ADVANCED DRAINAGE SYSTEMS, INC. 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 toAdvanced Drainage Systems, Inc. and its directly- and indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean onlyAdvanced Drainage Systems, Inc. exclusive of its subsidiaries. Our fiscal year begins onApril 1 and ends onMarch 31 . Unless otherwise noted, references to "year" pertain to our fiscal year. For example, 2021 refers to fiscal 2021, which is the period fromApril 1, 2020 toMarch 31, 2021 . 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 2020 Form 10-K, as filed with theSecurities and Exchange Commission (the "SEC") onJune 1, 2020 . 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 We are the leading global manufacturer of water management products and solutions for non-residential, residential, infrastructure and agricultural applications. With the acquisition ofInfiltrator Water Technologies in the second quarter of fiscal 2020, we are now a leading provider of plastic leach field chambers, septic tanks and accessories, for use primarily in residential applications. Executive Summary
First Quarter Fiscal 2021 Results
• Net sales increased 22.9% to
• Net income of
the prior year
• Adjusted EBITDA, a non-GAAP measure, increased 98.6% to
• Cash provided by operating activities increased 112.8% to
• Free cash flow, a non-GAAP measure, increased 132.4% to 123.4 million
Net sales increased$94.9 million , or 22.9%, to$508.6 million , as compared to$413.7 million in the prior year. Domestic pipe sales increased$11.5 million , or 4.4%, to$273.7 million . Domestic allied products & other sales increased$4.7 million , or 4.2%, to$116.9 million . These increases were driven by growth in both theU.S. construction and agriculture end markets.Infiltrator Water Technologies contributed an additional$84.1 million to net sales to external customers in the quarter. - 22 -
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Gross profit increased$250.7 million to$188.5 million as compared to($62.2) million in the prior year. The prior year gross profit includes$168.6 million of ESOP special dividend compensation expense. The remaining increase is primarily due to the acquisition ofInfiltrator Water Technologies , favorable material cost, an increase in operational efficiency and increases in both pipe and allied product sales. Adjusted EBITDA, a non-GAAP measure, increased$79.2 million , or 98.6%, to$159.5 million , as compared to$80.3 million in the prior year. The increase is primarily due to the factors mentioned above.Infiltrator Water Technologies contributed an additional$42.0 million to Adjusted EBITDA in the quarter. As a percentage of net sales, Adjusted EBITDA was 31.4% as compared to 19.4% in the prior year. Impact of COVID-19 InMarch 2020 , theWorld Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to spread throughoutthe 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.
Results of Operations
Comparison of the Three Months ended
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 three months ended
For the Three Months Ended June 30,
2020 2019
Consolidated Statements of Operations (In thousands) (In thousands)
data:
Net sales $ 508,639 100.0 % $ 413,708 100.0 %
Cost of goods sold 320,136 62.9 307,256 74.3
Cost of goods sold - ESOP special
dividend compensation - - 168,610 40.8
Gross profit 188,503 37.1 (62,158 ) (15.0 )
Selling expenses 28,160 5.5 26,365 6.4
General and administrative expenses 33,616 6.6 31,433 7.6
Selling, general and administrative -
ESOP special dividend compensation - - 78,142 18.9
Loss on disposal of assets and costs
from exit and
disposal activities 1,647 0.3 707 0.2
Intangible amortization 17,982 3.5 1,542 0.4
Income (loss) from operations 107,098 21.1 (200,347 ) (48.4 )
Interest expense 9,970 2.0 5,264 1.3
Derivative gains and other income, net (567 ) (0.1 )
(96 ) - Income (loss) before income taxes 97,695 19.2 (205,515 ) (49.7 ) Income tax expense 27,200 5.3 22,370 5.4 Equity in net loss (income) of unconsolidated affiliates (173 ) - (434 ) (0.1 ) Net income (loss) 70,668 13.9 (227,451 ) (55.0 ) Less: net income (loss) attributable to noncontrolling interest 202 -
(1,095 ) (0.3 )
Net income (loss) attributable to ADS
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Net sales - Net sales increased by$94.9 million , of which$84.1 million represented sales fromInfiltrator Water Technologies . Net sales excludingInfiltrator Water Technologies are referred to as organic sales, a non-GAAP measure. Three Months Ended June 30, 2020 June 30, 2019 Net Sales Net Sales Intersegment from External from External Net Sales Net Sales Customers Net Sales Intersegment Net Sales Customers Pipe$ 273,652 $ (1,845 ) $ 271,807 $ 262,181 $ -$ 262,181 Infiltrator Water Technologies 102,153 (18,068 ) 84,085 - - - International International - Pipe 26,950 - 26,950 29,284 - 29,284 International - Allied Products & Other 8,879 - 8,879 10,049 - 10,049Total International 35,829 - 35,829 39,333 - 39,333 Allied Products & Other 116,918 - 116,918 112,194 - 112,194 Intersegment Eliminations (19,913 ) 19,913 - - - - Total Consolidated$ 508,639 $ -$ 508,639 $ 413,708 $ -$ 413,708
• Pipe net sales to all customers for the three months ended
increased by
resulting in a
million decrease as a result of price and product mix.
