash used for acquisitions, partially offset by a $5.6 million increase in capital expenditures[24][144] - Cash used in financing activities increased by $165.2 million, driven by a $36.4 million increase in common stock repurchases and a $13.5 million acquisition holdback payment related to the Westside acquisition[24][146] Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering significant accounting policies, business combinations, accounts receivable, goodwill, debt, leases, income taxes, equity, compensation, fair value, commitments, segments, and earnings per share 1. Business, Basis of Presentation and Summary of Significant Accounting Policies GMS Inc. operates a network of approximately 300 distribution centers and 100 tool sales/rental centers across the U.S. and Canada, offering various construction products, with financial statements prepared using GAAP and management estimates, and no material impact expected from new accounting guidance adoption - GMS Inc. operates approximately 300 distribution centers and 100 tool sales, rental and service centers, providing wallboard, ceilings, steel framing, and complementary construction products to residential and commercial contractors in the U.S. and Canada[26][102] | Insurance Liability Type | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------ | :---------------------------- | | Medical self-insurance | $4,128 | $3,371 | | General liability, automobile and workers' compensation | $28,197 | $21,707 | | Expected recoveries for insurance liabilities | $(9,099) | $(4,973) | - The company is adopting new accounting guidance for reference rate reform and business combinations, but does not expect a material impact on its consolidated financial statements[41][42] 2. Business Combinations The company accounts for business combinations by recognizing acquired assets and liabilities at fair value, settling a $13.5 million holdback liability for Westside and acquiring CSSWF, which had an immaterial impact, while pro forma net sales for the six months ended October 31, 2021, were $2,269.7 million - Settled a $13.5 million holdback liability related to the Westside Building Material acquisition during the six months ended October 31, 2022[44][146] - Acquired Construction Supply of Southwest Florida, Inc. (CSSWF) on June 1, 2022, a distributor of stucco, building, and waterproofing supplies, with an immaterial impact on consolidated financial statements[45][110] | Metric | 3 Months Ended Oct 31, 2021 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Pro Forma Net sales | $1,170,557 | $2,269,667 | | Pro Forma Net income | $75,369 | $142,425 | 3. Accounts Receivable Trade accounts and notes receivable, net of allowances, increased to $872.9 million as of October 31, 2022, from $750.0 million as of April 30, 2022, with the allowance for expected credit losses increasing by $0.7 million | Metric | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----------------------------------- | :------------------------------ | :---------------------------- | | Trade receivables | $743,227 | $675,724 | | Other receivables | $140,406 | $83,668 | | Allowance for expected credit losses | $(5,750) | $(5,087) | | Other allowances | $(5,001) | $(4,259) | | Total Trade accounts and notes receivable | $872,882 | $750,046 | - The allowance for expected credit losses increased by $0.7 million, from $5.087 million as of April 30, 2022, to $5.750 million as of October 31, 2022[47] 4. Goodwill and Intangible Assets Goodwill decreased slightly to $690.3 million as of October 31, 2022, primarily due to translation adjustments, while total intangible assets, net, decreased to $411.2 million, with amortization expense of $34.6 million for definite-lived assets | Metric | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----------------------------------- | :------------------------------ | :---------------------------- | | Net Carrying Amount of Goodwill | $690,288 | $695,897 | | Total Intangible Assets, net | $411,200 | $454,747 | - Goodwill decreased by $5.6 million, primarily due to a negative translation adjustment of $7.0 million, partially offset by $0.7 million from new acquisitions and $0.7 million from prior period acquisition accounting adjustments[48] - Amortization expense for definite-lived intangible assets was $34.6 million for the six months ended October 31, 2022, an increase from $30.5 million in the prior year period[50] 5. Long-Term Debt The company's total carrying value of debt increased to $1,214.2 million as of October 31, 2022, including Term Loan