Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” “us,” “ADS” and the “Company” refer to Advanced Drainage Systems, Inc. and its directly- and indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean only Advanced Drainage Systems, Inc. exclusive of its subsidiaries.
Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, references to “year” pertain to our fiscal year. For example, 2022 refers to fiscal 2022, which is the period from April 1, 2021 to March 31, 2022.
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our Condensed Consolidated Financial Statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements included in our Fiscal 2021 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 27, 2021. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in the forward-looking statements. For more information, see the section below entitled “Forward Looking Statements.”
We consolidate our joint ventures for purposes of GAAP, except for our South American Joint Venture.
Overview
ADS is the leading manufacturer of innovative water management solutions in the stormwater and on-site septic wastewater industries, providing superior drainage solutions for use in the construction and agriculture marketplaces. Our innovative products, for which we hold many patents, are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, industry-acclaimed engineering support, overall product breadth and scale plus manufacturing excellence.
Impact of COVID-19
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it continues to spread throughout the United States and globally. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruptions and may have an adverse effect on our business. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. While our production facilities are operating as essential businesses, the Company continues to assess the potential effects and may experience future impacts such as reduced operations or temporarily closing facilities.
Executive Summary
Third Quarter Fiscal 2022 Results
•Net sales increased 47.1% to $715.4 million
•Net income increased 37.8% to $74.5 million
•Adjusted EBITDA, a non-GAAP measure, increased 26.9% to $176.2 million
Net sales increased $229.2 million, or 47.1%, to $715.4 million, as compared to $486.1 million in the prior year quarter. Domestic pipe sales increased $145.8 million, or 57.4%, to $400.0 million. Domestic allied products & other sales increased $37.9 million, or 34.5%, to $147.5 million. Infiltrator sales increased $50.3 million, or 51.1%, to $148.7 million. These increases were driven by double-digit sales growth in the U.S. construction end markets. International sales increased $10.5 million, or 23.1%, to $55.8 million, driven by strong sales growth in the Canadian, Mexican and Exports businesses.
Gross profit increased $40.5 million, or 24.0%, to $209.0 million as compared to $168.5 million in the prior year. The increase in gross profit is primarily due to the increase in sales volume and favorable pricing on pipe, on-site septic and allied products. These increases were partially offset by inflationary cost pressure on materials, transportation and labor, as well as an increase in the use of third-party logistics services. Labor shortages and absenteeism related to COVID-19 remain a challenge in both manufacturing and transportation operations.
Adjusted EBITDA, a non-GAAP measure, increased $37.3 million, or 26.9%, to $176.2 million, as compared to $138.9 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 24.6% as compared to 28.6% in the prior year.
Year-to-Date Fiscal 2022 Results
•Net sales increased 35.9% to $2,091.1 million
•Net income increased 11.0% to $227.9 million
•Adjusted EBITDA, a non-GAAP measure, increased 7.4% to $507.5 million
•Cash provided by operating activities of $193.8 million
•Free cash flow, a non-GAAP measure, of $93.5 million
Net sales increased $552.2 million, or 35.9%, to $2,091.1 million, as compared to $1,539.0 million in the prior year. Domestic pipe sales increased $338.6 million, or 41.3%, to $1,158.6 million. Domestic allied products & other sales increased $75.7 million, or 22.0%, to $420.2 million. Infiltrator sales increased $114.8 million, or 37.4%, to $421.3 million. These increases were driven by double-digit sales growth in both the U.S. construction and agriculture end markets. International sales increased $54.3 million, or 41.6%, to $184.8 million, driven by double-digit sales growth in the Canadian, Mexican and Exports businesses.
Gross profit increased $47.3 million, or 8.4%, to $610.2 million as compared to $562.9 million in the prior year. The increase is primarily due an increase in sales volume and favorable pricing on pipe, on-site septic and allied products. These increases were partially offset by inflationary cost pressure on materials, transportation and labor, as well as an increase in the use of third-party logistics services. Labor shortages and absenteeism related to COVID-19 remain a challenge in both manufacturing and transportation operations.
Adjusted EBITDA, a non-GAAP measure, increased $35.1 million, or 7.4%, to $507.5 million, as compared to $472.4 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 24.3% as compared to 30.7% in the prior year.
Results of Operations
Comparison of the Three Months ended December 31, 2021 to the Three Months ended December 31, 2020
The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.