•
second quarter of fiscal year 2020 and therefore did not report any
Infiltrator Water Technologies sales in the three months ended June 30,
2019 .
• International net sales for the three months ended
by
2019. The decrease was primarily attributable to a
in International Pipe Sales, attributable to volume decreases, and a
million decrease in International Allied Product sales.
• Allied Products & Other net sales for the three months ended
increased by
mix and an increase in sales volume.
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Cost of goods sold and Gross profit - Cost of goods sold increased by$12.9 million , or 4.2%, and gross profit increased by$250.7 million , or 403.3%, in the three months endedJune 30, 2020 over the comparable period in the previous year. Gross profit excludingInfiltrator Water Technologies and Cost of goods sold - ESOP special dividend compensation, referred to as organic gross profit, a Non-GAAP measure, increased 35.4%. For the Three Months Ended June 30, 2020 2019 $ Variance % Variance (In thousands) Pipe$ 74,695 $ 42,574 $ 32,121 75.4 % International 10,107 7,716 2,391 31.0 Allied Products & Other 59,328 56,162 3,166 5.6 Organic gross profit 144,130 106,452 37,678 35.4 Infiltrator Water Technologies 44,731 - 44,731 100.0 Cost of goods sold - ESOP special dividend compensation - (168,610 ) 168,610 100.0 Intersegment eliminations (358 ) - (358 ) 100.0 Total gross profit$ 188,503 $ (62,158 ) $ 250,661 (403.3 %)
• Pipe gross profit increased primarily due to lower costs in material,
labor and overhead. The increase was also attributable to the increase in
volume sold, offset by the decrease in the price and product mix of net
sales discussed above.
• The Company acquired
of fiscal year 2020 and therefore did not report any Infiltrator Water
Technologies gross profit in the three months ended June 30, 2019 .
• International gross profit decreased primarily due to the decreased sales
discussed above offset by lower costs of materials.
• Allied Products & Other gross profit increased primarily due to the
increase in net sales discussed above and lower labor and overhead costs.
Selling expenses - As a percentage of net sales, selling expenses decreased to 5.5% in the three months endedJune 30, 2020 compared to 6.4% in the three months endedJune 30, 2019 . The decrease as a percentage of net sales is the result of the Company's cost mitigation steps. General and administrative expenses - General and administrative expenses for the three months endedJune 30, 2020 increased$2.2 million from the prior year period. The increase was primarily due to$3.8 million in general and administrative expenses atInfiltrator Water Technologies . The increase was offset by decreases in general and administrative expenses as a result of the Company's cost mitigation steps. Selling, general and administrative - ESOP special dividend compensation - In fiscal 2020, ESOP special dividend compensation expense of$78.1 million was allocated to selling, general and administrative expenses. Loss on disposal of assets and costs from exit and disposal activities - In the three months endedJune 30, 2020 , we recorded a loss on the disposal of assets and costs from exit and disposal activities of approximately$1.6 million compared to a$0.7 million loss on the disposal of property, plant and equipment from the prior year period. The increase is primarily due to$1.1 million of expenses related to restructuring actions. See "Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities" for additional discussion.
