GMS Inc.

08/28/2025 | Press release | Distributed by Public on 08/28/2025 14:22

Quarterly Report for Quarter Ending July 31, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 2025.
Pending Merger with The Home Depot
On June 29, 2025, GMS Inc. ("we," "our," "us," or the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Home Depot, Inc. ("Parent" or "The Home Depot") and Gold Acquisition Sub, Inc., a wholly owned indirect subsidiary of Parent ("Merger Sub"). Pursuant to the terms of the Merger Agreement, Parent agreed to cause Merger Sub to commence a tender offer (as it may be extended, amended or supplemented from time to time, the "Offer"), which commenced on July 14, 2025, to purchase any and all of the outstanding shares of common stock of the Company (the "Shares"), at a price of $110.00 per Share (the "Offer Price"), in cash, without interest and net of any required withholding of taxes. For additional information, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Overview
Founded in 1971, GMS, through its operating subsidiaries, operates a network of more than 320 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products. We also operate nearly 100 tool sales, rental and service centers. Through these operations, we provide a comprehensive selection of building products and solutions for our residential and commercial contractor customer base across the United States and Canada. Our operating model combines the benefits of a national platform and strategy with a local go-to-market focus, enabling us to generate significant economies of scale while maintaining high levels of customer service.
Business Strategy
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) both organically and through acquisitions.
•Grow Complementary Products. We are focused on growing our complementary product lines, with a particular emphasis on achieving growth in tools and fasteners, insulation and certain exterior envelope applications, including EIFS, and diversifying and expanding our product offerings in order to better serve our customers.
•Expand our Platform. 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 branches is generally to further penetrate existing markets or to enter new markets adjacent to our existing operations. For adjacent markets, we typically have pre-existing customer relationships in those markets but need a new location to fully serve those relationships.
◦Acquisitions. We have a proven history of consummating core and complementary acquisitions in new and contiguous markets. Due to the large, 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, better serve our customers and drive earnings accretion from our acquisition strategy.
•Drive Improved Productivity and Profitability. Our business strategy entails a focus on reduced complexity, enhanced productivity and improved profitability across the organization, seeking to leverage our scale and employ both
technology and other best practices to lower our costs to deliver further margin expansion and earnings growth. By progressively improving our processes and systems, we also expect to continue to capture profitable market share in our existing footprint by delivering industry-leading customer service. We are expanding our e-commerce capabilities to better serve our customers.
Highlights
Key highlights in our business during the three months ended July 31, 2025 are described below:
•Generated net sales of $1,414.3 million during the three months ended July 31, 2025, a 2.4% decrease from the prior year period, primarily due to softening market conditions and a challenging pricing environment in steel framing. These factors were partially offset by contributions from recent acquisitions and resilient pricing in wallboard, ceilings and certain complementary products.
•Generated net income of $43.6 million during the three months ended July 31, 2025, a 23.9% decrease compared to the prior year, primarily due to a decrease in gross margin, primarily due to weakening demand, negative price and cost dynamics in wallboard and steel framing, and lower rebates as compared with a year ago due to reduced volumes. Also contributing was $5.5 million of transaction costs related to the pending merger with The Home Depot. Net income as a percentage of sales was 3.1% and 4.0% during the three months ended July 31, 2025 and 2024, respectively.
•Generated Adjusted EBITDA (a non-GAAP measure, see "Non-GAAP Financial Measures" in this Item 2) of $135.5 million during the three months ended July 31, 2025, a 7.1% decrease compared to the prior year. Adjusted EBITDA, as a percentage of net sales, decreased to 9.6% for the three months ended July 31, 2025 compared to 10.1% for the three months ended July 31, 2024, primarily due to gross margin contraction.
•Completed one acquisition and opened one greenfield location, as further described below.
Recent Developments
Acquisitions
On June 2, 2025, we acquired The Lutz Company, a supplier of complementary products, including EIFS and related cladding supplies, operating from a single location in the Minneapolis, Minnesota metro 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.