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For the Three Months Ended December 31,
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2021
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|
2020
|
|
Consolidated Statements of Operations data:
|
(In thousands)
|
|
Net sales
|
$
|
715,357
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|
|
100.0
|
%
|
|
$
|
486,145
|
|
|
100.0
|
%
|
|
Cost of goods sold
|
506,380
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|
|
70.8
|
|
|
317,640
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|
|
65.3
|
|
|
Gross profit
|
208,977
|
|
|
29.2
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|
|
168,505
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|
|
34.7
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Selling, general and administrative
|
80,059
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|
11.2
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|
66,606
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|
13.7
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|
Loss on disposal of assets and costs from exit and
disposal activities
|
3,466
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0.5
|
|
|
980
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0.2
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Intangible amortization
|
15,138
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2.1
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|
17,956
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3.7
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Income from operations
|
110,314
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|
15.4
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|
82,963
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|
17.1
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Interest expense
|
8,756
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|
1.2
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|
8,433
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|
1.7
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Derivative gains and other income, net
|
(979)
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(0.1)
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(165)
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|
—
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Income before income taxes
|
102,537
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|
14.3
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|
74,695
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15.4
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Income tax expense
|
28,792
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4.0
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20,264
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4.2
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Equity in net (income) loss of unconsolidated affiliates
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(717)
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(0.1)
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|
390
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|
0.1
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Net income
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74,462
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|
10.4
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|
|
54,041
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11.1
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Less: net income attributable to noncontrolling interest
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784
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0.1
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|
|
267
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0.1
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Net income attributable to ADS
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$
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73,678
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10.3
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%
|
|
$
|
53,774
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|
|
11.1
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%
|
Net sales - The following table presents net sales to external customers by reportable segment for the three months ended December 31, 2021 and 2020.
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(Amounts in thousands)
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2021
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2020
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$ Variance
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% Variance
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Pipe
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$
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396,695
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$
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252,898
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$
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143,797
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56.9
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%
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Infiltrator
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122,363
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81,221
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41,142
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50.7
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International
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50,143
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42,407
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7,736
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18.2
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Allied Products & Other
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146,156
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109,619
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36,537
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33.3
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Total Consolidated
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$
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715,357
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$
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486,145
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$
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229,212
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47.1
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%
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Our consolidated net sales for the three months ended December 31, 2021 increased by $229.2 million, or 47.1%, compared to the same period in fiscal 2021. The increase in net sales was primarily a result of growth in our domestic Pipe along with both the Infiltrator and International segments.
Our Pipe segment experienced growth primarily through improved pricing/mix of products sold. Infiltrator achieved growth through improved price/mix of products sold and higher volumes associated with the residential market. The increase in our International segment was driven by growth in the Canadian and Mexican businesses. Growth in Allied Products & Other was driven mainly by improved price/mix of products offerings.
Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the three months ended December 31, 2021 and 2020.
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(Amounts in thousands)
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2021
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2020
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$ Variance
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% Variance
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Pipe
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$
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68,717
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$
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58,679
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$
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10,038
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17.1
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%
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Infiltrator
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56,871
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45,264
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11,607
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25.6
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International
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11,816
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11,581
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|
235
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2.0
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Allied Products & Other
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71,617
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53,913
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17,704
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32.8
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Intersegment eliminations
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(44)
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(932)
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888
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(95.3)
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Total gross profit
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$
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208,977
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$
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168,505
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$
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40,472
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24.0
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%
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Our consolidated Cost of goods sold for the three months ended December 31, 2021 increased by $188.7 million, or 59.4%, and our consolidated Gross profit increased by $40.5 million, or 24.0%, compared to the same period in fiscal 2021. The increase in our gross profit was due to an increase in net sales from improved pricing partially offset by inflationary pressures of higher material and transportation costs along with higher manufacturing costs.
Selling, general and administrative expenses
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Three Months Ended December 31,
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(Amounts in thousands)
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2021
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|
2020
|
|
Selling, general and administrative expenses
|
$
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80,059
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$
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66,606
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% of Net sales
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11.2
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%
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13.7
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%
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Selling, general and administrative expenses for three months ended December 31, 2021 increased $13.5 million from the same period in fiscal 2021 and as a percentage of sales, decreased by 2.5%. The increase in Selling, general and administrative expenses is the result of increased headcount to support business growth along with higher spend in various areas impacted last year by COVID-19 including travel and entertainment expenses and increased transaction costs.
Loss on disposal of assets and costs from exit and disposal activities - The change in Loss on disposal of assets and costs from exit and disposal activities is primarily due to asset disposals.
Intangible amortization - Intangible amortization decreased $2.8 million due to the accelerated method of amortization for customer relationships.
