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. 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.
Executive Summary
Second Quarter Fiscal 2021 Results
• Net sales increased 9.7% to
• Net income of
• Adjusted EBITDA, a non-GAAP measure, increased 47.3% to
Net sales increased$48.3 million , or 9.7%, to$544.2 million , as compared to$495.9 million in the prior year. Domestic pipe sales increased$10.7 million , or 3.8%, to$292.1 million . Domestic allied products & other sales increased$3.6 million , or 3.2%, to$118.0 million . These increases were driven by sales growth in theU.S. construction end markets.Infiltrator Water Technologies sales increased$41.1 million , or 63.3%, to$106.0 million , as compared to$64.9 million in the prior year.
Gross profit increased
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favorable material cost, leverage from sales growth in both pipe and allied product sales and operational improvements offsetting inflationary costs.
Adjusted EBITDA, a non-GAAP measure, increased
Year-to-Date Fiscal 2021 Results
• Net sales increased 15.7% to
• Net income increased to
million in the prior year
• Adjusted EBITDA, a non-GAAP measure, increased 68.1% to
• Cash provided by operating activities increased 66.7% to
• Free cash flow, a non-GAAP measure, increased 76.1% to
Net sales increased$143.2 million , or 15.7%, to$1.053 billion , as compared to$909.6 million in the prior year. Domestic pipe sales increased$22.2 million , or 4.1%, to$565.8 million . Domestic allied products & other sales increased$8.4 million , or 3.7%, to$234.9 million . These increases were driven by growth in both theU.S. construction and agriculture end markets.Infiltrator Water Technologies sales increased$143.3 million , or 220.8%, to$208.1 million , as compared to$64.9 million in the prior year. Gross profit increased$310.0 million to$394.4 million as compared to$84.4 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
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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 periods presented. We believe this presentation is useful to investors in comparing historical results.
For the Three Months Ended September 30,
2020 2019
Consolidated Statements of Operations (In thousands) (In thousands)
data:
Net sales $ 544,187 100.0 % $ 495,905 100.0 %
Cost of goods sold 338,330 62.2 349,381 70.5
Gross profit 205,857 37.8 146,524 29.5
Selling expenses 30,586 5.6 29,971 6.0
General and administrative expenses 35,115 6.5 48,030 9.7
Loss on disposal of assets and costs
from exit and
disposal activities 627 0.1 2,004 0.4
Intangible amortization 17,955 3.3 9,300 1.9
Income (loss) from operations 121,574 22.3 57,219 11.5
Interest expense 9,360 1.7 52,332 10.6
Derivative gains (loss) and other income
(expense), net (151 ) - 175 -
Income (loss) before income taxes 112,365 20.6 4,712 1.0
Income tax expense (benefit) 31,827 5.8 (3,547 ) (0.7 )
Equity in net income of unconsolidated
affiliates (67 ) - (203 ) -
Net income (loss) 80,605 14.8 8,462 1.7
Less: net income (loss) attributable to
noncontrolling interest 369 0.1 873 0.2
Net income (loss) attributable to ADS $ 80,236 14.7 % $ 7,589 1.5 %
Net sales - Net sales increased by $48.3 million , or 9.7%, for the three months
ended September 30, 2020 compared to the three months ended September 30, 2019 .
Three Months Ended
September 30, 2020 September 30, 2019
Net Sales Net Sales
Intersegment from External Intersegment from External
Net Sales Net Sales Customers Net Sales Net Sales Customers
Pipe $ 292,133 $ (1,637 ) $ 290,496 $ 281,405 $ (342 ) $ 281,063
Infiltrator Water
Technologies 105,986 (18,692 ) 87,294 64,889 (12,189 ) 52,700
International
International - Pipe 35,592 (896 ) 34,696 34,617 - 34,617
International -
Allied Products &
Other 13,706 - 13,706 13,167 - 13,167
Total International 49,298 (896 ) 48,402 47,784 - 47,784
Allied Products &
Other 117,995 - 117,995 114,358 - 114,358
Intersegment
Eliminations (21,225 ) 21,225 - (12,531 ) 12,531 -
Total Consolidated $ 544,187 $ - $ 544,187 $ 495,905 $ - $ 495,905 • Pipe net sales to all customers for the three months ended
2020 increased by $10.7 million , or 3.8%, compared to the three months
ended September 30, 2019 . The increase was due to an increase in pipe
volume resulting in a $10.5 million increase in sales.
