Item 2. 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, 2016.
Recent Events
On September 27, 2016, we entered into an Incremental First Lien Term Commitments Amendment (the “Incremental Amendment”) to the First Lien Credit Agreement (the “Credit Agreement”), dated April 1, 2014, among GYP Holdings III Corp., as borrower, GYP Holdings II Corp., the financial institutions from time to time party thereto, as lenders, and Credit Suisse AG, as administrative agent and collateral agent.
The Incremental Amendment amended the Credit Agreement to, among other things, (i) refinance approximately $381.2 million in currently outstanding existing term loans borrowed under the Credit Agreement with a new tranche of $481.2 million incremental term loans, and (ii) reduce the interest rate applicable to loans borrowed under the Credit Agreement to LIBOR (subject to a floor of 1.00%) plus a borrowing margin of 3.50% from LIBOR plus a borrowing margin of 3.75%. The portion of the incremental term loans that exceeded the refinanced existing term loans was used to repay the ABL Facility (as defined herein) in part.
In addition, we recorded a write-off of debt discount and deferred financing fees of $1.5 million to “Write-off of discount and deferred financing fees” in the Condensed Consolidated Statements of Operations and Comprehensive Income. We accounted for the Incremental Amendment based upon the guidance within Accounting Standards Codification 470-50, “Debt-Modification and Extinguishment.”
Subsequent to October 31, 2016, certain of our direct and indirect subsidiaries entered into a Second Amendment to ABL Credit Agreement, dated November 18, 2016 (the “Second Amendment”), which amended the existing ABL Credit Agreement, dated April 1, 2014 (as amended by that certain First Amendment to ABL Credit Agreement, dated as of February 17, 2016, the “ABL Credit Agreement”), among GYP Holdings III Corp., as borrower, GYP Holdings II Corp., the lenders party hereto and Wells Fargo Bank, N.A., as administrative agent and collateral agent for the lenders. The Second Amendment amended the ABL Credit Agreement to, among other things, (i) increase the Revolving Credit Commitments thereunder from $300.0 million to $345.0 million, and (ii) extend the maturity date of the ABL Credit Agreement from April 1, 2019 to the earlier of (a) November 18, 2021 or (b) the date of termination in whole of the ABL Credit Agreement and the related obligations. The Second Amendment also amended the interest rate margin applicable to loans borrowed under the Credit Agreement to reflect a 0.25% decrease in the interest rate margin at each pricing level (as defined in the ABL Credit Agreement) relative to the interest rate margins charged at the corresponding pricing levels under the Credit Agreement. We will account for the Second Amendment based upon the guidance within Accounting Standards Codification 470-50, “Debt-Modifications and Extinguishments.”
Business Overview
Founded in 1971, we are the leading North American distributor of wallboard and ceilings. Our core customer is the interior contractor, who typically installs wallboard, ceilings and our other interior construction products in commercial and residential buildings. As a leading specialty distributor, we serve as a critical link between our suppliers and a highly fragmented customer base of over 20,000 contractors. Our operating model combines a national platform with a local go‑to‑market strategy through over 200 branches across the country. We believe this combination enables us to generate economies of scale while maintaining the high service levels, entrepreneurial culture and customer intimacy of a local business.
Our growth strategy entails taking market share within our existing footprint, expanding into new markets by opening new branches and acquiring competitors. We expect to continue to capture profitable market share in our existing footprint by delivering industry‑leading customer service. Our strategy for opening new branches is to further penetrate markets that are adjacent to our existing operations. Typically, we have pre‑existing customer relationships in these markets but need a new location to fully capitalize on those relationships. Since May 1, 2013 through the date of
this filing, we have opened 24 new branches and we currently expect to open several new branches each year depending on market conditions. In addition, we will continue to selectively pursue tuck‑in acquisitions and have a dedicated team of professionals to manage the process. Due to the large, highly fragmented nature of our market and our reputation throughout the industry, we believe we have the potential to access a robust acquisition pipeline that will continue to supplement our organic growth. We use a rigorous targeting process to identify acquisition candidates that will fit our culture and business model. As a result of our scale, purchasing power and ability to improve operations through implementing best practices, we believe we can achieve substantial synergies and drive earnings accretion from our acquisition strategy.
Factors and Trends Affecting our Operating Results
General Economic Conditions and Outlook
Our business is sensitive to changes in general economic conditions, including, in particular, conditions in the North American commercial construction and housing markets. The markets we serve are broadly categorized as commercial new construction, commercial R&R, residential new construction and residential R&R. We believe all four end markets are currently in an extended period of expansion following a deep and prolonged downturn.
Our addressable commercial construction market is composed of a variety of commercial and institutional sub‑segments with varying demand drivers. Our commercial markets include offices, hotels, retail stores and other commercial buildings, while our institutional markets include educational facilities, healthcare facilities, government buildings and other institutional facilities. The principal demand drivers across these markets include the overall economic outlook, the general business cycle, government spending, vacancy rates, employment trends, interest rates, availability of credit and demographic trends. Given the extreme depth of the last recession, despite the growth to date, activity in the commercial construction market remains well below average historical levels. According to Dodge Data & Analytics, new commercial construction put in place was 935 million square feet during the 2015 calendar year, which is an increase of 38% from 680 million square feet during the 2010 calendar year. However, new commercial construction activity remains well below historical levels. New commercial construction square footage put in place of 935 million square feet in 2015 would have needed to increase by 36% in order to achieve the historical market average of 1.3 billion square feet annually since 1970. We believe this represents a significant growth opportunity as activity continues to improve.
We believe commercial R&R spending is typically more stable than new commercial construction activity. Commercial R&R spending is driven by a number of factors, including commercial real estate prices and rental rates, office vacancy rates, government spending and interest rates. Commercial R&R spending is also driven by commercial lease expirations and renewals, as well as tenant turnover. Such events often result in repair, reconfiguration and/or upgrading of existing commercial space. As such, the commercial R&R market has historically been less volatile than commercial new construction. While there is very limited third party data for commercial R&R spending, we believe spending in this end market is in a period of expansion and will continue to grow over the next several years.
Residential construction activity is driven by a number of factors, including the overall economic outlook, employment, income growth, home prices, availability of mortgage financing, interest rates and consumer confidence, among others. According to the U.S. Census Bureau, U.S. housing starts reached 1.1 million in the 2015 calendar year, which is an increase of 10% from 2014 starts of 1.0 million. While housing starts increased for the sixth consecutive year in 2015, activity in the market remains well below historical levels. New residential housing starts of 1.1 million in 2015 would have needed to increase by 30% in order to reach their historical market average of 1.5 million annually since 1970.
While residential R&R activity is typically more stable than new construction activity, we believe the prolonged period of under‑investment during the recent downturn will result in above‑average growth for the next several years. The primary drivers of residential R&R spending include changes in existing home prices, existing home sales, the average age of the housing stock, consumer confidence and interest rates. According to the U.S. Census Bureau, residential R&R spending, including repairs and improvements, reached $285.4 billion in the 2015 calendar year, which is an increase of 4.4% from $273.3 billion in 2014.
Seasonality and Inflation
Our operating results are typically impacted by seasonality. Historically, sales of our products have been slightly higher in the first and second quarters of each fiscal year (covering the calendar months of May through October) due to favorable weather and longer daylight conditions during these periods. Seasonal variations in operating results may be impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects.
We believe that our results of operations are not materially impacted by moderate changes in the economic inflation rate. In general, we have historically been successful in passing on price increases from our vendors to our customers in a timely manner, although there is no assurance that we can successfully do so in the future.