Greenfields
During the three months ended July 31, 2025, the Company opened a new greenfield location in Spring Hill, Tennessee. Subsequent to quarter end, we opened a new greenfield location in Athens, Alabama.
Results of Operations
The following table summarizes key components of our results of operations for the three months ended July 31, 2025 and 2024:
Three Months Ended
July 31,
2025 2024
(dollars in thousands)
Statement of operations data:
Net sales $ 1,414,332 $ 1,448,456
Cost of sales (exclusive of depreciation and amortization shown separately below) 977,807 996,893
Gross profit 436,525 451,563
Operating expenses:
Selling, general and administrative expenses 314,379 315,152
Depreciation and amortization 40,919 38,032
Total operating expenses 355,298 353,184
Operating income 81,227 98,379
Other (expense) income:
Interest expense (21,068) (22,213)
Other income, net 906 2,028
Total other expense, net (20,162) (20,185)
Income before taxes 61,065 78,194
Provision for income taxes 17,505 20,946
Net income $ 43,560 $ 57,248
Non-GAAP measures:
Adjusted EBITDA(1) $ 135,489 $ 145,881
Adjusted EBITDA margin(1)(2) 9.6 % 10.1 %
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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.
Three Months Ended July 31, 2025 and 2024
Net Sales
Three Months Ended
July 31, 		Change
2025 2024 Dollar Percent
(dollars in thousands)
Wallboard $ 556,393 $ 587,929 $ (31,536) (5.4) %
Complementary products 440,457 443,513 (3,056) (0.7) %
Steel framing 196,553 209,858 (13,305) (6.3) %
Ceilings 220,929 207,156 13,773 6.6 %
Total net sales $ 1,414,332 $ 1,448,456 $ (34,124) (2.4) %
The following table presents the impact of changes in volume and pricing on net sales of wallboard, steel framing and ceilings products on a per day basis during the three months ended July 31, 2025 compared to the prior year period:
Volume Price/Mix
Wallboard (5.7) % 0.3 %
Steel framing (5.4) % (0.9) %
Ceilings (4.2) % 10.8 %
The decrease in net sales during the three months ended July 31, 2025 compared to the prior year period was primarily due to softened demand across our end markets and price deflation in steel framing. These factors were partially offset by contributions from recent acquisitions and resilient pricing in wallboard, ceilings and certain complementary products. The decrease in net sales consisted of the following:
•a decrease in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to lower volume, partially offset by an increase in price/product mix;
•a decrease in steel framing sales, which are principally impacted by commercial construction activity, primarily due to lower volume and a decrease in price/product mix;
•a decrease in complementary products sales, which include insulation, joint treatment, tools (including automatic taping and finishing tools), lumber and various other specialty building products, primarily due to softened demand; and
•partially offset by an increase in ceilings sales, which are principally impacted by commercial construction activity, primarily due to an increase in price/product mix, partially offset by lower volume.
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, 2025. 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
2025 2024 Dollar Percent
(dollars in thousands)
Net sales $ 1,414,332
Recently acquired net sales (1) (37,376)
Impact of foreign currency (2) 717
Base business net sales (3) $ 1,377,673 $ 1,448,456 $ (70,783) (4.9) %
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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 ended July 31, 2025, net sales includes sales from the following acquisitions: Yvon Building Supply, Inc., Yvon Insulation Corporation, Yvon Insulation Windsor, Laminated Glass Technologies, Inc., and Right Fit Foam Insulation Ltd. (collectively, "Yvon") acquired on July 2, 2024; R.S. Elliott Specialty Supply, Inc. acquired on August 26, 2024; and Lutz acquired on June 2, 2025.
(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 decrease in organic net sales was primarily driven by softened demand across our end markets and price deflation in steel framing. These decreases were partially offset by resilient pricing in wallboard, ceilings and certain complementary products.