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•
million for the three months ended
three months ended
Water Technologies on July 31, 2019 and therefore did not report any
Infiltrator Water Technologies sales for the month of July 2019 .
• International net sales for the three months ended September 30, 2020
increased by $1.5 million , or 3.2%, compared to the three months ended
September 30, 2019 . The increase was primarily attributable to a $1.0
million increase in International Pipe Sales and a
in International Allied Product sales.
• Allied Products & Other net sales for the three months ended
2020 increased by
ended
product mix and an increase in sales volume.
Cost of goods sold and Gross profit - Cost of goods sold decreased by$11.1 million , or 3.2%, and gross profit increased by$59.3 million , or 40.5%, in the three months endedSeptember 30, 2020 over the comparable period in the previous year. Gross profit excludingInfiltrator Water Technologies , referred to as Legacy ADS gross profit, a Non-GAAP measure, increased 24.4%. For the Three Months Ended September 30, 2020 2019 $ Variance % Variance (In thousands) Pipe$ 82,944 $ 59,103 $ 23,841 40.3 % International 13,260 9,247 4,013 43.4 Allied Products & Other 59,335 56,653 2,682 4.7 Legacy ADS gross profit 155,539 125,003 30,536 24.4 Infiltrator Water Technologies 49,946 22,499 27,447 122.0 Intersegment eliminations 372 (978 ) 1,350 (138.0 ) Total gross profit$ 205,857 $ 146,524 $ 59,333 40.5 %
• 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 discussed above.
• The Company acquired
therefore did not report any
for the month of
• International gross profit increased primarily due to the increased sales
discussed above and 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.
Operating expenses
Three Months Ended
September 30,
2020 2019
Selling expenses 5.6 % 6.0 %
General and administrative expenses 6.5 % 9.7 %
Selling, general and administrative expenses 12.1 % 15.7 %
Selling expenses - As a percentage of net sales, selling expenses decreased to 5.6% in the three months endedSeptember 30, 2020 compared to 6.0% in the three months endedSeptember 30, 2019 . The decrease as a percentage of net sales is the result of the Company's cost mitigation steps. - 27 -
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General and administrative expenses - General and administrative expenses for the three months endedSeptember 30, 2020 decreased$12.9 million from the prior year period. The decrease was primarily due to a$15.9 million decrease in transaction costs due to theInfiltrator Water Technologies acquisition. Loss on disposal of assets and costs from exit and disposal activities - The decrease in Loss on disposal of assets and costs from exit and disposal activities is primarily due to asset disposals in fiscal 2020. See "Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities" for additional discussion. Intangible amortization - Intangible amortization increased primarily due to the addition of intangible assets related to the acquisition ofInfiltrator Water Technologies . Interest expense - Interest expense decreased$43.0 million in the three months endedSeptember 30, 2020 compared to the same period in the previous fiscal year. The decrease was primarily due to$33.2 million of the write-off of deferred financing costs and$4.2 million prepayment penalty related to the extinguishment of debt instruments in the three months endedSeptember 30, 2019 . The remainder of the decrease is due to decreased debt levels. Derivative gain (loss) and other income (expense), net - Derivative gain (loss) and other income (expense) increased by$0.3 million for the three months endedSeptember 30, 2020 compared to the same period in the previous fiscal year.