Acquisitions
We complement our organic growth strategy with selective, tuck‑in acquisitions. Since the beginning of full year 2014 through the date of this filing, we have completed 22 strategic acquisitions totaling 53 branches. We believe that significant opportunities exist to expand our geographic footprint by executing additional strategic acquisitions and we consistently strive to maintain an extensive and active acquisition pipeline. We are often evaluating several acquisition opportunities at any given time.
Since the beginning of full year 2014 through the date of this filing, we have completed the following acquisitions:
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Acquired Company
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Acquisition Date
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Branches Acquired
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Dakota Gypsum (ND)
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August 1, 2013
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1
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Sun Valley Supply, Inc. (AZ)
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August 19, 2013
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1
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Contractors’ Choice Supply, Inc. (TX)
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August 1, 2014
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1
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Drywall Supply, Inc. (NE)
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October 1, 2014
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2
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AllSouth Drywall Supply Company (GA)
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November 24, 2014
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1
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Serrano Supply, Inc. (IA)
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February 2, 2015
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1
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Ohio Valley Building Products, LLC (WV)
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February 16, 2015
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1
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J&B Materials, Inc. (CA, HI)
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March 16, 2015
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5
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Tri-Cities Drywall & Supply Co. (WA)
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September 29, 2015
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1
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Badgerland Supply, Inc. (WI, IL)
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November 2, 2015
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6
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Hathaway & Sons, Inc. (CA)
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November 9, 2015
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1
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Gypsum Supply Company (MI, OH)
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January 1, 2016
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11
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Robert N. Karpp Company, Inc. (MA)
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February 1, 2016
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3
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Professional Handling & Distribution, Inc. (IL)
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February 1, 2016
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2
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M.R. Lee Building Materials, Inc. (IL)
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April 4, 2016
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1
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Wall & Ceiling Supply Co., Inc. (WA)
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May 2, 2016
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1
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Rockwise, LLC (AZ, CO)
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July 5, 2016
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3
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Steven F. Kempf Building Materials, Inc. (PA)
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August 29, 2016
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1
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Olympia Building Supplies, LLC (FL)
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September 1, 2016
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3
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United Building Materials, Inc. (OH)
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October 3, 2016
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3
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Ryan Building Materials, Inc. (MI)
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October 31, 2016
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3
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Interior Products Supply (IN)
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December 5, 2016
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1
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Our Products
The following is a summary of our net sales by product group for the three and six months ended October 31, 2016 and 2015:
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Three Months Ended
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Six Months Ended
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October 31,
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% of
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October 31,
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% of
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October 31,
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% of
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October 31,
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% of
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2016
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Total
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2015
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Total
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2016
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Total
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2015
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Total
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(dollars in thousands)
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(dollars in thousands)
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Wallboard
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$
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269,975
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45.6
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%
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$
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214,254
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46.8
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%
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$
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521,271
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45.7
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%
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$
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425,177
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46.7
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%
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Ceilings
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85,400
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14.4
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%
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74,613
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16.3
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%
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171,749
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15.0
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%
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153,581
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16.9
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%
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Steel framing
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96,075
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16.2
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%
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70,307
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15.3
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%
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180,417
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15.8
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%
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137,639
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15.1
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%
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Other products
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140,396
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23.7
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%
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98,903
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21.6
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%
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268,209
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23.5
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%
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194,121
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21.3
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%
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Total net sales
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$
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591,846
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$
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458,077
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$
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1,141,646
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$
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910,518
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Results of Operations
Three Months Ended October 31, 2016 and 2015
The following table summarizes key components of our results of operations for the three months ended October 31, 2016 and 2015:
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Three Months Ended
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|
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October 31,
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2016
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2015
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(dollars in thousands)
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Statement of operations data:
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Net sales
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$
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591,846
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$
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458,077
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Cost of sales (exclusive of depreciation and amortization shown separately below)
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398,622
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314,164
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Gross profit
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193,224
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143,913
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Operating expenses:
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Selling, general and administrative expenses
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149,798
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114,352
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Depreciation and amortization
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17,368
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15,262
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Total operating expenses
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167,166
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129,614
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Operating income
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26,058
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14,299
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Other (expense) income:
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Interest expense
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(7,154)
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(9,260)
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Write-off of debt discount and deferred financing fees
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(1,466)
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—
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Other income, net
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496
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409
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Total other (expense), net
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(8,124)
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(8,851)
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Income before tax
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17,934
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5,448
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Income tax expense
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710
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2,623
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Net income
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$
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17,224
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$
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2,825
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Non-GAAP measures:
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Adjusted EBITDA(1)
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$
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49,519
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$
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34,800
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Adjusted EBITDA margin(1)
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8.4
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%
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|
7.6
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%
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(1)
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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 important.
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Net Sales
Net sales of $591.8 million for the three months ended October 31, 2016 increased $133.7 million, or 29.2%, on one additional shipping day, from $458.1 million for the three months ended October 31, 2015. Our performance in the three months ended October 31, 2016 was strong as our sales increased across all product categories. In the three months ended October 31, 2016, our wallboard sales, which are impacted by both commercial and residential construction
activity, increased by $55.7 million, or 26.0.%, compared to the three months ended October 31, 2015. The increase in wallboard sales was a result of a 27.2% increase in unit volume primarily driven by greater end market demand, market share gains and the impact of acquisitions, partially offset by a 1.0% decrease in pricing. In addition, in the three months ended October 31, 2016, our ceilings sales increased $10.8 million, or 14.5%, from the three months ended October 31, 2015, and steel framing sales increased $25.8 million, or 36.7%. The increases in ceilings and steel framing sales are primarily driven by commercial construction activity. For the three months ended October 31, 2016, our other products sales category, which includes tools, insulation, joint treatment and various other specialty products, increased $41.5 million, or 42.0%, compared to the three months ended October 31, 2015. Other products net sales benefitted from significant pull through factor, further supplemented by pricing improvements, additional retail showrooms, targeted acquisitions and other strategic initiatives.
From February 1, 2015 through October 31, 2016, we have completed 16 acquisitions, totaling 46 branches. These acquisitions contributed $112.8 million and $25.6 million to our net sales in the three months ended October 31, 2016 and 2015, respectively. Excluding these acquired sites, for the three months ended October 31, 2016 and 2015, our base business net sales increased $46.5 million, or 10.8%, compared to the three months ended October 31, 2015. The overall increase in our base business net sales reflects the increase in demand for our products as a result of the improvement in new housing starts, R&R activity and commercial construction, coupled with market share gains.
The following table breaks out our consolidated net sales into the base business component and the excluded components, which consist of recently acquired branches, as shown below:
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Three Months Ended
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October 31,
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(Unaudited)
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2016
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2015
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(dollars in thousands)
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Base business net sales
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$
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479,006
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$
|
432,498
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Recently acquired net sales (excluded from base business)
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112,840
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25,579
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Total net sales
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$
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591,846
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$
|
458,077
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When calculating our “base business” results, we exclude any branches that were acquired in the current fiscal year, prior fiscal year and three months prior to the start of the prior fiscal year. Therefore, any acquisition occurring between February 1, 2015 and April 30, 2017 will be excluded from base business net sales for any period during fiscal year 2017.