Facility, Senior Notes, and ABL Facility, with significant available borrowing capacity and full compliance with all debt covenants | Debt Component | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----------------------------------- | :------------------------------ | :---------------------------- | | Term Loan Facility | $502,058 | $504,613 | | Senior Notes | $350,000 | $350,000 | | ABL Facility | $240,000 | $211,134 | | Finance lease obligations | $126,480 | $120,138 | | Installment notes | $3,347 | $7,086 | | Carrying value of debt | $1,214,162 | $1,184,190 | | Long-term debt, less current portion | $1,166,544 | $1,136,585 | - As of October 31, 2022, the company had $271.8 million available borrowing capacity under its ABL Facility and $22.0 million under its Canadian Revolving Credit Facility[58][61] - The company was in compliance with all covenants contained in the Term Loan Facility, Senior Notes indenture, and ABL Facility as of October 31, 2022[59][60] 6. Leases Total lease cost for the six months ended October 31, 2022, was $52.9 million, an increase from the prior year, with cash paid for operating leases at $29.9 million and finance leases at $16.5 million, and weighted-average remaining lease terms of 4.6 and 3.5 years respectively | Lease Cost Component | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Amortization of right-of-use assets | $11,797 | $11,156 | | Interest on lease liabilities | $3,561 | $4,424 | | Operating lease cost | $25,979 | $22,327 | | Variable lease cost | $11,580 | $8,552 | | Total lease cost | $52,917 | $46,459 | | Cash Flow from Leases | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating cash flows from operating leases | $29,905 | $22,727 | | Operating cash flows from finance leases | $3,561 | $4,424 | | Financing cash flows from finance leases | $16,450 | $15,154 | - Weighted-average remaining lease terms are 4.6 years for operating leases and 3.5 years for finance leases as of October 31, 2022[64] 7. Income Taxes The effective income tax rate for the six months ended October 31, 2022, was 26.1%, up from 24.4% in the prior year, primarily due to foreign and state taxes and anticipated changes in Canadian tax regulations, with a $11.5 million valuation allowance against deferred tax assets | Metric | 6 Months Ended Oct 31, 2022 | 6 Months Ended Oct 31, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Effective income tax rate | 26.1% | 24.4% | - The increase in the effective tax rate was primarily due to the impact of foreign and state taxes and actions taken in anticipation of expected changes in Canadian tax regulations[66][136] - A valuation allowance of $11.5 million was held against deferred tax assets as of October 31, 2022[67] 8. Stockholders' Equity The Board approved an expanded $200.0 million share repurchase program, under which the company repurchased 1.1 million shares for $49.6 million, leaving $161.2 million authorized, while accumulated other comprehensive loss significantly increased to $(34.6) million due to foreign currency translation adjustments - An expanded share repurchase program of up to $200.0 million was approved on June 20, 2022, replacing the previous $75.0 million authorization[69][140] - Repurchased approximately 1.1 million shares of common stock for $49.6 million during the six months ended October 31, 2022[70][140] - As of October 31, 2022, $161.2 million remained authorized under the share repurchase program[70][140] | Component of Accumulated Other Comprehensive Loss | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :------------------------------------------------ | :------------------------------ | :---------------------------- | | Foreign Currency Translation | $(36,984) | $(5,041) | | Derivative Financial Instruments | $2,347 | $(1,002) | | Total Accumulated Other Comprehensive Loss | $(34,637) | $(6,043) | 9. Equity-Based Compensation Equity-based compensation expense was $6.5 million for the six months ended October 31, 2022, with stock option activity including 184,000 options granted and 91,000 exercised, restricted stock unit activity seeing 201,000 units granted and 164,000 vested, and 33,000 shares purchased through the ESPP - Equity-based compensation expense totaled $6.5 million for the six months ended October 31, 2022, an increase from $4.8 million in the prior year[72] | Stock Option Activity (6 Months Ended Oct 31, 2022) | Number of Options (in thousands) | Weighted Average Exercise Price | | :-------------------------------------------------- | :------------------------------- | :------------------------------ | | Outstanding as of April 30, 2022 | 1,245 | $25.65 | | Options granted | 184 | $53.60 | | Options exercised | (91) | $15.92 | | Outstanding as of October 31, 2022 | 1,336 | $30.16 | | Exercisable as of October 31, 2022 | 913 | $23.08 | - As of October 31, 2022, there was $7.1 million of unrecognized compensation cost for stock options, expected to be recognized over 2.2 years[73] - As of October 31, 2022, there was $10.4 million of unrecognized compensation cost for nonvested restricted stock units, expected to be recognized over 2.1 years[75] | ESPP Activity | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Number of shares purchased | 33 | 43 | | Average purchase price | $40.05 | $26.36 | 10. Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests Liabilities for stock appreciation rights, deferred compensation, and redeemable noncontrolling interests increased from $44.1 million to $50.2 million as of October 31, 2022, primarily due to fair value changes, with total related expense at $6.4 million for the six-month period | Metric | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----------------------------------- | :------------------------------ | :---------------------------- | | Stock Appreciation Rights | $36,155 | $30,878 | | Deferred Compensation | $2,327 | $2,205 | | Redeemable Noncontrolling Interests | $11,739 | $11,026 | | Total | $50,221 | $44,109 | - Total expense related to these instruments was $6.4 million for the six months ended October 31, 2022, compared to $2.8 million in the prior year period[79] 11. Fair Value Measurements The company's interest rate swaps, hedging a $500.0 million notional amount of its Term Loan Facility, had a fair value asset of $3.3 million as of October 31, 2022, while the fair value of Senior Notes was $274.8 million, below their carrying amount | Metric | October 31, 2022 (in thousands) | April 30, 2022 (in thousands) | | :----------------------------------- | :------------------------------ | :---------------------------- | | Interest rate swaps (Level 2) | $3,300 | $(1,136) | - The company has interest rate swap agreements with a notional amount of $500.0 million to convert the variable interest rate on a portion of its Term Loan Facility to a fixed 1-month LIBOR interest rate of 2.46%[80] | Debt Instrument | Carrying Amount (in thousands) | Fair Value (in thousands) | | :----------------------------------- | :----------------------------- | :------------------------ | | Senior Notes (Oct 31, 2022) | $350,000 | $274,750 | | Senior Notes (Apr 30, 2022) | $350,000 | $310,625 | 12. Commitments and Contingencies The company is involved in various lawsuits and administrative actions, including product liability and asbestos-related claims, with 1,046 asbestos-related lawsuits filed since 2002, 992 dismissed, 42 pending, and 12 settled without material financial impact - The company faces inherent risk of product liability claims, including those related to alleged exposure to asbestos-containing products distributed prior to 1979[165] - Since 2002, approximately 1,046 asbestos-related personal injury lawsuits have been filed; 992 have been dismissed, 42 are pending, and 12 have been settled without material financial impact[165] 13. Segments The company's segment results show strong performance in geographic divisions, with net sales of $2,727.0 million and Adjusted EBITDA of $353.2 million for the six months ended October 31, 2022, with net sales increasing across all product categories, led by wallboard, and the United States accounting for the majority of sales and assets | Segment | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Geographic divisions Net Sales | $2,726,988 | $2,173,040 | | Geographic divisions Gross Profit | $860,006 | $700,605 | | Geographic divisions Adjusted EBITDA | $353,176 | $274,940 | | Total Net Sales | $2,790,532 | $2,192,627 | | Total Gross Profit | $899,221 | $707,703 | | Total Adjusted EBITDA | $370,527 | $277,618 | | Product Line | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Wallboard | $1,106,111 | $804,657 | $301,454 | 37.46% | | Ceilings | $326,876 | $278,937 | $47,939 | 17.20% | | Steel framing | $553,048 | $468,276 | $84,772 | 18.10% | | Complementary products | $804,497 | $640,757 | $163,740 | 25.55% | | Total net sales | $2,790,532 | $2,192,627 | $597,905 | 27.27% | | Geographic Area | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | United States Net Sales | $2,440,195 | $1,850,893 | | Canada Net Sales | $350,337 | $341,734 | | Total Net Sales | $2,790,532 | $2,192,627 | | United States Property and Equipment, net (Oct 31, 2022) | $326,930 | N/A | | Canada Property and Equipment, net (Oct 31, 2022) | $36,053 | N/A | 14. Earnings Per Common Share Basic earnings per common share increased to $4.54 for the six months ended October 31, 2022, from $3.14 in the prior year, while diluted EPS rose to $4.47 from $3.09, with weighted average common shares outstanding decreasing slightly due to share repurchases | Metric | 3 Months Ended Oct 31, 2022 | 3 Months Ended Oct 31, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $2.44 | $1.72 | | Diluted EPS | $2.41 | $1.69 | | Basic weighted average common shares outstanding (in thousands) | 42,232 | 43,135 | | Diluted weighted average common shares outstanding (in thousands) | 42,887 | 43,894 | | Metric | 6 Months Ended Oct 31, 2022 | 6 Months Ended Oct 31, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $4.54 | $3.14 | | Diluted EPS | $4.47 | $3.09 | | Basic weighted average common shares outstanding (in thousands) | 42,390 | 43,112 | | Diluted weighted average common shares outstanding (in thousands) | 43,102 | 43,933 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting strong performance driven by inflationary pricing, active residential construction, and an improving commercial landscape, detailing market conditions, business strategy, key financial highlights, and a comprehensive analysis of financial results for the three and six months ended October 31, 2022 Overview GMS Inc. is a leading distributor of building products, operating a vast network of distribution and tool centers across the U.S. and Canada, leveraging a business model that combines national scale with a local market focus for economies of scale and high customer service - GMS Inc. operates approximately 300 distribution centers and 100 tool sales, rental and service centers, offering wallboard, ceilings, steel framing, and complementary construction products[102] - The company serves residential and commercial contractor customers across the United States and Canada, leveraging a unique operating model that combines national platform benefits with a local go-to-market focus[102] Market Conditions and Outlook The residential market, despite a slowdown in single-family starts due to affordability concerns, is supported by strong demand and backlog, with multi-family construction expected to remain strong, while the commercial market shows improvement in medical, hospitality, and governmental projects amidst inflationary pressures - Residential single-family starts are slowing down due to affordability concerns (inflation, higher mortgage rates), but a backlog of work remains, and long-term demand fundamentals are solid[103][104] - Multi-family residential construction is expected to remain strong through the fiscal year due to increasing starts and a large backlog[103] - Commercial demand is improving, with stronger year-over-year wallboard sales and volumes, particularly in medical, hospitality, and governmental projects, though larger office projects remain tempered[105] - Both residential and commercial contractors face inflationary pressures and availability constraints for fuel, labor, and building products[106] Business Strategy The company's business strategy focuses on expanding market share in core products, growing complementary product lines for diversification and higher margins, and platform expansion through greenfield openings and strategic acquisitions, while emphasizing improved productivity and profitability by leveraging scale, technology, and best practices - Strategic pillars include expanding market share in core products (wallboard, ceilings, steel framing) and growing complementary product lines (insulation, lumber, tools) to diversify offerings and drive higher sales and margins[109] - Platform expansion involves greenfield openings in adjacent markets and strategic acquisitions in new and contiguous markets, supported by a rigorous targeting process and experienced integration team[109] - The company aims to drive improved productivity and profitability by leveraging its scale, technology, and best practices to achieve margin expansion and earnings growth[109] Highlights For the six months ended October 31, 2022, GMS Inc. achieved significant financial growth, with net sales increasing by 27.3% to $2,790.5 million, net income rising by 42.1% to $192.6 million, and Adjusted EBITDA growing by 33.5% to $370.5 million, while expanding its footprint through one acquisition and multiple greenfield openings | Metric | 6 