Gross Profit and Gross Margin
Three Months Ended
July 31, 		Change
2025 2024 Dollar Percent
(dollars in thousands)
Gross profit $ 436,525 $ 451,563 $ (15,038) (3.3) %
Gross margin 30.9 % 31.2 %
The decrease in gross profit during the three months ended July 31, 2025 compared to the prior year period was primarily due to gross margin contraction, partially offset by contributions from recent acquisitions. The decrease in gross margin on net sales for the three months ended July 31, 2025 compared to the prior year period was primarily due to lower vendor incentive income due to reduced volumes.
Selling, General and Administrative Expenses
Three Months Ended
July 31, 		Change
2025 2024 Dollar Percent
(dollars in thousands)
Selling, general and administrative expenses $ 314,379 $ 315,152 $ (773) (0.2) %
% of net sales 22.2 % 21.8 %
Selling, general and administrative expenses include employee compensation and benefits, rent and facility related expenses, fleet related expenses including fuel costs, advertising, and other administrative expenses, such as insurance, legal, accounting and information technology costs. The slight decrease in selling, general and administrative expenses during the three months ended July 31, 2025 compared to the prior year was primarily due to lower overall operating costs, reflective of realized savings from our initial cost reduction initiatives and reduced activity from changes in demand. Partially offsetting these decreases was approximately $6.5 million of incremental selling, general and administrative expenses from acquisitions and $5.5 million of transaction costs related to the pending merger with The Home Depot. The increase in selling, general and administrative expenses as a percentage of our net sales during the three months ended July 31, 2025 compared to the prior year period was primarily due to operating cost inflation and costs related to the pending merger with The Home Depot.
Depreciation and Amortization Expense
Three Months Ended
July 31, 		Change
2025 2024 Dollar Percent
(dollars in thousands)
Depreciation $ 21,290 $ 19,228 $ 2,062 10.7 %
Amortization 19,629 18,804 825 4.4 %
Depreciation and amortization $ 40,919 $ 38,032 $ 2,887 7.6 %
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, 2025 compared to the prior year period was primarily due to incremental expense resulting from property and equipment obtained in acquisitions and capital expenditures over the past year. The increase in amortization expense during the three months ended July 31, 2025 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in acquisitions over the past year, partially offset by the time-based progression of our use of the accelerated method of amortization for acquired customer relationships.
Interest Expense
Three Months Ended
July 31, 		Change
2025 2024 Dollar Percent
(dollars in thousands)
Interest expense $ 21,068 $ 22,213 $ (1,145) (5.2) %
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 ended July 31, 2025 compared to the prior year period was primarily due to a decrease in interest rates.
Income Taxes
Three Months Ended
July 31, 		Change
2025 2024 Dollar Percent
(dollars in thousands)
Provision for income taxes $ 17,505 $ 20,946 $ (3,441) (16.4) %
Effective tax rate 28.7 % 26.8 %
The change in the effective income tax rate during the three months ended July 31, 2025 compared to the prior year period was primarily due to state taxes and other permanent tax adjustments.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our 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, share repurchases, 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, 2025, we had available borrowing capacity of approximately $619.2 million under our ABL Facility. The ABL Facility is scheduled to mature on December 22, 2027. The ABL Facility contains a cross-default provision with the senior secured first lien term loan facility (the "Term Loan Facility").
On July 25, 2025, we delivered a notice of conditional full redemption (together with notices of conditional full redemption, delivered on each of August 8, 2025 and August 25, 2025, the "Redemption Notice") to the holders of our outstanding senior unsecured notes due May 2029 (the "Senior Notes"). Pursuant to the Redemption Notice and the terms of the related indenture, we will redeem all $350.0 million aggregate principal amount of outstanding Senior Notes (the "Redemption"), at a redemption price of 101.156% of the principal amount of the Senior Notes outstanding, plus accrued and unpaid interest. The Redemption is conditioned upon the consummation of the transactions contemplated in the Merger Agreement.