Interest expense - Interest expense increased $0.3 million in the three months ended December 31, 2021 compared to the same period in the previous fiscal year. The increase was primarily due to increased average debt levels.
Derivative gain and other income, net - Derivative gain and other income increased by $0.8 million for the three months ended December 31, 2021 compared to the same period in the previous fiscal year.
Income tax expense - The following table presents the effective tax rates for the three months ended December 31, 2021 and 2020.
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Three Months Ended December 31,
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2021
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|
2020
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Effective tax rate
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28.1
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%
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|
27.1
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%
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The change in the effective tax rate was primarily due to changes in the Company’s projected annual effective tax rate and other items. See “Note 11. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - The Equity in net (income) loss of unconsolidated affiliates increased for the three months ended December 31, 2021 as compared to the same period in the previous fiscal year due to an increase in the current period income at our South American Joint Venture.
Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased for three months ended December 31, 2021 due to an increase in net income at our ADS Mexicana joint venture.
Comparison of the Nine Months Ended December 31, 2021 to the Nine Months Ended December 31, 2020
The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.
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|
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For the Nine Months Ended December 31,
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2021
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2020
|
|
Consolidated Statements of Operations data:
|
(In thousands)
|
|
Net sales
|
$
|
2,091,128
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|
100.0
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%
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$
|
1,538,971
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100.0
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%
|
|
Cost of goods sold
|
1,480,973
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|
70.8
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|
976,106
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|
63.4
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|
|
Gross profit
|
610,155
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|
|
29.2
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|
|
562,865
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|
|
36.6
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|
|
Selling, general and administrative
|
230,231
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|
|
11.0
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|
|
194,083
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|
12.6
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|
Loss on disposal of assets and costs from exit and
disposal activities
|
2,554
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|
0.1
|
|
|
3,254
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|
|
0.2
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|
|
Intangible amortization
|
46,229
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|
|
2.2
|
|
|
53,893
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|
|
3.5
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|
|
Income from operations
|
331,141
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|
|
15.8
|
|
|
311,635
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|
|
20.2
|
|
|
Interest expense
|
25,100
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|
|
1.2
|
|
|
27,763
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|
|
1.8
|
|
|
Derivative gain and other income, net
|
(2,791)
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|
|
(0.1)
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|
|
(883)
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|
|
(0.1)
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|
|
Income before income taxes
|
308,832
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|
|
14.8
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|
|
284,755
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|
|
18.5
|
|
|
Income tax expense
|
82,063
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|
|
3.9
|
|
|
79,291
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|
|
5.2
|
|
|
Equity in net (income) loss of unconsolidated affiliates
|
(1,128)
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|
|
(0.1)
|
|
|
150
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|
|
—
|
|
|
Net income
|
227,897
|
|
|
10.9
|
|
|
205,314
|
|
|
13.3
|
|
|
Less: net income attributable to noncontrolling interest
|
2,873
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|
|
0.1
|
|
|
838
|
|
|
0.1
|
|
|
Net income attributable to ADS
|
$
|
225,024
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|
|
10.8
|
%
|
|
$
|
204,476
|
|
|
13.3
|
%
|
Net sales - The following table presents net sales to external customers by reportable segment for the nine months ended December 31, 2021 and 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
(Amounts in thousands)
|
2021
|
|
2020
|
|
$ Variance
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|
% Variance
|
|
Pipe
|
$
|
1,150,655
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|
|
$
|
815,201
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|
|
$
|
335,454
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|
|
41.1
|
%
|
|
Infiltrator
|
353,567
|
|
|
252,600
|
|
|
100,967
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|
|
40.0
|
|
|
International
|
170,999
|
|
|
126,638
|
|
|
44,361
|
|
|
35.0
|
|
|
Allied Products & Other
|
415,907
|
|
|
344,532
|
|
|
71,375
|
|
|
20.7
|
|
|
Total Consolidated
|
$
|
2,091,128
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|
|
$
|
1,538,971
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|
|
$
|
552,157
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|
|
35.9
|
%
|
Our consolidated net sales for the nine months ended December 31, 2021 increased by $552.2 million, or 35.9%, compared to the same period in fiscal 2021. The increase in net sales was primarily a result of growth in our domestic Pipe along with both the Infiltrator and International segments.
Our Pipe segment experienced growth in the residential, agriculture and construction markets through both higher volumes and improved pricing/mix of products sold. Infiltrator achieved growth through improved price/mix of products sold and higher volumes associated with the residential market. The increase in our International segment was driven by growth in the Canadian, Mexican and Export businesses. Growth in Allied Products & Other was driven mainly by improved price/mix of products offerings.
Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the nine months ended December 31, 2021 and 2020.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
2021
|
|
2020
|
|
$ Variance
|
|
% Variance
|
|
Pipe
|
$
|
194,644
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|
|
$
|
216,318
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|
|
$
|
(21,674)
|
|
|
(10.0)
|
%
|
|
Infiltrator
|
168,090
|
|
|
139,941
|
|
|
28,149
|
|
|
20.1
|
|
|
International
|
45,512
|
|
|
34,948
|
|
|
10,564
|
|
|
30.2
|
|
|
Allied Products & Other
|
200,488
|
|
|
172,576
|
|
|
27,912
|
|
|
16.2
|
|
|
Intersegment eliminations
|
1,421
|
|
|
(918)
|
|
|
2,339
|
|
|
(254.8)
|
|
|
Total gross profit
|
$
|
610,155
|
|
|
$
|
562,865
|
|
|
$
|
47,290
|
|
|
8.4
|
%
|
Our consolidated Cost of goods sold for the nine months ended December 31, 2021 increased by $504.9 million, or 51.7%, and our consolidated Gross profit increased by $47.3 million, or 8.4%, compared to the same period in fiscal 2021. The increase in our gross profit was due to an increase in net sales from higher volumes and improved pricing and was partially offset by inflationary pressures of higher material and transportation costs along with higher manufacturing costs.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended December 31,
|
|
(Amounts in thousands)
|
2021
|
|
2020
|
|
Selling, general and administrative expenses
|
$
|
230,231
|
|
|
$
|
194,083
|
|
|
% of Net sales
|
11.0
|
%
|
|
12.6
|
%
|
Selling, general and administrative expenses for nine months ended December 31, 2021 increased $36.1 million from the same period in fiscal 2021 and as a percentage of sales, decreased by 1.6%. The increase in Selling, general and administrative expenses is the result of increased headcount to support business growth along with higher spend in various areas impacted last year by COVID-19 including travel and entertainment expenses and transaction costs.
Loss on disposal of assets and costs from exit and disposal activities - The change in Loss on disposal of assets and costs from exit and disposal activities is primarily due to asset disposals.
Intangible amortization - Intangible amortization decreased by $7.7 million primarily due the accelerated method of amortization for customer relationships.
Interest expense - Interest expense decreased $2.7 million in the nine months ended December 31, 2021 compared to the same period in the previous fiscal year. The decrease was primarily due to decreased average debt levels.
Derivative gain and other income, net - Derivative gain and other income increased by $1.9 million for the nine months ended December 31, 2021 compared to the same period in the previous fiscal year.
Income tax expense – The following table presents the effective tax rates for the nine months ended December 31, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
Effective tax rate
|
26.6
|
%
|
|
27.8
|
%
|
The change in the effective tax rate was primarily due to discrete income tax events related to the stock-based compensation windfall and other items. See “Note 11. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - The Equity in net (income) loss of unconsolidated affiliates increased for the nine months ended December 31, 2021 as compared to the same period in the previous fiscal year due to an increase in the current period income at our South American Joint Venture.
Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased for the nine months ended December 31, 2021 due to increased net income at our ADS Mexicana joint venture.
Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP and should not be considered as alternatives to net income as measures of financial performance or cash flows from operations or any other performance measure derived in accordance with GAAP. We calculate Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.
Adjusted EBITDA and Adjusted EBITDA Margin are included in this Form 10-Q because they are key metrics used by management and our board of directors to assess our consolidated financial performance. These non-GAAP financial measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use these non-GAAP financial measures to supplement GAAP measures of performance to evaluate the effectiveness of our consolidated business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We use Adjusted EBITDA Margin to evaluate our ability to generate profitable sales.
Adjusted EBITDA and Adjusted EBITDA Margin contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs, cash expenditures to replace assets being depreciated and amortized and interest expense, or the cash requirements necessary to service interest on principal payments on our indebtedness. In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency transaction losses. Management compensates for these limitations by relying on our GAAP results and using non-GAAP measures on a supplemental basis.
The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods presented.