Intangible amortization - Intangible amortization increased as a percentage of net sales primarily due the addition of intangible assets related to the Acquisition.
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Interest expense - Interest expense increased$4.7 million in the three months endedJune 30, 2020 compared to the same period in the previous fiscal year. The increase was due to increased debt levels and changes in interest rates as a result of the Acquisition financing transactions.
Derivative gain and other income, net - Derivative gain and other income
increased by
Income tax expense (benefit) - For the three months endedJune 30, 2020 and 2019, the effective tax rates were 27.8% and (10.9%), respectively. The change in the effective tax rate was primarily due to a discrete income tax event related to stock appreciation from the additional ESOP shares allocated during the three months endedJune 30, 2019 . See "Note 13. Income Taxes" for additional information. Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net (income) loss of unconsolidated affiliates decreased by$0.3 million for the three months endedJune 30, 2020 as compared to the same period in the previous fiscal year due to a decrease in the current period income at our South American Joint Venture. Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased by$1.3 million for the three months endedJune 30, 2020 to a net income of$0.2 million compared to a net loss of$1.1 million in the same period in the previous fiscal year due to a 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. 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. Adjusted EBITDA and Adjusted EBITDA Margin 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 Adjusted EBITDA and Adjusted EBITDA Margin 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 are not GAAP measures of our financial performance 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, and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. 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 costs 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 in addition to using Adjusted EBITDA and Adjusted EBITDA Margin supplementally. Our measures of Adjusted EBITDA and Adjusted EBITDA Margin are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. - 26 -
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The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods indicated.
Three Months Ended
June 30,
2020 2019
(In thousands)
Net income (loss) $ 70,668 $ (227,451 )
Depreciation and amortization 35,781 16,694
Interest expense 9,970 5,264
Income tax expense 27,200 22,370
EBITDA 143,619 (183,123 )
Loss on disposal of assets and costs from exit
and disposal activities 1,647 707 ESOP and stock-based compensation expense 12,462 7,425 ESOP special dividend compensation(a) - 246,752 Transaction costs(b) 656 4,245
Strategic growth and operational
improvement initiatives(c) 1,755 2,195 COVID-19 related costs(d) 564 - Other adjustments(e) (1,233 ) 2,095 Adjusted EBITDA$ 159,470 $ 80,296 Adjusted EBITDA Margin 31.4 % 19.4 %
(a) In the first quarter of fiscal 2020, the Company paid a special dividend of
loan resulting in
"Note 9. Net Income Per Share and Stockholders' Equity" for additional
information.
(b) Represents expenses recorded related to legal, accounting and otherprofessional fees incurred in connection with business or asset acquisitions
and dispositions.
(c) Represents professional fees incurred in connection with our strategicgrowth 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.
(d) 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.
(e) 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. The other adjustments in fiscal 2020 also includes
expenses related to the ADS Mexicana's investigation.
The following table presents our Adjusted EBITDA for the Company prior to the
Acquisition ("Legacy ADS"), which consists of the combination of the Segment
Adjusted Gross Profit for Pipe, Allied Products & Other, and International plus
the portion of corporate and selling expenses which impacts Adjusted EBITDA and
Infiltrator Water Technologies prior to the Acquisition ("Legacy Infiltrator
Water Technologies"), which consists of the combination of the Segment Adjusted
Gross Profit for Infiltrator Water Technologies plus the portion of corporate
and selling expenses which impacts Adjusted EBITDA.
