GMS Inc., a North American distributor of wallboard and suspended ceilings systems reported financial results for the fiscal fourth quarter and fiscal year ended April 30, 2018.

Revenues for the fiscal fourth quarter ended April 30, 2018 increased 3.4 percent to a record $635.8 million from $615.0 million for the fiscal fourth quarter ended April 30, 2017. Net income declined to $9.9 million, or $0.24 per diluted share, compared to $14.3 million, or $0.34 per diluted share. The decrease in net income is attributable to $3.0 million in pre-tax transaction costs and $5.1 million in pre-tax mark-to-market currency adjustments during the fourth quarter of fiscal 2018, both related to the acquisition of WSB Titan (“Titan”). In addition, the fourth quarter of fiscal 2017 included $1.2 million of non-recurring other income. Adjusted EBITDA decreased 3.9 percent for the fiscal fourth quarter to $50.1 million from adjusted EBITDA of $52.1 million from the fourth quarter of fiscal 2017.

Mike Callahan, President and CEO of GMS, stated, “We delivered a solid fourth quarter capping off a successful fiscal 2018. Subsequent to quarter end, we completed the acquisition of Titan, which strengthens GMS’s position as the market leader in wallboard distribution in North America and provides an additional platform with multiple levers to drive profitable growth. We were also pleased to deliver record sales for a third consecutive year and achieve our target of gross margin in excess of 32.5 percent for fiscal 2018.”

Mr. Callahan continued, “Looking ahead to fiscal 2019, the markets that we operate in remain healthy and we are encouraged that May sales increased 7 percent over last year as we finally started to experience favorable weather trends. We also initiated a strategic cost reduction plan in May of this year to improve our operational efficiency and demonstrate our strong commitment to expanding our margins, while continuing to invest in the areas of our business that we believe will provide the best return for our shareholders, business partners, and employees. Excluding one-time, pre-tax severance related charges in the range of $4.1 to $4.6 million that we expect to record in the first quarter of fiscal 2019, we anticipate that the actions we have taken will generate payroll related and other cost savings of approximately $20.0 million on an annual basis. We will also continue to focus on successfully integrating Titan and look forward to implementing the best practices across the combined organization to further expand total company margins over time. I am excited about the overall strength of our business and confident in our ability to deliver another year of record sales and Adjusted EBITDA in fiscal 2019.”

Fourth Quarter 2018 Results

Net sales for the fourth quarter of fiscal 2018 ended April 30, 2018 were $635.8 million, compared to $615.0 million for the fourth quarter of fiscal 2017 ended April 30, 2017.

•           Wallboard sales of $280.0 million decreased 0.8 percent compared to the fourth quarter of fiscal 2017, with wallboard unit volume decline of 3.1 percent to 878 million square feet offset by pricing improvement of 2.4 percent. Wallboard volume decline was partially driven by adverse weather conditions, as well as, continued challenging competitive dynamics.

•           Ceilings sales of $95.6 million rose 9.3 percent compared to the fourth quarter of fiscal 2017, mainly due to greater commercial activity, pricing improvement and the positive impact of acquisitions.

•           Steel framing sales of $107 million grew 6.8 percent compared to the fourth quarter of fiscal 2017, mainly driven by pricing improvement.

•           Other product sales of $153.2 million were up 5.6 percent compared to the fourth quarter of fiscal 2017, as a result of strategic initiatives, pricing improvement and the positive impact of acquisitions.

Gross profit of $205.8 million grew 2.4 percent compared to $201.0 million in the fourth quarter of fiscal 2017, mainly attributable to higher pricing and increased sales. Gross margin decreased by approximately 30 basis points to 32.4 percent compared to 32.7 percent in the fourth quarter of fiscal 2017 largely due to product mix.

Net income of $9.9 million, or $0.24 per diluted share, decreased by 30.5 percent or $4.4 million compared to $14.3 million, or $0.34 per diluted share, in the fourth quarter of fiscal 2017. Adjusted net income of $23.5 million, or $0.56 per diluted share, decreased $2.4 million, compared to $25.9 million, or $0.62 per diluted share, in the fourth quarter of fiscal 2017.