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(In thousands)
|
|
Net income
|
$
|
74,462
|
|
|
$
|
54,041
|
|
|
$
|
227,897
|
|
|
$
|
205,314
|
|
|
Depreciation and amortization
|
34,837
|
|
|
35,762
|
|
|
103,687
|
|
|
107,321
|
|
|
Interest expense
|
8,756
|
|
|
8,433
|
|
|
25,100
|
|
|
27,763
|
|
|
Income tax expense
|
28,792
|
|
|
20,264
|
|
|
82,063
|
|
|
79,291
|
|
|
EBITDA
|
146,847
|
|
|
118,500
|
|
|
438,747
|
|
|
419,689
|
|
|
Loss on disposal of assets and costs from exit and disposal activities
|
3,466
|
|
|
980
|
|
|
2,554
|
|
|
3,254
|
|
|
ESOP and stock-based compensation expense
|
23,463
|
|
|
18,325
|
|
|
61,900
|
|
|
45,413
|
|
|
Transaction costs(a)
|
2,145
|
|
|
54
|
|
|
3,022
|
|
|
1,428
|
|
|
Strategic growth and operational improvement initiatives(b)
|
—
|
|
|
573
|
|
|
—
|
|
|
2,689
|
|
|
COVID-19 related costs(c)
|
—
|
|
|
—
|
|
|
—
|
|
|
806
|
|
|
Other adjustments(d)
|
234
|
|
|
431
|
|
|
1,318
|
|
|
(872)
|
|
|
Adjusted EBITDA
|
$
|
176,155
|
|
|
$
|
138,863
|
|
|
$
|
507,541
|
|
|
$
|
472,407
|
|
|
Adjusted EBITDA Margin
|
24.6
|
%
|
|
28.6
|
%
|
|
24.3
|
%
|
|
30.7
|
%
|
(a)Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with business or asset acquisitions and dispositions.
(b)Represents professional fees incurred in connection with our strategic growth and operational improvement initiatives, which include various market feasibility assessments and acquisition strategies, along with our operational improvement initiatives, which include evaluation of our manufacturing network and improvement initiatives.
(c)Includes expenses directly related to our response to the COVID-19 pandemic, including adjustments to our pandemic pay program and expenses associated with our third party crisis management vendor.
(d)Includes derivative fair value adjustments, foreign currency transaction (gains) losses, the proportionate share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is accounted for under the equity method of accounting and executive retirement expense.
Liquidity and Capital Resources
Historically we have funded our operations through internally generated cash flow supplemented by debt financings, equity issuance and finance and operating leases. These sources have been sufficient historically to fund our primary liquidity requirements, including working capital, capital expenditures, debt service and dividend payments for our convertible preferred stock and common stock. From time to time, we may explore additional financing methods and other means to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.
The following table presents key liquidity metrics utilized by management. The table includes the Non-GAAP measure, Free Cash Flow, which is further discussed and defined below, and Leverage ratio which is calculated as net debt divided by the trailing twelve months Adjusted EBITDA.
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|
|
Nine Months Ended
December 31,
|
|
(Amounts in thousands)
|
2021
|
|
2020
|
|
Net cash provided by operating activities
|
$
|
193,847
|
|
|
$
|
448,776
|
|
|
Capital expenditures
|
(100,367)
|
|
|
(57,675)
|
|
|
Free Cash Flow
|
93,480
|
|
|
391,101
|
|
|
Total debt (debt and finance lease obligations)
|
971,050
|
|
|
|
|
Cash
|
22,173
|
|
|
|
|
Net debt (total debt less cash)
|
948,877
|
|
|
|
|
Leverage Ratio
|
1.6
|
|
|
Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures. Free cash flow is a measure used by management and our Board of Directors to assess our ability to generate cash. Accordingly, free cash flow has been presented in this Quarterly Report on Form 10-Q as a supplemental measure of liquidity that is not required by, or presented in accordance with GAAP, because management believes that free cash flow provides useful information to investors and others in understanding and evaluating our ability to generate cash flow from operations after capital expenditures.
Free cash flow is not a GAAP measure of our liquidity and should not be considered as an alternative to cash flow from operating activities as a measure of liquidity or any other liquidity measure derived in accordance with GAAP. Our measure of free cash flow is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
Net cash provided by operating activities decreased $254.9 million to $193.8 million, as compared to $448.8 million in the prior year, primarily due to changes in net working capital. Free cash flow (Non-GAAP) decreased $297.6 million to $93.5 million, as compared to $391.1 million in the prior year. Net debt (total debt and finance lease obligations net of cash) was $948.9 million as of December 31, 2021.
The following table summarizes our available liquidity for the periods presented.
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|
|
|
|
|
|
|
(Amounts in thousands)
|
December 31, 2021
|
|
Revolver capacity
|
$
|
350,000
|
|
|
Less: outstanding borrowings
|
(133,500)
|
|
|
Less: letters of credit
|
(12,505)
|
|
|
Revolver available liquidity
|
$
|
203,995
|
|
In addition to the available liquidity above, we have the ability to borrow up to $1.3 billion under our Term Loan Facility, subject to leverage ratio restrictions.