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Three Months Ended
June 30,
2020 2019
(In thousands)
Legacy ADS Adjusted EBITDA
Pipe Adjusted Gross Profit $ 90,599 $ 57,493
International Adjusted Gross Profit 11,408 9,227
Allied Products & Other Adjusted Gross Profit 60,468
57,187
Unallocated corporate and selling expenses (44,644 ) (43,611 ) Legacy ADS Adjusted EBITDA$ 117,831 $
80,296
Legacy Infiltrator Water Technologies Adjusted EBITDA Infiltrator Water Technologies Adjusted Gross Profit 47,928
-
Unallocated corporate and selling expenses (5,931 )
-
Legacy Infiltrator Water Technologies Adjusted EBITDA
- Intersegment eliminations (358 ) - Consolidated Adjusted EBITDA$ 159,470 $ 80,296
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.
Three Months Ended
June 30,
(Amounts in thousands) 2020 2019
Net cash provided by operating activities
(10,295 ) (9,723 )
Free Cash Flow 123,438 53,117
Total debt (debt and finance lease obligations) 1,105,630 Cash
235,210
Net debt (total debt less cash) 870,420
Leverage Ratio 2.0
Net cash provided by operating activities increased $70.9 million to $133.7
million , as compared to $62.8 million in the prior year, primarily due to
improvements in profitability and working capital. Free cash flow (Non-GAAP)
increased $70.3 million to $123.4 million , as compared to $53.1 million in the
prior year. Net debt (total debt and finance lease obligations net of cash) was
$870.4 million as of June 30, 2020 .
The following table summarizes our available liquidity as of
(Amounts in thousands) June 30, 2020 Revolver capacity$ 350,000 Less: outstanding borrowings 50,000 Less: letters of credit 11,005 Revolver available liquidity$ 288,995 - 28 -
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In addition to the available liquidity above, we have the ability to borrow up
to
As ofJune 30, 2020 , we had$8.9 million in cash that was held by our foreign subsidiaries. We continue to evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested.
Working Capital and Cash Flows
As ofJune 30, 2020 , we had$524.2 million in liquidity, including$235.2 million of cash,$289.0 million in borrowings available under our Revolving Credit Agreement, net of$11.0 million of outstanding letters of credit. We believe that our cash on hand, together with the availability of borrowings under our new 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. InJuly 2020 , we paid down the remaining$50.0 million of the Revolving Credit Facility. Working Capital - Working capital increased to$470.5 million as ofJune 30, 2020 , from$428.0 million as ofMarch 31, 2020 . The increase in working capital is primarily due to improved collections of our accounts receivable, as well as improved payment terms on our accounts payable partially offset by a reduction in inventory and lower material costs. Three Months Ended June 30, (Amounts in thousands) 2020 2019
Net cash provided by operating activities
Operating Cash Flows - Cash flows provided by operating activities for the three months endedJune 30, 2020 was$133.7 million as compared with cash provided by operating activities of$62.8 million for the three months endedJune 30, 2019 . Cash flows from operating activities during the three months endedJune 30, 2020 was primarily impacted by the acquisition ofInfiltrator Water Technologies and the Company's cost containment measures. Investing Cash Flows - During the three months endedJune 30, 2020 and 2019, cash used in investing activities was$9.9 million and$9.7 million , respectively. Capital expenditures during the three months endedJune 30, 2020 increased by$0.2 million compared to the same period in fiscal 2020. Our capital expenditures for the three months endedJune 30, 2020 were used primarily for new equipment and operational efficiency and productivity projects. Financing Cash Flows - During the three months endedJune 30, 2020 , cash used in financing activities was$62.9 million due to repayment of$50.0 million on the Revolving Credit Facility, quarterly dividend payments of$7.7 million and payments on our finance lease obligations of$5.7 million . During the three months endedJune 30, 2019 , cash used in financing activities was$52.6 million due to the special and quarterly dividend payment of$69.6 million and payments on our finance lease obligations of$6.0 million . These uses were partially offset by$21.8 million of net borrowings on our previous credit agreement. 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.
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Our measure of free cash flow is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
Capital Expenditures
Capital expenditures totaled$10.3 million and$9.7 million for the three months endedJune 30, 2020 and 2019, respectively.Infiltrator Water Technologies capital expenditures for the three months endedJune 30, 2020 was$4.2 million of our total capital expenditures. Our capital expenditures for the three months endedJune 30, 2020 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$60 to$65 million in fiscal year 2020. Such capital expenditures are expected to be financed using funds generated by operations. As ofJune 30, 2020 , there were no material contractual obligations or commitments related to these planned capital expenditures.