Months Ended Oct 31, 2022 (in millions) | 6 Months Ended Oct 31, 2021 (in millions) | YoY Change (in millions) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------------------- | :----------- | | Net sales | $2,790.5 | $2,192.6 | $597.9 | 27.3% | | Net income | $192.6 | $135.6 | $57.0 | 42.1% | | Adjusted EBITDA | $370.5 | $277.6 | $92.9 | 33.5% | | Adjusted EBITDA margin | 13.3% | 12.7% | 0.6 pp | N/A | - Growth in net sales was primarily due to inflationary pricing, active residential construction, improving commercial landscape, volume growth in wallboard, ceilings, and complementary products, and contributions from acquisitions[112] - Completed one acquisition (CSSWF) and opened three greenfield locations (Wildwood, FL; Cleveland, OH; Greenville, NC), along with six new Ames Taping Tools stores[110][111][112] Results of Operations This section provides a detailed analysis of the company's financial performance for the three and six months ended October 31, 2022, covering net sales, gross profit, operating expenses, interest expense, and income taxes, highlighting the impact of inflationary pricing, acquisitions, and market conditions Three Months Ended October 31, 2022 and 2021 For the three months ended October 31, 2022, net sales increased by 24.4% to $1,431.0 million, gross profit rose by 24.9% to $464.5 million, and net income increased by 38.7% to $103.2 million, driven by inflationary pricing, volume growth, and rising interest rates Net Sales Net sales for the three months ended October 31, 2022, increased by 24.4% to $1,431.0 million, primarily due to inflationary pricing, active residential construction, improving commercial landscape, and the Ames acquisition, with organic net sales growing by 22.2% | Product Line | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Wallboard | $584,557 | $414,522 | $170,035 | 41.0% | | Ceilings | $159,601 | $140,866 | $18,735 | 13.3% | | Steel framing | $278,152 | $272,000 | $6,152 | 2.3% | | Complementary products | $408,669 | $323,163 | $85,506 | 26.5% | | Total net sales | $1,430,979 | $1,150,551 | $280,428 | 24.4% | - Organic (base business) net sales increased by 22.2% to $1,405.8 million, driven by inflationary pricing, active residential construction, and volume growth in wallboard, ceilings, and complementary products[117][118] - Recently acquired net sales contributed $35.7 million, primarily from the Ames, Kimco Supply Company, and CSSWF acquisitions[117] Gross Profit and Gross Margin Gross profit increased by 24.9% to $464.5 million, and gross margin improved slightly to 32.5% for the three months ended October 31, 2022, primarily due to successful pass-through of product inflation, strong residential construction, improving commercial sales, and incremental profit from acquisitions | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Gross profit | $464,500 | $371,870 | $92,630 | 24.9% | | Gross margin | 32.5% | 32.3% | 0.2 pp | N/A | - The increase in gross profit and margin was driven by successful pass-through of product inflation, continued strength in residential construction, improving commercial sales, and incremental gross profit from acquisitions[119] Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses increased by 21.0% to $279.0 million for the three months ended October 31, 2022, primarily due to higher payroll, fuel, travel, and facilities costs driven by increased sales volume, inflationary pressures, and acquisitions, while decreasing as a percentage of net sales to 19.5% | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | SG&A expenses | $278,994 | $230,531 | $48,463 | 21.0% | | % of net sales | 19.5% | 20.0% | (0.5 pp) | N/A | - The increase in SG&A was primarily due to higher payroll, fuel, travel, and facilities costs, driven by increased sales volume, inflationary pressures, and incremental expenses from acquisitions[122] Depreciation and Amortization Expense Depreciation and amortization expense increased by 9.6% to $32.2 million for the three months ended October 31, 2022, with depreciation rising due to property and equipment from the Ames acquisition and capital expenditures, and amortization increasing due to definite-lived intangible assets from the Ames acquisition | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Depreciation | $15,058 | $13,703 | $1,355 | 9.9% | | Amortization | $17,168 | $15,700 | $1,468 | 9.4% | | Total Depreciation and amortization | $32,226 | $29,403 | $2,823 | 9.6% | - Depreciation increased due to property and equipment obtained in the Ames acquisition and capital