We have excluded the following acquisitions from the base business for the periods identified:
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Branches
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Acquisition
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Acquisition Date
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Acquired
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Periods Excluded
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Serrano Supply, Inc. (IA)
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February 2, 2015
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1
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February 2, 2015 - October 31, 2016
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Ohio Valley Building Products, LLC (WV)
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February 16, 2015
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1
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February 16, 2015 - October 31, 2016
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J&B Materials, Inc. (CA, HI)
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March 16, 2015
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5
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March 16, 2015 - October 31, 2016
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Tri-Cities Drywall & Supply Co. (WA)
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September 29, 2015
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1
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|
September 29, 2015 - October 31, 2016
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Badgerland Supply, Inc. (WI, IL)
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|
November 2, 2015
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|
6
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|
November 2, 2015 - October 31, 2016
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|
Hathaway & Sons, Inc. (CA)
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|
November 9, 2015
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1
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November 9, 2015 - October 31, 2016
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|
Gypsum Supply Company (MI, OH)
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|
January 1, 2016
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|
11
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|
January 1, 2016 - October 31, 2016
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|
Robert N. Karpp Company, Inc. (MA)
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|
February 1, 2016
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|
3
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|
February 1, 2016 - October 31, 2016
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|
Professional Handling & Distribution, Inc. (IL)
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|
February 1, 2016
|
|
2
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|
February 1, 2016 - October 31, 2016
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|
M.R. Lee Building Materials, Inc. (IL)
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|
April 4, 2016
|
|
1
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|
April 4, 2016 - October 31, 2016
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Wall & Ceiling Supply Co., Inc. (WA)
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|
May 2, 2016
|
|
1
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|
May 2, 2016 - October 31, 2016
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Rockwise, LLC (AZ, CO)
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|
July 5, 2016
|
|
3
|
|
July 5, 2016 - October 31, 2016
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|
Steven F. Kempf Building Materials, Inc. (PA)
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|
August 29, 2016
|
|
1
|
|
August 29, 2016 - October 31, 2016
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|
Olympia Building Supplies, LLC (FL)
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|
September 1, 2016
|
|
3
|
|
September 1, 2016 - October 31, 2016
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|
United Building Materials, Inc. (OH)
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|
October 3, 2016
|
|
3
|
|
October 3, 2016 - October 31, 2016
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Ryan Building Materials, Inc. (MI)
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|
October 31, 2016
|
|
3
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|
October 31, 2016
|
|
Gross Profit and Gross Margin
Gross profit was $193.2 million for the three months ended October 31, 2016 compared to $143.9 million for the three months ended October 31, 2015. The increase in gross profit was due to $133.7 million in additional sales, partially offset by a $84.5 million increase in cost of sales. Gross margin on net sales increased to 32.6% for the three months ended October 31, 2016 compared to 31.4% for the three months ended October 31, 2015 primarily as the result of improved product margins and mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Our selling, general and administrative expenses increased $35.4 million, or 31.0%, to $149.8 million for the three months ended October 31, 2016 from $114.4 million for the three months ended October 31, 2015. This increase was due to increases in warehouse expense of $4.6 million, of which $2.1 million was related to payroll and $1.4 million was related to facility costs; delivery expense of $13.4 million, of which $8.6 million was related to payroll and $2.3 million was related to equipment rental cost increases; and increases in branch and corporate general and administrative expenses of $17.4 million, of which $11.8 million was driven by payroll and payroll related costs, $1.7 million was related to increases in real estate rent expense, and the majority of the remaining increase was due to increases in expenses incurred as a result of the Company’s significant growth and recent IPO. The increases in payroll and payroll related costs were primarily due to increased headcount, which in turn was due to the increase in delivered volume and to acquisitions. Selling, general and administrative expenses were 25.3% and 25.0% of our net sales for the three months ended October 31, 2016 and 2015, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense was $17.4 million for the three months ended October 31, 2016 compared to $15.3 million for the three months ended October 31, 2015. The increase is primarily due to an increase in amortization of acquired definite lived intangible assets of $2.0 million.
Other Expense
Other expense consists primarily of interest expense associated with our debt, interest income and miscellaneous non‑operating income.
Interest expense of $7.2 million in the three months ended October 31, 2016 decreased by $2.1 million from $9.3 million for the three months ended October 31, 2015. This decrease was primarily driven by the decrease in interest expense (including the decrease in amortization of the related deferred financing costs and original issue discount) of $2.8 million related to the Term Loan Facilities, which was, in turn, primarily the result of the repayment of $160.0 million of the Second Lien Facility. The decrease in interest expense related to the Term Loan Facilities was offset primarily by an increase in interest expense on the ABL Facility of $0.7 million, which was, in turn, due to the increase in the outstanding balance of the ABL Facility from $21.5 million as of October 31, 2015 to $152.4 million as of October 31, 2016. See “—Liquidity and Capital Resources—Our Credit Facilities.”
Also included in “Other expense” is the write-off of debt discount and deferred financing fees of $1.5 million for the three months ended October 31, 2016. We wrote-off these debt discount and deferred financing fees of $1.5 million in connection with the refinancing the First Lien Facility.
Income Tax Expense
Income tax expense was $0.7 million for the three months ended October 31, 2016 compared to income tax expense of $2.6 million for the three months ended October 31, 2015. This $1.9 million decrease in income tax expense was primarily the result of an increase in taxable income due to higher profitability. Our effective tax rate was 4.0% and 48.1% for the three months ended October 31, 2016 and 2015, respectively. The decrease in the effective tax rate from the three months ended October 31, 2015 to the three months ended October 31, 2016 is primarily due to a $7.0 million decrease in deferred tax liabilities and tax expense resulting from the 338 (h)(10) election made for the Gypsum Supply Company acquisition, which decreased the effective rate by 38.8%, as well as, to a lesser degree, the decreased impact of permanent differences and a decrease in the blended state tax rates.
Net Income
Net income of $17.2 million for the three months ended October 31, 2016 increased $14.4 million from our net income of $2.8 million for the three months ended October 31, 2015. The net income of $17.2 million for the three months ended October 31, 2016 was comprised of operating profit of $26.1 million, interest expense of $7.2 million, write-off of discount and deferred financing fees of $1.5 million, other income of $0.5 million and income tax expense of $0.7 million. The net income of $2.8 million for the three months ended October 31, 2015 was comprised of operating profit of $14.3 million, interest expense of $9.3 million, other income of $0.4 million and income tax expense of $2.6 million.
Adjusted EBITDA
Adjusted EBITDA of $49.5 million for the three months ended October 31, 2016 increased $14.7 million, or 42.3%, from our Adjusted EBITDA of $34.8 million for the three months ended October 31, 2015. The increase in Adjusted EBITDA was primarily due to increased profitability on higher net sales during the three months ended October 31, 2016, which was partially offset by increases in variable costs to support the increased sales volumes. These variable costs include warehouse and delivery costs and other variable compensation. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” for how we define and calculate Adjusted EBITDA, reconciliations thereof to net income and a description of why we believe these measures are important.
Six Months Ended October 31, 2016 and 2015
The following table summarizes key components of our results of operations for the six months ended October 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
(dollars in thousands)
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,141,646
|
|
$
|
910,518
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below)
|
|
|
769,837
|
|
|
625,717
|
|
Gross profit
|
|
|
371,809
|
|
|
284,801
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
284,856
|
|
|
224,562
|
|
Depreciation and amortization
|
|
|
33,163
|
|
|
31,327
|
|
Total operating expenses
|
|
|
318,019
|
|
|
255,889
|
|
Operating income
|
|
|
53,790
|
|
|
28,912
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(14,731)
|
|
|
(18,517)
|
|
Write-off of discount and deferred financing fees
|
|
|
(6,892)
|
|
|
—
|
|
Other income, net
|
|
|
1,089
|
|
|
919
|
|
Total other (expense), net
|
|
|
(20,534)
|
|
|
(17,598)
|
|
Income before tax
|
|
|
33,256
|
|
|
11,314
|
|
Income tax expense
|
|
|
6,869
|
|
|
5,478
|
|
Net income
|
|
$
|
26,387
|
|
$
|
5,836
|
|
Non-GAAP measures:
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
95,460
|
|
$
|
68,913
|
|
Adjusted EBITDA margin(1)
|
|
|
8.4
|
%
|
|
7.6
|
%
|
|
(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 important.