Employee Stock Ownership Plan ("ESOP")
The Company established theAdvanced Drainage Systems, Inc. ESOP (the "ESOP" or the "Plan") effectiveApril 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 thanMarch 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 2020 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 thanMarch 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 24% greater after conversion.
Impact on Net Income - Following the repayment of the ESOP loan discussed above,
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
June 30,
2020 2019
(In thousands)
Net income (loss) attributable to ADS
- 246,752
ESOP deferred stock-based compensation 6,863 5,584
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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
June 30,
2020 2019
(Shares in millions)
Weighted average common shares outstanding 69.4 57.6
Conversion of redeemable convertible shares 16.6 17.5
Financing Transactions
New Senior Secured Credit Facility - InJuly 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. InSeptember 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 ofJune 30, 2020 , the outstanding principal drawn on Term Loan Facility was$646.5 million and the outstanding principal on the Revolving Credit Facility was$50.0 million . The Company had$289.0 million available to be drawn on the Revolving Credit Facility, net of$11.0 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 onJune 22, 2018 . The Intercompany Note matures onJune 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 ofJune 30, 2020 andMarch 31, 2020 , there were no borrowings under the Intercompany Note. Issuance of Senior Notes due 2027 - OnSeptember 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 outsidethe United States under Regulation S of the Securities Act. Interest on the Senior Notes will be payable semi-annually in cash in arrears onMarch 31 andSeptember 30 of each year, commencing onMarch 31, 2020 , at a rate of 5.000% per annum. The Senior Notes will mature onSeptember 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 afterSeptember 30, 2022 at established redemption prices. At any time prior toSeptember 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 toSeptember 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.
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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 endingMarch 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 anyLoan 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 endingMarch 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 11. Debt" to the Consolidated Financial
Statements in our Fiscal 2020 Form 10-K. We are in compliance with our debt
covenants as of
Off-Balance Sheet Arrangements
Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in "Note 10.Related Party Transactions" to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As ofJune 30, 2020 , our South American Joint Venture had approximately$9.7 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 2020 Form 10-K, except as disclosed in Note 1.
Background and Summary of Significant Accounting Policies.
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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
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 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;
• uncertainties surrounding the integration of acquisitions and similar
transactions, including the acquisition of Infiltrator Water
Technologies and the integration of
• our ability to realize the anticipated benefits from the acquisition of
• risks that the acquisition of
transactions may involve unexpected costs, liabilities or delays;
• 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;
• the effect of any claims, litigation, investigations or proceedings,
including those described below under "Part II. Other Information 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;
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• our ability to remediate the material weakness in our internal control
over financial reporting, including remediation of the control
environment for our joint venture affiliate
as described in "Item 9A. Controls and Procedures" of our Fiscal 2020
Form 10-K;
• 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 Water Technologies ; 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;
• the risks associated with our self-insured programs;
• 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;
• our ability to project product mix;
• the risks associated with our current levels of indebtedness, including
borrowings under our new Credit Agreement and outstanding indebtedness
under our Senior Notes;
• the nature, cost and outcome of any future litigation and other legalproceedings, including any such proceedings related to our acquisition
of Infiltrator Water Technologies as may be instituted against the
Company and others;
• fluctuations in our effective tax rate, including from the Tax Cuts and
Jobs Act of 2017;
• our ability to meet future capital requirements and fund our liquidity needs;
• the risk that information may arise that would require the Company to
make adjustments or revisions or to restate further the financial
statements and other financial data for certain prior periods and any
future periods;
• any delay in the filing of any filings with the SEC ;
• the review of potential weaknesses or deficiencies in the Company's
disclosure controls and procedures, and discovering further weaknesses
of which we are not currently aware or which have not been detected; and
• additional uncertainties related to accounting issues generally.
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.
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