Working Capital and Cash Flows
As of December 31, 2021, we had $226.2 million in liquidity, including $22.2 million of cash, $204.0 million in borrowings available under our Revolving Credit Agreement, net of $12.5 million of outstanding letters of credit. We believe that our cash on hand, together with the availability of borrowings under our Credit Agreement and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled principal and interest payments on our indebtedness and the dividend payment requirement for our convertible preferred stock for at least the next twelve months.
Working Capital - Working capital increased to $442.9 million as of December 31, 2021, from $424.7 million as of March 31, 2021. The increase in working capital is primarily due to increased inventory and accounts receivable. These increases were offset by decreased cash related to share repurchase activity.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
December 31,
|
|
(Amounts in thousands)
|
2021
|
|
2020
|
|
Net cash provided by operating activities
|
$
|
193,847
|
|
|
$
|
448,776
|
|
|
Net cash used in investing activities
|
(150,040)
|
|
|
(57,159)
|
|
|
Net cash used in financing activities
|
(216,574)
|
|
|
(343,116)
|
|
Operating Cash Flows – Cash flows from operating activities decreased $254.9 million during the nine months ended December 31, 2021 due to changes in net working capital including increased inventory and accounts receivable.
Investing Cash Flows - Cash flows used in investing activities during the nine months ended December 31, 2021 increased by $92.9 million compared to the same period in fiscal 2021. The increase in cash used in investing activities was primarily due to the acquisition of Jet, net of cash acquired.
Capital expenditures totaled $100.4 million and $57.7 million for the nine months ended December 31, 2021 and 2020, respectively. Our capital expenditures for the nine months ended December 31, 2021 were used primarily to support facility expansions, equipment replacements, our recycled resin and technology improvement initiatives.
We currently anticipate that we will make capital expenditures of approximately $130 to $150 million in fiscal year 2022. Such capital expenditures are expected to be financed using funds generated by operations. As of December 31, 2021, there were no material contractual obligations or commitments related to these planned capital expenditures.
Financing Cash Flows - During the nine months ended December 31, 2021, cash used included the repurchase of common stock of $292.0 million, repayment of $124.6 million on the Revolving Credit Facility, $13.1 million of shares withheld for tax purposes, $27.8 million of dividend payments and payments on our finance lease obligations of $49.4 million. Cash provided by financing activities included proceeds of $258.1 million on the Revolving Credit Facility.
During the nine months ended December 31, 2020, cash used in financing activities included the repayment of $205.3 million on the Term Loan Facility, the repayment of $100.0 million on the Revolving Credit Facility, dividend payments of $24.5 million and payments on our finance lease obligations of $15.9 million.
Cash held by Foreign Subsidiaries - As of December 31, 2021, we had $18.3 million in cash that was held by our foreign subsidiaries, including $11.0 million held by our Canadian subsidiaries. We continue to evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested, except for Canada. We plan to repatriate earnings from Canada and believe that there will be no additional tax costs associated with the repatriation of such earnings other than any potential non-U.S. withholding taxes.
Employee Stock Ownership Plan (“ESOP”)
The Company established the Advanced Drainage Systems, Inc. ESOP (the “ESOP” or the “Plan”) effective April 1, 1993 to enable eligible employees to acquire stock ownership in ADS in the form of redeemable convertible preferred shares. The Plan was funded by an existing tax-qualified profit-sharing retirement plan, as well as a 30-year term loan from ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than March 2023, the ESOP committee can direct the shares of redeemable convertible preferred stock owned by the ESOP to be converted into shares of the Company’s common stock.
The Company is obligated to make contributions to the Plan, which, when aggregated with the Plan’s dividends, equal the amount necessary to enable the Plan to make its regularly scheduled payments of principal and interest due on its term loan to ADS. Compensation expense is recognized based upon the average annual fair value of the shares during the period which ADS receives payments on the term loan, and the number of ESOP shares allocated to participant accounts.
As disclosed in “Note 16. Employee Benefit Plans” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2021 Form 10-K, redeemable convertible preferred stock can convert to common stock upon retirement, disability, death, or vested terminations over the life of the Plan. As stated above, within 30 days following the repayment of the ESOP loan, all redeemable convertible preferred stock will be converted to common stock, which will be no later than March 2023.
The ESOP’s conversion of redeemable convertible preferred stock into common stock will have a meaningful impact on the Company’s net income, net income per share and common shares outstanding. The outstanding shares of common stock would be 20% greater after conversion.