|
Net Sales
Net sales of $1,141.6 million for the six months ended October 31, 2016 increased $231.1 million, or 25.4%, from $910.5 million for the six months ended October 31, 2015. Our performance in the six months ended October 31, 2016 was strong as our sales increased across all product categories. In the six months ended October 31, 2016, our wallboard sales, which are impacted by both commercial and residential construction activity, increased by $96.1 million, or 22.6%, compared to the six months ended October 31, 2015. The increase in wallboard sales was a result of a 23.7% increase in unit volume primarily driven by greater end market demand, market share gains and the impact of acquisitions, partially offset by a 0.9% decrease in pricing. In addition, in the six months ended October 31, 2016, our ceiling sales increased $18.2 million, or 11.8%, from the six months ended October 31, 2015, and steel framing sales increased $42.8 million, or 31.1%. The increases in ceiling and steel framing sales are primarily driven by commercial construction activity. For the six months ended October 31, 2016, our other products sales category, which includes tools, insulation, joint treatment and various other specialty products, increased $74.1 million, or 38.2%, compared to the six months ended October 31, 2015. Other products net sales benefitted from significant pull through factor, further supplemented by pricing improvements, additional retail showrooms, targeted acquisitions and other strategic initiatives.
From February 1, 2015 through October 31, 2016, we have completed 16 acquisitions, totaling 46 branches. These acquisitions contributed $195.5 million and $50.2 million to our net sales in the six months ended October 31, 2016 and 2015, respectively. Excluding these acquired sites, for the six months ended October 31, 2016 and 2015, our base business net sales increased $85.9 million, or 10.0%, compared to the six months ended October 31, 2015. The overall increase in our base business net sales reflects the increase in demand for our products as
a result of the improvement in new housing starts, R&R activity and commercial construction, coupled with market share gains.
The following table breaks out our consolidated net sales into the base business component and the excluded components, which consist of recently acquired branches, as shown below:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 31,
|
|
(Unaudited)
|
|
|
2016
|
|
2015
|
|
|
|
(dollars in thousands)
|
|
Base business net sales
|
|
$
|
946,179
|
|
$
|
860,276
|
|
Recently acquired net sales (excluded from base business)
|
|
|
195,467
|
|
|
50,242
|
|
Total net sales
|
|
$
|
1,141,646
|
|
$
|
910,518
|
|
When calculating our “base business” results, we exclude any branches that were acquired in the current fiscal year, prior fiscal year and three months prior to the start of the prior fiscal year. Therefore, any acquisition occurring between February 1, 2015 and April 30, 2017 will be excluded from base business net sales for any period during fiscal year 2017.
We have excluded the following acquisitions from the base business for the periods identified:
|
|
|
|
|
|
|
|
|
|
|
|
Branches
|
|
|
|
Acquisition
|
|
Acquisition Date
|
|
Acquired
|
|
Periods Excluded
|
|
Serrano Supply, Inc. (IA)
|
|
February 2, 2015
|
|
1
|
|
February 2, 2015 - October 31, 2016
|
|
Ohio Valley Building Products, LLC (WV)
|
|
February 16, 2015
|
|
1
|
|
February 16, 2015 - October 31, 2016
|
|
J&B Materials, Inc. (CA, HI)
|
|
March 16, 2015
|
|
5
|
|
March 16, 2015 - October 31, 2016
|
|
Tri-Cities Drywall & Supply Co. (WA)
|
|
September 29, 2015
|
|
1
|
|
September 29, 2015 - October 31, 2016
|
|
Badgerland Supply, Inc. (WI, IL)
|
|
November 2, 2015
|
|
6
|
|
November 2, 2015 - October 31, 2016
|
|
Hathaway & Sons, Inc. (CA)
|
|
November 9, 2015
|
|
1
|
|
November 9, 2015 - October 31, 2016
|
|
Gypsum Supply Company (MI, OH)
|
|
January 1, 2016
|
|
11
|
|
January 1, 2016 - October 31, 2016
|
|
Robert N. Karpp Company, Inc. (MA)
|
|
February 1, 2016
|
|
3
|
|
February 1, 2016 - October 31, 2016
|
|
Professional Handling & Distribution, Inc. (IL)
|
|
February 1, 2016
|
|
2
|
|
February 1, 2016 - October 31, 2016
|
|
M.R. Lee Building Materials, Inc. (IL)
|
|
April 4, 2016
|
|
1
|
|
April 4, 2016 - October 31, 2016
|
|
Wall & Ceiling Supply Co., Inc. (WA)
|
|
May 2, 2016
|
|
1
|
|
May 2, 2016 - October 31, 2016
|
|
Rockwise, LLC (AZ, CO)
|
|
July 5, 2016
|
|
3
|
|
July 5, 2016 - October 31, 2016
|
|
Steven F. Kempf Building Materials, Inc. (PA)
|
|
August 29, 2016
|
|
1
|
|
August 29, 2016 - October 31, 2016
|
|
Olympia Building Supplies, LLC (FL)
|
|
September 1, 2016
|
|
3
|
|
September 1, 2016 - October 31, 2016
|
|
United Building Materials, Inc. (OH)
|
|
October 3, 2016
|
|
3
|
|
October 3, 2016 - October 31, 2016
|
|
Ryan Building Materials, Inc. (MI)
|
|
October 31, 2016
|
|
3
|
|
October 31, 2016
|
|
Gross Profit and Gross Margin
Gross profit was $371.8 million for the six months ended October 31, 2016 compared to $284.8 million for the six months ended October 31, 2015. The increase in gross profit was due to $231.1 million in additional sales, partially offset by a $144.1 million increase in cost of sales. Gross margin on net sales increased to 32.6% for the six months ended October 31, 2016 compared to 31.3% for the six months ended October 31, 2015 primarily as the result of improved product margins and mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Our selling, general and administrative expenses increased $60.3 million, or 26.8%, to $284.9 million for the six months ended October 31, 2016 from $224.6 million for the six months ended October 31, 2015. This increase was due to increases in warehouse expense of $7.9 million, of which $3.9 million was related to payroll and $2.2 million was
related to facility costs; delivery expense of $24.4 million, of which $15.5 million was related to payroll and $4.5 million was related to equipment rental cost increases; and increases in branch and corporate general and administrative expenses of $28.0 million, of which $19.0 million was driven by payroll and payroll related costs, $3.1 million was related to increases in real estate rent expense and the majority of the remaining increase was due to increases in expenses incurred as a result of the Company’s significant growth and recent IPO. The increases in payroll and payroll related costs were primarily due to increased headcount, which in turn was due to the increase in delivered volume and to acquisitions. Selling, general and administrative expenses were 25.0% and 24.7% of our net sales for the six months ended October 31, 2016 and 2015, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense was $33.2 million for the six months ended October 31, 2016 compared to $31.3 million for the six months ended October 31, 2015. The increase is primarily due to an increase in amortization of acquired definite lived intangible assets of $2.6 million, offset by a decrease in depreciation and amortization expense of property and equipment of $0.8 million.
Other Expense
Other expense consists primarily of interest expense associated with our debt, interest income and miscellaneous non‑operating income and expense.
Interest expense of $14.7 million in the six months ended October 31, 2016 decreased by $3.8 million from $18.5 million for the six months ended October 31, 2015. This decrease was primarily driven by the decrease in interest expense (including the decrease in amortization of the related deferred financing costs and original issue discount) of $5.1 million related to the Term Loan Facilities, which was, in turn, primarily the result of the repayment of $160.0 million of the Second Lien Facility. The decrease in interest expense related to the Term Loan Facilities was offset primarily by an increase in interest expense on the ABL Facility of $1.3 million, which was, in turn, due to the increase in the outstanding balance of the ABL Facility from $21.5 million as of October 31, 2015 to $152.4 million as of October 31, 2016. See “—Liquidity and Capital Resources—Our Credit Facilities.”