expenditures. Amortization increased due to definite-lived intangible assets from the Ames acquisition[123] Interest Expense Interest expense increased by 8.9% to $16.1 million for the three months ended October 31, 2022, primarily due to increases in interest rates and average debt outstanding | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Interest expense | $16,055 | $14,744 | $1,311 | 8.9% | - The increase in interest expense was primarily driven by higher interest rates and an increase in average debt outstanding[124] Income Taxes The provision for income taxes increased by 51.4% to $36.0 million, with the effective tax rate rising to 25.9% for the three months ended October 31, 2022, mainly due to anticipated changes in Canadian tax regulations and stock-based compensation | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Provision for income taxes | $35,995 | $23,769 | $12,226 | 51.4% | | Effective tax rate | 25.9% | 24.2% | 1.7 pp | N/A | - The change in the effective income tax rate was primarily due to actions taken in anticipation of expected changes in Canadian tax regulations and stock-based compensation[126] Six Months Ended October 31, 2022 and 2021 For the six months ended October 31, 2022, net sales increased by 27.3% to $2,790.5 million, gross profit rose by 27.1% to $899.2 million, and net income increased by 42.1% to $192.6 million, driven by inflationary pricing, acquisitions, and higher sales volume Net Sales Net sales for the six months ended October 31, 2022, increased by 27.3% to $2,790.5 million, primarily due to inflationary pricing, active residential construction, improving commercial landscape, and acquisitions, with organic net sales growing by 23.1% | Product Line | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Wallboard | $1,106,111 | $804,657 | $301,454 | 37.5% | | Ceilings | $326,876 | $278,937 | $47,939 | 17.2% | | Steel framing | $553,048 | $468,276 | $84,772 | 18.1% | | Complementary products | $804,497 | $640,757 | $163,740 | 25.6% | | Total net sales | $2,790,532 | $2,192,627 | $597,905 | 27.3% | - Organic (base business) net sales increased by 23.1% to $2,699.5 million, driven by inflationary pricing, active residential construction, volume growth in wallboard, ceilings, and complementary products, and an improving commercial landscape[130][131] - Recently acquired net sales contributed $109.6 million, primarily from the Westside, Ames, Kimco Supply Company, and CSSWF acquisitions[130] Gross Profit and Gross Margin Gross profit increased by 27.1% to $899.2 million for the six months ended October 31, 2022, primarily due to successful pass-through of product inflation and active residential construction, with gross margin remaining flat at 32.2% due to mixed product line impacts | Metric | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Gross profit | $899,221 | $707,703 | $191,518 | 27.1% | | Gross margin | 32.2% | 32.3% | (0.1 pp) | N/A | - The increase in gross profit was primarily due to the successful pass-through of product inflation, active residential construction, and incremental gross profit from acquisitions[132] - Gross margin remained flat, with wallboard and steel margins unfavorably impacted by price-cost dynamics, while complementary products and ceilings benefited[132] Selling, General and Administrative Expenses SG&A expenses increased by 23.0% to $546.7 million for the six months ended October 31, 2022, driven by higher payroll, fuel, travel, and facilities costs due to increased sales volume, inflationary pressures, and acquisitions, while decreasing as a percentage of net sales to 19.6% | Metric | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | SG&A expenses | $546,683 | $444,612 | $102,071 | 23.0% | | % of net sales | 19.6% | 20.3% | (0.7 pp) | N/A | - The increase in SG&A was primarily due to higher payroll, fuel, travel, and facilities costs, driven by increased sales volume, inflationary pressures, and incremental expenses from acquisitions[133] Depreciation and Amortization Expense Depreciation and amortization expense increased by 13.2% to $64.7 million for the six months ended October 31, 2022, with depreciation rising due to property and equipment from Westside and Ames acquisitions, and amortization increasing due to definite-lived intangible assets from these acquisitions | Metric | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Depreciation | $30,051 | $26,628 | $3,423 | 12.9% | | Amortization | $34,615 | $30,489 | $4,126 | 13.5% | | Total Depreciation and amortization | $64,666 | $57,117 | $7,549 | 