Impact on Net Income - Provided that the converted common stock do not qualify as participating securities, the Company will no longer be required to apply the two-class method to determine Net income per share. In addition, the Company would not be required to recognize the fair value of ESOP deferred compensation attributable to the shares of redeemable convertible preferred shares allocated.
The impact of the ESOP on net income includes the fair value of ESOP deferred compensation attributable to the shares of redeemable convertible preferred stock allocated to employee ESOP accounts during the applicable period, which is a non-cash charge to our earnings and not deductible for income tax purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(In thousands)
|
|
Net income attributable to ADS
|
$
|
73,678
|
|
|
$
|
53,774
|
|
|
$
|
225,024
|
|
|
$
|
204,476
|
|
|
ESOP deferred stock-based compensation
|
17,221
|
|
13,513
|
|
43,389
|
|
29,506
|
Impact on Common Stock Outstanding - The repayment of the ESOP loan and related conversion of redeemable convertible preferred shares will have an impact on the number of common shares outstanding. As shares are converted, the number of common shares outstanding will increase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(Shares in millions)
|
|
Weighted average common shares outstanding
|
71.3
|
|
|
70.5
|
|
|
71.1
|
|
|
69.9
|
|
|
Conversion of redeemable convertible shares
|
13.0
|
|
|
15.8
|
|
|
14.0
|
|
|
16.2
|
|
Financing Transactions
Senior Secured Credit Facility - In July 2019, the Company entered into the Base Credit Agreement by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto. In September 2019, the Company amended the Base Credit Agreement. The Senior Secured Credit Facility provides the Term Loan Facility in an initial aggregate principal amount of $700 million, the Revolving Credit Facility in an initial aggregate principal amount of up to $350 million, the L/C Facility in the initial aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility and a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving Credit Facility. As of December 31, 2021, the outstanding principal drawn on Term Loan Facility was $436.0 million and $133.5 million on the Revolving Credit Facility. The Company had $204.0 million available to be drawn on the Revolving Credit Facility, net of $12.5 million of outstanding letters of credit.
ADS Mexicana Revolving Credit Facility - The Company and ADS Mexicana entered into an Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a capacity of $12.0 million on June 22, 2018. The Intercompany Note matures on June 22, 2022. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are determined by certain base rates or LIBOR rates plus an applicable margin based on the Leverage Ratio. As of December 31, 2021 and March 31, 2021, there were $1.5 million and no borrowings, respectively, outstanding under the Intercompany Note.
Issuance of Senior Notes due 2027 - On September 23, 2019, the Company issued $350.0 million aggregate principal amount of its Senior Notes, pursuant to the Indenture among the Company, the Guarantors and the Trustee. The Senior Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act or to persons outside the United States under Regulation S of the Securities Act.
Interest on the Senior Notes will be payable semi-annually in cash in arrears on March 31 and September 30 of each year, commencing on March 31, 2020, at a rate of 5.000% per annum. The Senior Notes will mature on September 30, 2027. The Company used the majority of the net proceeds from the offering of the Senior Notes for the repayment of $300.0 million of its outstanding borrowings under the Company’s Base Credit Agreement.
The Company may redeem the Senior Notes, in whole or in part, at any time on or after September 30, 2022 at established redemption prices. At any time prior to September 30, 2022, the Company may also redeem up to 40% of the Senior Notes
with net cash proceeds of certain equity offerings at a redemption price equal to 105.000% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to September 30, 2022, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium.
The Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants.
Equipment Financing – In November 2021, the Company purchased material handling equipment, trucks and trailers previously leased under a master lease agreement and classified as finance leases. The purchase was funded with debt through the Master Lease Agreement and Interim Funding Schedule with Fifth Third. The assets acquired are titled to the Company and included in Property, plant and equipment, net on the Company's Condensed Consolidated Balance Sheet. The equipment financing of has a balance of $36.0 million and has a term of between 12 and 84 months, based on the life of the equipment. The equipment financing bears a weighted average interest of 1.4%.
Covenant Compliance - The Senior Secured Credit Facility requires, if the aggregate amount of outstanding exposure under the Revolving Facility exceeds $122.5 million at the end of any fiscal quarter, the Company to maintain a consolidated senior secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2020) not to exceed 4.25 to 1.00 for any four consecutive fiscal quarter periods.
The Senior Secured Credit Facility also includes other covenants, including negative covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Credit Agreement) ability to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of their property; (iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose of all or substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make certain investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new lines of business; (x) modify certain material contractual obligations, organizational documents, accounting policies or fiscal year; or (xi) create or permit restrictions on the ability of any subsidiary of any Loan Party (as defined in the Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.