Also included in “Other expense” is the write-off of debt discount and deferred financing fees of $6.9 million for the six months ended October 31, 2016. This includes $5.4 million which was written off in connection with the repayment of the $160.0 million principal amount of our Second Lien Facility as well as $1.5 million in connection with the refinancing the First Lien Facility.
Income Tax Expense
Income tax expense was $6.9 million for the six months ended October 31, 2016 compared to income tax expense of $5.5 million for the six months ended October 31, 2015. This $1.4 million increase in income tax expense was primarily the result of an increase in taxable income due to higher profitability. Our effective tax rate was 20.7% and 48.4% for the six months ended October 31, 2016 and 2015, respectively. The decrease in the effective tax rate from the six months ended October 31, 2015 to the six months ended October 31, 2016 is primarily due to a $7.0 million decrease in deferred tax liabilities and tax expense resulting from the 338 (h)(10) election made for the Gypsum Supply Company acquisition, which decreased the effective rate by 20.9%, as well as, to a lesser degree, the decreased impact of permanent differences and a decrease in the blended state tax rates.
Net Income
Net income of $26.4 million for the six months ended October 31, 2016 increased $20.6 million from our net income of $5.8 million for the six months ended October 31, 2015. The net income of $26.4 million for the six months ended October 31, 2016 was comprised of operating profit of $53.8 million, interest expense of $14.7 million, write-off of discount and deferred financing fees of $6.9 million, other income of $1.1 million and income tax expense of $6.9 million. The net income of $5.8 million for the six months ended October 31, 2015 was comprised of operating profit of $28.9 million, interest expense of $18.5 million, other income of $0.9 million and income tax expense of $5.5 million.
Adjusted EBITDA
Adjusted EBITDA of $95.5 million for the six months ended October 31, 2016 increased $26.6 million, or 38.6%, from our Adjusted EBITDA of $68.9 million for the six months ended October 31, 2015. The increase in Adjusted EBITDA was primarily due to increased profitability on higher net sales during the six months ended October 31, 2016, which was partially offset by increases in variable costs to support the increased sales volumes. These variable costs include warehouse and delivery costs and other variable compensation costs. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” for how we define and calculate Adjusted EBITDA, reconciliations thereof to net income and a description of why we believe these measures are important.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under the ABL Facility to finance working capital needs and capital expenditures. We believe that these sources of funds will be adequate to fund debt service requirements and provide cash, as required, to support our strategies, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months.
As of October 31, 2016, we had available borrowing capacity of approximately $167.6 million under our $300.0 million ABL Facility. For a summary of selected terms of the ABL Facility and other indebtedness, see “—Our Credit Facilities.”
A
s discussed in "
—Recent Events
" we amended our ABL Facility on
November 18, 2016.
In September 2016, the Company entered into an Incremental First Lien Term Commitments Amendment (the “Incremental Amendment”) to the First Lien Credit Agreement (the “Credit Agreement”), dated April 1, 2014, among GYP Holdings III Corp., as borrower, GYP Holdings II Corp., the financial institutions from time to time party thereto, as lenders, and Credit Suisse AG, as administrative agent and collateral agent.
The Incremental Amendment amended the Credit Agreement to, among other things, (i) refinance approximately $381.2 million in currently outstanding existing term loans borrowed under the Credit Agreement with a new tranche of $481.2 million incremental term loans, and (ii) reduce the interest rate applicable to loans borrowed under the Credit Agreement to LIBOR plus 3.50% from LIBOR plus 3.75%. The portion of the incremental term loans that exceeded the refinanced existing term loans was used to repay the ABL Facility in part.
In fiscal 2016, we amended our ABL Facility to exercise the $100.0 million accordion feature of the ABL Facility which increased the aggregate revolving commitments from $200.0 million to $300.0 million and increased the sublimit for same day swing line borrowings from $20.0 million to $30.0 million. The other terms of the ABL Facility remain unchanged.
For the six months ended October 31, 2016 and 2015, our use of cash was primarily driven by our investing activities, particularly our investments in acquisitions and property and equipment for our operating facilities.
Treasury Stock
In fiscal 2016, we repurchased 394,577 shares of our common stock at a cost of $5.8 million in connection with our separation agreement with a former employee. We then reissued these shares for proceeds of $4.9 million. The difference between the cost of the treasury stock and the proceeds from its reissuance was accounted for, using the “cost” method, as an increase to accumulated deficit of $1.0 million as of April 30, 2016. We do not have plans to repurchase a significant number of shares in the near future.
Cash Flows
A summary of our operating, investing and financing activities is shown in the following table:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
$
|
691
|
|
$
|
(2,327)
|
|
Cash (used in) provided by investing activities
|
|
|
(139,318)
|
|
|
2,560
|
|
Cash provided by (used in) financing activities
|
|
|
135,942
|
|
|
(3,097)
|
|
Decrease in cash and cash equivalents
|
|
$
|
(2,685)
|
|
$
|
(2,864)
|
|
Operating Activities
Cash provided by, or used in, operating activities consists primarily of net income adjusted for non‑cash items, including depreciation and amortization, equity‑based compensation, deferred taxes and the effects of changes in operating assets and liabilities, which were primarily the changes in working capital discussed below.
Net cash provided by operating activities was $0.7 million for the six months ended October 31, 2016. This cash provided was primarily driven by net income of $26.4 million and non-cash adjustments of $42.5 million, including depreciation and amortization of $41.4 million. Cash provided by operating activities was partially offset by cash used to build primary working capital of $32.2 million, primarily driven by an increase in trade accounts and notes receivable and inventory, coupled with cash used for current assets and liabilities, net of $23.6 million and deferred tax benefits of $12.4 million.
Net cash used in operating activities was $2.3 million for the six months ended October 31, 2015. This use of cash was primarily driven by cash used to build primary working capital of $22.7 million, principally receivables, coupled by cash used for current assets and liabilities, net of $10.7 million and deferred taxes of $11.1 million. Cash used in operating activities was partially offset by net income of $5.8 million and non-cash adjustments of $36.4 million, including depreciation and amortization of $33.0 million. The increase in accounts receivable was the result of increased sales.
Investing Activities
Net cash used in investing activities consists primarily of acquisitions; investments in our facilities including purchases of land, buildings, and leasehold improvements; and purchases of fleet assets, IT and other equipment. We present this figure net of proceeds from asset sales which typically relate to sales of our fleet assets and closed facilities.
In the six months ended October 31, 2016, net cash used in investing activities was $139.3 million, which consists of purchases of property and equipment of $5.0 million, net of $1.3 million in proceeds from asset sales and $135.6 million used to acquire businesses during the period.
In the six months ended October 31, 2015, net cash provided by investing activities was $2.6 million, which consists of purchases of property and equipment of $2.7 million, net of $6.1 million in proceeds from asset sales and $0.8 million used to acquire businesses during the period.
Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our fiscal 2017 capital expenditures to be approximately $8.0 million to $11.0 million (excluding acquisitions) primarily related to fleet and equipment purchases, facilities and IT investments to support our operations.
Financing Activities
Cash provided by, or used in, financing activities consists primarily of borrowings and related repayments under our credit agreements, as well as repayments of capital lease obligations and proceeds from the sales of equity.