13.2% | - Depreciation increased due to property and equipment obtained in the Westside and Ames acquisitions. Amortization increased due to definite-lived intangible assets from these acquisitions[134] Interest Expense Interest expense increased by 8.2% to $30.7 million for the six months ended October 31, 2022, primarily due to increases in interest rates and average debt outstanding | Metric | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Interest expense | $30,716 | $28,401 | $2,315 | 8.2% | - The increase in interest expense was primarily driven by higher interest rates and an increase in average debt outstanding[135] Income Taxes The provision for income taxes increased by 55.5% to $68.0 million, with the effective tax rate rising to 26.1% for the six months ended October 31, 2022, mainly due to anticipated changes in Canadian tax regulations and stock-based compensation | Metric | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | YoY Change (in thousands) | YoY % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------ | :----------- | | Provision for income taxes | $68,025 | $43,740 | $24,285 | 55.5% | | Effective tax rate | 26.1% | 24.4% | 1.7 pp | N/A | - The change in the effective income tax rate was primarily due to actions taken in anticipation of expected changes in Canadian tax regulations and stock-based compensation[136] Liquidity and Capital Resources The company relies on cash flow from operations, cash on hand, and available funds from its ABL and Canadian Facilities to finance working capital, capital expenditures, and acquisitions, with improved operating cash flow, decreased investing cash flow, and increased financing cash flow, while remaining in compliance with all debt covenants Summary GMS Inc. relies on cash flow from operations, cash on hand, and its ABL Facility ($271.8 million available) and Canadian Facility ($22.0 million available) to fund operations and growth, with an expanded $200.0 million share repurchase program approved, and $161.2 million remaining authorized as of October 31, 2022 - The company's primary liquidity sources are cash flow from operations, cash on hand, and funds available under its ABL Facility and Canadian Facility[137] - As of October 31, 2022, the company had $271.8 million available under its ABL Facility and $22.0 million under its Canadian Facility[138] - An expanded share repurchase program of $200.0 million was approved, with $161.2 million remaining authorization as of October 31, 2022[140] Cash Flows Cash provided by operating activities significantly increased to $102.9 million for the six months ended October 31, 2022, from a use of $77.1 million in the prior year due to improved inventory management, while cash used in investing activities decreased by $117.2 million and cash used in financing activities increased by $165.2 million | Activity | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Cash provided by (used in) operating activities | $102,861 | $(77,095) | | Cash used in investing activities | $(23,394) | $(140,629) | | Cash (used in) provided by financing activities | $(55,140) | $110,103 | | Increase (decrease) in cash and cash equivalents | $22,285 | $(107,702) | - The change in operating cash flow was primarily due to an increase in inventory in the prior year period related to ensuring product availability and managing price inflation[143] - The decrease in cash used in investing activities was primarily due to a $122.4 million decrease in cash used for acquisitions, partially offset by a $5.6 million increase in capital expenditures[144] - The change in financing cash flows was primarily due to net borrowings of $28.9 million from revolving credit facilities (compared to $140.8 million in prior year), a $36.4 million increase in common stock repurchases, and a $13.5 million acquisition holdback payment[146] Debt Covenants The company was in compliance with all covenants under its Term Loan Facility, Senior Notes indenture, and ABL Facility as of October 31, 2022 - The company was in compliance with all covenants contained in the Term Loan Facility, the indenture governing the Senior Notes, and the ABL Facility as of October 31, 2022[147][148] Contractual Obligations No material changes to the company's contractual obligations have occurred since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022, beyond those in the ordinary course of business - No material changes to contractual obligations since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022[149] Off-Balance Sheet Arrangements No material changes