The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory prepayments (subject to certain exceptions and limitations): (i) annual prepayments (beginning with the fiscal year ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii) 100% of the net cash proceeds from any non-ordinary course sale of assets and certain casualty or condemnation events; and (iii) 100% of the net cash proceeds of indebtedness not permitted to be incurred under the Senior Secured Credit Facility.
For further information, see “Note 13. Debt” to the Consolidated Financial Statements in our Fiscal 2021 Form 10-K. We are in compliance with our debt covenants as of December 31, 2021.
Off-Balance Sheet Arrangements
Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 8. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of December 31, 2021, our South American Joint Venture had approximately $9.2 million of outstanding debt subject to our guarantees. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity, or capital resources.
Critical Accounting Policies and Estimates
There have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2021 Form 10-K, except as disclosed in "Note 1. Background and Summary of Significant Accounting Policies".
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements. Some of the forward-looking statements can be identified by the use of terms such as “believes,” “expects,” “may,” “will,” “would,” “should,” “could,” “seeks,” “predict,” “potential,” “continue,” “intends,” “plans,” “projects,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this Form 10-Q and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects, growth strategies, and the industries in which we operate and include, without limitation, statements relating to our future performance.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations, financial condition, liquidity and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our actual consolidated results of operations, financial condition, liquidity and industry development are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those reflected in forward-looking statements relating to our operations and business, the risks and uncertainties discussed in this Form 10-Q (including under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and those described from time to time in our other filings with the SEC. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:
•fluctuations in the price and availability of resins and other raw materials and our ability to pass any increased costs of raw materials on to our customers in a timely manner;
•volatility in general business and economic conditions in the markets in which we operate, including the adverse impact on the U.S. and global economy of the COVID-19 global pandemic, and the impact of COVID-19 in the near, medium and long-term on our business, results of operations, financial position, liquidity or cash flows, and other limitation factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence;
•cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending;
•the risks of increasing competition in our existing and future markets, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials, and our ability to continue to convert current demand for concrete, steel and polyvinyl chloride (“PVC”) pipe products into demand for our high performance thermoplastic corrugated pipe and Allied Products;
•uncertainties surrounding the integration and realization of anticipated benefits of acquisitions and similar transactions, including Infiltrator;
•the effect of any claims, litigation, investigations or proceedings, including those described under “Item 1. Legal Proceedings” of this Quarterly Report;
•the effect of weather or seasonality;
•the loss of any of our significant customers;
•the risks of doing business internationally;
•the risks of conducting a portion of our operations through joint ventures;
•our ability to expand into new geographic or product markets, including risks associated with new markets and products associated with our recent acquisition of Infiltrator;
•our ability to achieve the acquisition component of our growth strategy;
•the risk associated with manufacturing processes;
•our ability to manage our assets;
•the risks associated with our product warranties;
•our ability to manage our supply purchasing and customer credit policies;
•our ability to control labor costs and to attract, train and retain highly qualified employees and key personnel;
•our ability to protect our intellectual property rights;
•changes in laws and regulations, including environmental laws and regulations;
•the risks associated with our current levels of indebtedness, including borrowings under our existing credit agreement and outstanding indebtedness under our existing senior notes;
•fluctuations in our effective tax rate, including from the Tax Cuts and Jobs Act;
•our ability to meet future capital requirements and fund our liquidity needs; and
•other risks and uncertainties, including those listed under “Item 1A. Risk Factors.” in the Fiscal 2021 Form 10-K.
All forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to various market risks, primarily related to changes in interest rates, credit, raw material supply prices and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions. Our exposure to market risk has not materially changed from what we previously disclosed in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, except as disclosed below.
Interest Rate Risk - We are subject to interest rate risk associated with our bank debt. Changes in interest rates impact the fair value of our fixed-rate debt, but there is no impact to earnings and cash flow. Alternatively, changes in interest rates do not affect the fair value of our variable-rate debt, but they do affect future earnings and cash flow. The Revolving Credit Facility and the Term Note, notes bear variable interest rates. The Revolving Credit Facility and Term Note bear interest either at LIBOR or the Prime Rate, at our option, plus applicable pricing margins. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $5.7 million based on our borrowings as of December 31, 2021. Assuming the Revolving Credit Facility is fully drawn, each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately $7.8 million, for the twelve months ended December 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for evaluating the effectiveness of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), rules 13a-15(e) and 15d-15(e). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the three months ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.