Net cash provided by financing activities was $135.9 million for the six months ended October 31, 2016, consisting primarily of net borrowings from the ABL Facility of $50.4 million, an extension on the First Lien Facility of $100.0 million and proceeds from the IPO of $156.9 million offset by the repayment of the Second Lien Facility of $160.0 million. In the six months ended October 31, 2015, cash used in financing activities was $3.1 million, which consisted primarily of net borrowings from the ABL Facility of $4.5 million offset by stock repurchases of $5.8 million.
Adjusted Working Capital
Adjusted working capital is an important measurement that we use in determining the efficiencies of our operations and our ability to readily convert assets into cash. Adjusted working capital represents current assets, excluding cash and cash equivalents, minus current liabilities, excluding current maturities of long‑term debt. The material components of adjusted working capital for us include accounts receivable, inventory and accounts payable. Management of our adjusted working capital helps to ensure we can maximize our return and continue to invest in our operations for future growth. Comparing our adjusted working capital to that of other companies in our industry may be difficult, as other companies may calculate adjusted working capital differently than we do. A summary of working capital and adjusted working capital as of October 31, 2016 and April 30, 2016 is shown in the following table:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
April 30,
|
|
|
|
2016
|
|
2016
|
|
|
|
(in thousands)
|
|
Trade accounts and notes receivable, net of allowances
|
|
$
|
324,622
|
|
$
|
270,257
|
|
Inventories, net
|
|
|
192,422
|
|
|
165,766
|
|
Accounts payable
|
|
|
(106,889)
|
|
|
(91,500)
|
|
|
|
|
410,155
|
|
|
344,523
|
|
Other current assets
|
|
|
36,910
|
|
|
35,620
|
|
Other current liabilities
|
|
|
(92,762)
|
|
|
(129,075)
|
|
Working capital
|
|
$
|
354,303
|
|
$
|
251,068
|
|
Cash and cash equivalents
|
|
|
(16,387)
|
|
|
(19,072)
|
|
Current maturities of long term debt
|
|
|
11,168
|
|
|
35,581
|
|
Adjusted working capital
|
|
$
|
349,084
|
|
$
|
267,577
|
|
Our adjusted working capital increased by $81.5 million from April 30, 2016 to October 31, 2016 as a result of an increase in working capital of $103.2 million and a decrease in cash and cash equivalents of $2.7 million, offset by a $24.4 million decrease in current maturities of long term debt. Working capital increased by $103.2 million as a result of an increase in trade accounts and notes receivable and inventories, net of $54.4 million and $26.7 million, respectively, and decreases in other current liabilities of $36.3 million partially offset by an increase in accounts payable of $15.4 million. The increase in trade accounts and notes receivable was related to increases in sales and to working capital needs related to acquisitions.
Our Credit Facilities
Our long‑term debt consisted of the following at October 31, 2016 and April 30, 2016:
Acquisition Debt
On April 1, 2014, our wholly‑owned subsidiaries, GYP Holdings II Corp., as parent guarantor, and GYP Holdings III Corp., as borrower, entered into a senior secured first lien term loan facility, or the First Lien Facility, and a senior secured second lien term loan facility, or the Second Lien Facility and, together with the First Lien Facility, the Term Loan Facilities, in the aggregate amount of $550.0 million in connection with the Acquisition. The proceeds from the Term Loan Facilities were used to (i) repay all amounts outstanding under the 2010 Credit Facility in the amount of $86.1 million, (ii) pay the Acquisition purchase price and (iii) pay related fees and expenses.
The First Lien Facility was issued in an original aggregate principal amount of $388.1 million (net of $1.9 million of original issue discount). The Second Lien Facility was issued in an original aggregate principal amount of $158.4 million (net of $1.6 million of original issue discount). The First Lien Facility permits us to add one or more incremental term loans up to a fixed amount of $100.0 million plus a certain amount depending on a secured first lien leverage ratio test included in the First Lien Facility. The First Lien Facility bears interest at LIBOR (subject to a floor of 1.00%) plus a borrowing margin of 3.75%. The First Lien Facility amortizes in nominal quarterly installments equal to approximately $975 thousand or 0.25% of the original aggregate principal amount of the First Lien Facility and matures on April 1, 2021. Provided that the individual affected lenders agree accordingly, the maturities of the term loans under the Term Loan Facilities, may, upon our request and without the consent of any other lender, be extended. Further, we are not subject to any financial maintenance covenants pursuant to the terms of the Term Loan Facilities.
In June 2016, we used the IPO proceeds together with cash on hand to repay the $160.0 million principal amount of our Second Lien Facility, which was a payment in full of the entire loan balance due under the Second Lien Facility during the six months ended October 31, 2016.
In September 2016, we entered into the Incremental Amendment to the Credit Agreement. The Incremental Amendment amended the Credit Agreement to, among other things, (i) refinance approximately $381.2 million in currently outstanding existing term loans borrowed under the Credit Agreement with a new tranche of $481.2 million incremental term loans, and (ii) reduce the interest rate applicable to loans borrowed under the Credit Agreement to LIBOR (subject to a floor of 1.00%) plus a borrowing margin of 3.50% from LIBOR plus a borrowing margin of 3.75%. At October 31, 2016, the borrowing interest rates for the First Lien Facility was 4.50%. Accrued interest, presented within other accrued expenses and current liabilities in our consolidated balance sheets, was approximately $0.4 million and $0.2 million at October 31, 2016 and April 30, 2016, respectively, and cash paid for interest was $11.0 million and $15.7 million in the six months ended October 31, 2016 and 2015, respectively.
Asset Based Lending Facility
The asset‑based revolving credit facility, or the ABL Facility, entered into on April 1, 2014, provides for revolving loans and the issuance of letters of credit up to an initial maximum aggregate principal amount of $200.0 million. Extensions of credit under the ABL Facility will be limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments. As of six months ended October 31, 2016, there was approximately $0.4 million accrued interest payable on the ABL Facility. In the six months ended October 31, 2016 and 2015, we paid interest and other fees of $2.0 million and $0.8 million, respectively, on the ABL Facility.
In fiscal 2016, we amended our ABL Facility to exercise the $100.0 million accordion feature of the ABL Facility which increased the aggregate revolving commitments from $200.0 million to $300.0 million and increased the sublimit for same day swing line borrowings from $20.0 million to $30.0 million. The other terms of the ABL Facility remain unchanged.
At our option, the interest rates applicable to the loans under the ABL Facility are based at LIBOR or Base Rate, plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility Credit Agreement, based on average daily availability for the most recent fiscal quarter. The ABL Facility also contains an unused commitment fee subject to utilization, as included in the ABL Facility Credit Agreement.
The ABL Facility will mature on April 1, 2019 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon our request and without the consent of any other lender.
As of October 31, 2016, approximately $167.6 million was available for future borrowings under our ABL Facility.
Subsequent to October 31, 2016, the Company entered into the Second Amendment to the ABL Credit Agreement. The Second Amendment amended the ABL Credit Agreement to, among other things, (i) increase the Revolving Credit Commitments thereunder from $300.0 million to $345.0 million, and (ii) extend the maturity date of the ABL Credit Agreement from April 1, 2019 to the earlier of (a) November 18, 2021 or (b) the date of termination in whole of the ABL Credit Agreement and the related obligations. The Second Amendment also amended the interest rate
margin applicable to loans borrowed under the Credit Agreement to reflect a 0.25% decrease in the interest rate margin at each pricing level (as defined in the ABL Credit Agreement) relative to the interest rate margins charged at the corresponding pricing levels under the Credit Agreement.