Adjusted EBITDA of $50.1 million decreased 3.9 percent compared to $52.1 million in the fourth quarter of fiscal 2017. Adjusted EBITDA margin was 7.9 percent as a percentage of net sales, down 60 basis points compared to the fourth quarter of fiscal 2017, impacted by the approximately 30 basis point decrease in gross margin and approximately 30 basis point increase in SG&A expense driven primarily by higher logistics costs.

Fiscal Year 2018 Results

Net sales for the fiscal year ended April 30, 2018 increased 8.3 percent to a record $2.51 billion, compared to $2.32 billion for the fiscal year ended April 30, 2017, with growth across all product categories.

Gross profit of $818.6 million in fiscal 2018 increased 7.9 percent, compared to $758.6 million in fiscal 2017. Gross margin of 32.6 percent decreased by 10 basis points, compared to 32.7 percent in the prior year, primarily due to lower margins in the first quarter of fiscal 2018.

Net income of $63.0 million in fiscal 2018, or $1.49 per diluted share, grew $14.1 million or 28.8 percent, compared to $48.9 million, or $1.19 per diluted share, in fiscal 2017. Adjusted net income of $84.7 million, or $2.01 per diluted share, increased $2.4 million, compared to $82.3 million, or $2.00 per diluted share in the prior year.

Adjusted EBITDA grew 5.9 percent to a record $199.3 million in fiscal 2018, compared to $188.2 million in fiscal 2017. Adjusted EBITDA margin was 7.9 percent as a percentage of net sales in fiscal 2018, down slightly from 8.1 percent in fiscal 2017, primarily the result of a slight decrease in gross margin and a slight increase in SG&A.

Capital Resources

As of April 30, 2018, GMS had cash of $36.4 million and total debt of $595.9 million, compared to cash of $14.6 million and total debt of $594.9 million as of April 30, 2017.

Subsequent to the end of fiscal 2018, on June 1, 2018, the company amended its First Lien Credit Agreement with new borrowings consisting of an approximately $997 million term loan facility due in 2025. Borrowings under the new term loan bear interest at a floating rate based on LIBOR, with a 0 percent floor, plus 2.75 percent, representing a 25 basis point improvement compared to the previous term loan’s interest rate. Net proceeds from the new term loan were used to repay the company’s previous first lien term loan of approximately $572 million and to finance the acquisition of Titan.

Titan Update

GMS completed its acquisition of Titan on June 1, 2018. Titan’s unaudited results, including the impact of foreign currency exchange for the twelve months ended April 30, 2018, included net sales and Adjusted EBITDA of $478.4 million (C$612.1 million) and $68.4 million (C$87.5 million), respectively. This represents an increase of 17.4 percent in net sales and a 17.8 percent increase in Adjusted EBITDA compared to the twelve months ended April 30, 2017. Based on an average monthly exchange rate of 0.7816 and excluding purchasing synergies, Titan is expected to contribute between $68.0 million and $72.0 million to Adjusted EBITDA for the eleven months ending April 30, 2019.

The company expects to record additional transaction related charges of $11.0 to $11.5 million in the first quarter of fiscal 2019, including an additional $5.7 million of mark-to-market currency adjustments. In addition, subject to finalization of the Titan purchase price allocation, inventory will be increased by an estimated $4.8 million (assuming an exchange rate of .7721 on June 1, 2018) to reflect its estimated fair value for purchase accounting purposes. Cost of sales in the first quarter of fiscal 2019 will be increased by this amount as it will include the impact of this increase as the related inventory is sold.

Lease Accounting

As previously announced, in order to take advantage of the Tax Act’s accelerated depreciation provisions, facilitate the implementation of the new lease accounting standard which we will adopt in fiscal 2020, and improve the comparability of our financial statements with our publicly traded peers, effective May 1, 2018 we began financing the purchase of new commercial vehicles under capital leases and converted the majority of our legacy equipment operating leases into capital leases. We anticipate that this will reduce our SG&A expense and increase our Adjusted EBITDA by approximately $21.0 to $24.0 million per year beginning June 1, 2018. The conversion of our existing leases is also expected to increase the property and equipment and debt balances by approximately $75.0 million as of the first quarter of fiscal 2019.