to the company's off-balance sheet arrangements have occurred since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022 - No material changes to off-balance sheet arrangements since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022[150] Non-GAAP Financial Measures This section defines Adjusted EBITDA and Adjusted EBITDA margin as non-GAAP measures used by management and investors to compare operating performance consistently across periods, excluding items not indicative of core operations, and provides a reconciliation of net income to Adjusted EBITDA - Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures used to compare operating performance consistently by excluding items not indicative of core operations[151] - Adjusted EBITDA is utilized in certain calculations under the company's debt agreements[152] | Metric | 3 Months Ended Oct 31, 2022 (in thousands) | 3 Months Ended Oct 31, 2021 (in thousands) | 6 Months Ended Oct 31, 2022 (in thousands) | 6 Months Ended Oct 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income | $103,153 | $74,361 | $192,623 | $135,563 | | Interest expense | $16,055 | $14,744 | $30,716 | $28,401 | | Provision for income taxes | $35,995 | $23,769 | $68,025 | $43,740 | | Depreciation expense | $15,058 | $13,703 | $30,051 | $26,628 | | Amortization expense | $17,168 | $15,700 | $34,615 | $30,489 | | Adjusted EBITDA | $195,513 | $149,539 | $370,527 | $277,618 | | Adjusted EBITDA Margin | 13.7% | 13.0% | 13.3% | 12.7% | Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to the company's exposure to market risks have occurred since its Annual Report on Form 10-K for the fiscal year ended April 30, 2022 - No material changes to market risk exposure since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022[159] Item 4. Controls and Procedures As of October 31, 2022, management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the three months ended October 31, 2022 - The CEO and CFO concluded that disclosure controls and procedures were effective as of October 31, 2022[161] - No material changes in internal control over financial reporting occurred during the three months ended October 31, 2022[162] PART II – Other Information Item 1. Legal Proceedings The company is involved in various lawsuits and administrative actions, including product liability and asbestos-related claims, with no current legal proceedings expected to have a material adverse effect on the business or financial condition - The company is a defendant in various lawsuits and administrative actions, including product liability claims and asbestos-related personal injury lawsuits[165] - No current legal proceedings are expected to have a material adverse effect on the company's business or financial condition[165] Item 1A. Risk Factors No material changes in the risks facing the company have occurred since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022 - No material changes in the risks facing the company since the Annual Report on Form 10-K for the fiscal year ended April 30, 2022[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended October 31, 2022, the company repurchased 600,871 shares of common stock at an average price of $42.90 per share under its publicly announced program, with approximately $161.2 million remaining authorized for repurchase as of October 31, 2022 | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------------- | :------------------------------- | :--------------------------- | | August 1 through August 31 | — | $— | | September 1 through September 30 | 330,892 | $42.82 | | October 1 through October 31 | 269,979 | $42.99 | | Total | 600,871 | $42.90 | - As of October 31, 2022, $161.2 million of shares may yet be purchased under the expanded share repurchase program[167] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities[168] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[169] Item 5. Other Information No other information is reported under this item - None[170] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q report, including certifications, corporate documents, and XBRL interactive data files - Includes certifications of the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[172] - Includes Inline XBRL Instance Document and Taxonomy Extension Documents (Exhibits 101 INS, SCH, CAL, DEF, LAB, PRE)[172] Signatures The report is duly signed on behalf of GMS Inc. by Scott M. Deakin, Chief Financial Officer, on December 8, 2022 - The Quarterly Report was signed by Scott M. Deakin, Chief Financial Officer, on December 8, 2022[176]