Collateral under the ABL Facility and Term Loan Facilities
The ABL Facility is collateralized by (a) first priority perfected liens on our (i) accounts receivable, (ii) inventory, (iii) deposit accounts, (iv) cash and cash equivalents, (v) tax refunds and tax payments, (vi) chattel paper and (vii) documents, instruments, general intangibles, securities accounts, books and records, proceeds and supporting obligations related to each of the foregoing, subject to certain exceptions (collectively, “ABL Priority Collateral”) and (b) third priority perfected liens on our remaining assets not constituting ABL Priority Collateral, subject to customary exceptions (collectively, “Term Priority Collateral”).
The First Lien Facility and the Second Lien Facility are collateralized by (a) first priority liens and second priority liens, respectively, on the Term Priority Collateral and (b) second priority liens and third priority liens, respectively, on the ABL Priority Collateral, subject to customary exceptions.
Prepayments under the ABL Facility and Term Loan Facilities
The ABL Facility may be prepaid at our option at any time without premium or penalty and will be subject to mandatory prepayment if the outstanding ABL Facility exceeds the lesser of the (i) borrowing base and (ii) the aggregate amount of commitments. Mandatory prepayments do not result in a permanent reduction of the lenders’ commitments under the ABL Facility.
The Term Loans under the Term Loan Facilities may be prepaid at any time without penalty. Under certain circumstances and subject to certain exceptions, the Term Loan Facilities will be subject to mandatory prepayments in the amount equal to: 100% of the net proceeds of certain assets sales and issuances or incurrences of non‑permitted indebtedness; and 50% of annual excess cash flow for any fiscal year, such percentage to decrease to 25% or 0% depending on the attainment of certain total leverage ratio targets.
As of October 31, 2016 and April 30, 2015, there was no requirement for a prepayment related to excess cash flow.
Guarantees
GYP Holdings III Corp. is the borrower under Term Loan Facilities and the lead borrower under the ABL Facility. Our wholly‑owned subsidiary, GYP Holdings II Corp. (and direct parent of GYP Holdings III Corp.) guarantees our payment obligations under the Term Loan Facilities and the ABL Facility. Certain of our other subsidiaries are co‑borrowers under the ABL Facility and guarantee our payment obligations under the Term Loan Facilities.
Covenants under the ABL Facility and Term Loan Facilities
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants at October 31, 2016 and April 30, 2016.
The Term Loan Facilities contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the Term Loan Credit Agreements, to: (i) incur more indebtedness; (ii) pay dividends, redeem stock or make other distributions; (iii) make investments; (iv) create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; (v) create liens securing indebtedness; (vi) transfer or sell assets; (vii) merge or consolidate; (viii) enter into certain transactions with our affiliates; and (ix) prepay or amend the terms of certain indebtedness. We were in compliance with all restrictive covenants at October 31, 2016 and April 30, 2016.
Events of Default under the ABL Facility and Term Loan Facilities
The ABL Facility and Term Loan Facilities provide for customary events of default, including non‑payment of principal, interest or fees, violation of covenants, material inaccuracy of representations or warranties, specified cross
default to other material indebtedness, certain bankruptcy events, certain ERISA events, material invalidity of guarantees or security interest, material judgments and changes of control.
Installment Notes
The installment notes as of October 31, 2016 and April 30, 2016 represent notes for subsidiary stock repurchases from shareholders, notes for the payout of stock appreciation rights and a note to a seller of an acquired business.
Contractual Obligations
A
s discussed in "
—Recent Events
" we fully repaid the Second Lien Facility using net proceeds from our IPO in the six months ended October 31, 2016. Other than the repayment of the Second Lien Facility t
here 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, 2016, 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, 2016.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.
Accounting Pronouncements Recently Adopted
See Note 1,
Basis of Presentation, Business and Summary of Significant Accounting Policies
, of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding recently adopted accounting pronouncements.
Accounting Pronouncements Not Yet Adopted
See Note 1,
Basis of Presentation, Business and Summary of Significant Accounting Policies
, of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding not yet adopted accounting pronouncements.
Non-GAAP Financial Measures
Adjusted EBITDA
The following is a reconciliation of our net income to Adjusted EBITDA for the six months ended October 31, 2016 and 2015. 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, which are not recognized financial measures under GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA and Adjusted EBITDA margin is helpful in highlighting trends in our operating results, while other measures can differ significantly depending on long‑term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.
In addition, we utilize Adjusted EBITDA in certain calculations under the ABL Facility and the First Lien Facility. The ABL Facility and the First Lien Facility permit us to make certain additional adjustments in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data
presented in this Quarterly Report on Form 10‑Q. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA. See also, “—Liquidity and Capital Resources—Our Credit Facilities.”
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. Some of these limitations include:
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·
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Adjusted EBITDA and Adjusted EBITDA margin do not reflect every expenditure, future requirements for capital expenditures or contractual commitments;
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·
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Adjusted EBITDA does not reflect changes in our working capital needs;
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·
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Adjusted EBITDA does not reflect the significant interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt;
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·
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Adjusted EBITDA does not reflect income tax expense and, because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate;
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·
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|
although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any costs of such replacements;
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·
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|
non‑cash compensation is and will remain a key element of our overall long‑term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and
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·
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Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations.
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We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA and Adjusted EBITDA margin only as supplemental information.
The following is a reconciliation of our net income to Adjusted EBITDA for the three and six months ended October 31, 2016 and 2015:
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Three Months Ended
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Six Months Ended
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October 31,
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October 31,
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|
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2016
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|
2015 (i)
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|
2016
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|
2015 (i)
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|
|
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(dollars in thousands)
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|
(dollars in thousands)
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|
|
|
|
|
|
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|
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|
|
|
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|
|
Net income
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$
|
17,224
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$
|
2,825
|
|
$
|
26,387
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|
$
|
5,836
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|
Interest expense
|
|
|
8,620
|
|
|
9,260
|
|
|
21,623
|
|
|
18,517
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|
Interest income
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|
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(35)
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|
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(208)
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|
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(78)
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|
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(438)
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|
Income tax expense
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|
|
710
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|
|
2,623
|
|
|
6,869
|
|
|
5,478
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|
Depreciation expense
|
|
|
6,548
|
|
|
6,465
|
|
|
12,930
|
|
|
13,738
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|
Amortization expense
|
|
|
10,820
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|
|
8,797
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|
|
20,233
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|
|
17,589
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EBITDA
|
|
$
|
43,887
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|
$
|
29,762
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$
|
87,964
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$
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60,720
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Stock appreciation rights expense(a)
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$
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(144)
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|
$
|
692
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$
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(236)
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$
|
1,286
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Redeemable noncontrolling interests(b)
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|
|
2,531
|
|
|
451
|
|
|
2,823
|
|
|
1,005
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|
Equity-based compensation(c)
|
|
|
686
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|
|
863
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|
|
1,359
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|
|
1,361
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Severance and other permitted costs(d)
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|
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118
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|
|
824
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|
|
258
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|
|
1,381
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Transaction costs (acquisitions and other)(e)
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|
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1,827
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|
|
1,340
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|
|
2,481
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|
|
1,755
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Loss (gain) on disposal of assets
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|
|
68
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|
|
305
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|
|
(130)
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|
|
280
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|
Management fee to related party(f)
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|
|
—
|
|
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563
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|
|
188
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|
|
1,125
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Effects of fair value adjustments to inventory(g)
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|
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457
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|
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—
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621
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|
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—
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Interest rate cap mark-to-market(h)
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89
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|
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—
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|
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132
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—
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Adjusted EBITDA
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$
|
49,519
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$
|
34,800
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|
$
|
95,460
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|
$
|
68,913
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(a)
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Represents non‑cash compensation expenses related to stock appreciation rights agreements. For additional details regarding stock appreciation rights, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Subsidiary Equity‑Based Deferred Compensation Arrangements” included in our Annual Report on Form 10-K for the year ended April 30, 2016.