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, 2025.
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.
Cash Flows
A summary of our operating, investing and financing activities is shown in the following table:
Three Months Ended July 31,
2025 2024
(in thousands)
Cash used in operating activities $ (30,944) $ (22,939)
Cash used in investing activities (8,623) (126,219)
Cash provided by financing activities 23,907 35,290
Effect of exchange rates on cash and cash equivalents (8) 892
Decrease in cash and cash equivalents $ (15,668) $ (112,976)
Operating Activities
The increase in cash used in operating activities during the three months ended July 31, 2025 compared to the prior year period was primarily due to a decrease in net income and increase in cash used for working capital.
Investing Activities
The decrease in cash used in investing activities during the three months ended July 31, 2025 compared to the prior year period was primarily due to a $117.0 million decrease in cash used for acquisitions.
Capital expenditures during the three months ended July 31, 2025 primarily consisted of the purchase of delivery and warehouse equipment, building and leasehold improvements, and IT-related spending. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.
Financing Activities
The decrease in cash provided by financing activities during the three months ended July 31, 2025 compared to the prior year period was primarily due to net borrowings of $46.1 million under our ABL Facility during the three months ended July 31, 2025, compared to net repayments of $90.2 million during the prior year period. Also contributing to the change was a $1.8 million increase in payments for principal on long-term debt and finance leases. Partially offsetting these was a $33.8 million decrease in repurchases of common stock during the three months ended July 31, 2025 compared to the prior year period.
Share Repurchase Program
On December 2, 2024, the Company's Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $250.0 million of its outstanding common stock (such new repurchase program, the "2024 Repurchase Plan"). The 2024 Repurchase Plan replaces the Company's previous share repurchase authorization of $250.0 million, which commenced in October 2023. See Note 8 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information regarding the 2024 Repurchase Plan.
We repurchased approximately 0.2 million shares of our common stock for $12.9 million pursuant to our repurchase plans during the three months ended July 31, 2025. As of July 31, 2025, we had $179.2 million of remaining purchase authorization under the 2024 Repurchase Plan.
Debt Covenants
The ABL Facility, 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 ABL Facility, the Term Loan Facility and the indenture governing the Senior Notes. We were in compliance with all such covenants as of July 31, 2025.
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 ended April 30, 2025, 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 ended April 30, 2025.
Newly Issued Accounting Pronouncements
See Note 1 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements.
Critical Accounting Estimates
During the three months ended July 31, 2025, there were no material changes to our critical accounting estimates or our significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2025.
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 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 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.
The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin:
Three Months Ended
July 31,
2025 2024
(in thousands)
Net income $ 43,560 $ 57,248
Interest expense 21,068 22,213
Interest income (84) (370)
Provision for income taxes 17,505 20,946
Depreciation expense 21,290 19,228
Amortization expense 19,629 18,804
Stock appreciation rights(a) 867 243
Redeemable noncontrolling interests and deferred compensation(b) 86 422
Equity-based compensation(c) 3,744 3,678
Severance and other permitted costs(d) 1,185 956
Transaction costs (acquisitions and other)(e) 6,150 1,280
Loss on disposal of assets(f) 4 858
Effects of fair value adjustments to inventory(g) - 375
Change in fair value of contingent consideration(h) 485 -
Adjusted EBITDA $ 135,489 $ 145,881
Net sales $ 1,414,332 $ 1,448,456
Adjusted EBITDA Margin 9.6 % 10.1 %
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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 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 certain other cost adjustments as permitted under the ABL Facility and the Term Loan Facility.
(e)Represents costs related to acquisitions paid to third parties, including costs for the pending merger with The Home Depot.
(f)Includes gains and losses from the sale and disposal of assets.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
(h)Represents the change in fair value of contingent consideration arrangements.
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