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(b)
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Represents non‑cash compensation expense related to changes in the redemption values of noncontrolling interests. For additional details regarding redeemable noncontrolling interests of our subsidiaries, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Subsidiary Equity‑Based Deferred Compensation Arrangements” included in our Annual Report on Form 10-K for the year ended April 30, 2016.
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(c)
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Represents non‑cash equity‑based compensation expense related to the issuance of stock options.
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(d)
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Represents severance expenses and other costs permitted in calculations under the ABL Facility and the Term Loan Facilities.
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(e)
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Represents one‑time costs related to our IPO and acquisitions (other than the Acquisition) paid to third party advisors.
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(f)
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Represents management fees paid by us to our Sponsor. Following our IPO, our Sponsor no longer receives management fees from us.
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(g)
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Represents the non‑cash cost of sales impact of purchase accounting adjustments to increase inventory to its estimated fair value.
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(h)
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Represents the mark‑to‑market adjustments for the interest rate cap.
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(i)
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Quarterly amounts for fiscal 2016 included in the table above reflect the revised balances for income tax expense and net income as discussed in Note 1, “Basis of Presentation, Business, and Summary of Significant Accounting Policies” of Item 1 of this Quarterly Report on Form 10-Q.
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Adjusted Working Capital
Adjusted working capital represents current assets, excluding cash and cash equivalents, minus current liabilities, excluding current maturities of long-term debt. Adjusted working capital is not a recognized term under GAAP and does not purport to be an alternative to working capital. Management believes that adjusted working capital is useful in analyzing the cash flow and working capital needs of the Company. We exclude cash and cash equivalents and current maturities of long-term debt to evaluate the investment in working capital required to support our business.
The following is a reconciliation from working capital, the most directly comparable financial measure under GAAP, to adjusted working capital as of the dates presented:
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October 31,
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April 30,
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2016
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2016
|
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(in thousands)
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Current assets
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$
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553,954
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$
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471,643
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Current liabilities
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|
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199,651
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|
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220,575
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Working capital
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$
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354,303
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$
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251,068
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Cash and cash equivalents
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|
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(16,387)
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|
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(19,072)
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|
Current maturities of long term debt
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|
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11,168
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|
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35,581
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Adjusted working capital
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$
|
349,084
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$
|
267,577
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk through fluctuations in interest rates on our debt obligations. A significant portion of our outstanding debt bears interest at variable rates. As a result, increases in interest rates could increase the cost of servicing our debt and could materially reduce our profitability and cash flows. However, we have entered into an interest rate cap on three-month U.S. dollar LIBOR based on a strike rate of 2.0%, which effectively caps the interest rate at 5.5% on an initial notional amount of $275.0 million of our variable rate debt obligation under the First Lien Facility, or any replacement facility with similar terms. Excluding the impact of this interest rate cap and the interest rate floor on the First Lien Facility, each 1% increase in interest rates on the First Lien Facility would increase our annual interest expense by approximately $4.8 million based on balances outstanding under the First Lien Facility as of October 31, 2016. Assuming the ABL Facility was fully drawn, each 1% increase in interest rates would result in a $3.5 million increase in our annual interest expense on the ABL Facility. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities, as well as through hedging activities, such as entering into interest rate derivative agreements, as discussed below under "—Derivative Financial Instruments." As of October 31, 2016, $152.4 million was outstanding under the ABL Facility and $167.6 million was available for future borrowings under the ABL Facility. In addition, we had $480.0 million outstanding under the First Lien Facility.
Other than noted above, there have been no material changes to our exposure to market risks from those reported in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance
that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management of the company, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Because of their inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on their evaluation, as of the end of the period covered in this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described below.
Remediation Efforts and Status of Previously Disclosed Material Weaknesses
As previously disclosed in the prospectus filed with the SEC on May 27, 2016 in connection with the initial public offering, or IPO, of our common stock we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses included an insufficient complement of personnel with a level of U.S. GAAP accounting knowledge commensurate with our financial reporting requirements, a lack of formal accounting policies and procedures, ineffective IT general computer controls and a lack of controls over the preparation and review of manual journal entries. The material weakness related to our IT general controls could impact the effectiveness of our IT-dependent controls which could result in our inability to prevent or detect material misstatements in our financial statement accounts or disclosures. These deficiencies previously resulted in material adjustments to correct the previously issued fiscal 2013 and 2014 consolidated financial statements of our wholly owned subsidiary, GYP Holdings III Corp., and could result in material misstatements to our consolidated financial statements that would not be prevented or detected.
We are currently in the process of remediating the above material weaknesses and have taken several steps to improve our internal control over financial reporting. While we are pleased with the progress of our remediation efforts to date, we will continue to evaluate their effectiveness on our remediation status and may determine to take additional measures to address the material weaknesses or otherwise modify our remediation plan. Our finance and IT leadership continues to closely evaluate, supplement, and make changes, as needed, to the complement of resources responsible for our ongoing remediation efforts and the effectiveness of internal control over financial reporting
.
However, while we have made progress in the overall remediation status, the material weaknesses cannot be considered remediated until the applicable controls have been designed, implemented and operated for a sufficient period of time and management has concluded that these controls are operating effectively.
To address the material weakness associated with an insufficient complement of personnel with a level of U.S. GAAP accounting knowledge commensurate with our financial reporting requirements, we have taken the following measures:
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·
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Beginning in early 2015, we hired additional financial reporting personnel with technical accounting and financial reporting experience.
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·
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During fiscal 2016 and in the first quarter of fiscal 2017, we made changes to our financial reporting and accounting resources, including adjusting the roles and responsibilities of these resources to align with their experience and expertise.
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·
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In fiscal 2016, we enhanced our internal audit function through the engagement of a third party professional services firm and the hiring of an experienced senior manager of internal audit with public company experience to lead our internal audit function and assist us in the monitoring of internal control over financial reporting.
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To address the material weakness related to formal accounting policies and procedures, we have taken the following measures over the last twelve months:
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·
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We developed and implemented formal accounting policies and procedures, including those designed to evaluate the impact of new accounting pronouncements.
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·
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We provided training to our entire accounting organization in order to enhance the level of communication and understanding of internal controls.
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|
·
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We established a disclosure committee designed to strengthen the effectiveness of our disclosure controls and evaluate whether our financial statements and public filings include the appropriate disclosures.
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To address the material weakness associated with ineffective IT general computer controls, over the last twelve months, we have been developing and implementing numerous enhancements to our IT infrastructure and to the design of our IT policies and procedures. Specifically, we have performed the following:
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·
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We developed policies and procedures related to the management and approval of changes in our IT environment, including procedures to review changes in IT data and the configuration of systems. We are in the final phase of implementing these policies and procedures.
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·
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We developed policies and procedures related to security access, including policies and procedures to set up or remove users to our IT systems. We are in the final phase of implementing these policies and procedures.
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·
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We established policies and procedures for the performance of security access reviews of our key financial systems’ users to ensure the appropriateness of their roles and security access levels. These access reviews will be performed on a periodic basis. Management is in the process of finalizing the initial series of these reviews.
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·
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We developed monitoring activities designed to effectively mitigate lack of segregation of duties in IT development and production roles. We are in the final phase of implementing these policies and procedures.
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To address the material weakness associated with the lack of controls over the preparation and review of manual journal entries, we developed controls designed to segregate the duties of creating and posting accounting journal entries, which we implemented during the fiscal quarter ended October 31, 2016. We continue to review these controls and are assessing whether additional enhancements are necessary to remediate the related material weakness.
Changes in Internal Control Over Financial Reporting
Except as described above in “—Remediation Efforts and Status of Previously Disclosed Material Weaknesses,” there were no changes in our internal control over financial reporting during the fiscal quarter ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.