Income tax expense (benefit) - The following table presents the effective tax
rates for the three months ended
Three Months Ended
September 30,
2020 2019
Effective tax rate 28.3 % (75.3 )%
The change in the effective tax rate was primarily due to the Acquisition. See "Note 13. Income Taxes" for additional information.
Equity in net income of unconsolidated affiliates - Equity in net income 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 for the three months endedSeptember 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 decreased for three months endedSeptember 30, 2020 due to a net income at our ADS Mexicana joint venture. - 28 -
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Comparison of the Six 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 periods presented. We believe this presentation is useful to investors in comparing historical results.
For the Six Months Ended September 30,
2020 2019
Consolidated Statements of Operations (In thousands) (In thousands)
data:
Net sales $ 1,052,826 100.0 % $ 909,613 100.0 %
Cost of goods sold 658,466 62.5 656,637 72.2
Cost of goods sold - ESOP special
dividend compensation - - 168,610 18.5
Gross profit 394,360 37.5 84,366 9.3
Selling 58,746 5.6 56,336 6.2
General and administrative 68,731 6.5 79,463 8.7
Selling, general and administrative -
ESOP special dividend compensation - - 78,142 8.6
Loss on disposal of assets and costs
from exit and
disposal activities 2,274 0.2 2,711 0.3
Intangible amortization 35,937 3.4 10,842 1.2
Income (loss) from operations 228,672 21.7 (143,128 ) (15.7 )
Interest expense 19,330 1.8 57,596 6.3
Derivative gains (loss) and other income
(expense), net (718 ) (0.1 ) 79 -
Income (loss) before income taxes 210,060 20.0 (200,803 ) (22.1 )
Income tax expense (benefit) 59,027 5.6 18,823 2.1
Equity in net income of unconsolidated
affiliates (240 ) - (637 ) (0.1 )
Net income (loss) 151,273 14.4 (218,989 ) (24.1 )
Less: net income (loss) attributable to
noncontrolling interest 571 - (222 ) -
Net income (loss) attributable to ADS
Net sales - Net sales increased by$143.2 million , or 15.7%, for the six months endedSeptember 30, 2020 compared to the six months endedSeptember 30, 2019 . Six Months Ended September 30, 2020 September 31, 2019 Net Sales from Net Sales from Intersegment External Intersegment External Net Sales Net Sales Customers Net Sales Net Sales Customers Pipe$ 565,785 $ (3,482 ) $ 562,303
208,139 (36,760 ) 171,379 64,889 (12,189 ) 52,700
International
International - Pipe 62,542 (896 ) 61,646 63,902 - 63,902 International - Allied Products & Other 22,585 - 22,585 23,216 - 23,216Total International 85,127 (896 ) 84,231 87,118 - 87,118 Allied Products & Other 234,913 - 234,913 226,551 - 226,551 Intersegment Eliminations (41,138 ) 41,138 - (12,531 ) 12,531 - Total Consolidated$ 1,052,826 $ -$ 1,052,826 $ 909,613 $ -$ 909,613
• Pipe net sales to all customers for the six months ended
2020 increased by
September 30, 2019 . The increase was due to an increase in pipe - 29 -
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volume resulting in a
a
•
months ended
the six months ended
Water Technologies on July 31, 2019 and therefore did not report any
Infiltrator Water Technologies sales prior to August 2019 .
• International net sales for the six months ended
decreased by
million decrease in International Pipe Sales, attributable to volume
decreases, and a
sales.
• Allied Products & Other net sales for the six months ended
2020 increased by $8.4 million , or 3.7%, compared to the six months ended
September 30, 2019 . The increase was due to an increase in price and
product mix and an increase in sales volume.
Cost of goods sold and Gross profit - Cost of goods sold increased by $1.8
million , or 0.3%, and gross profit increased by $310.0 million , or 367.4%, in
the six months ended September 30, 2020 over the comparable period in the
previous year. The increase in gross profit was primarily due to the ESOP
special dividend compensation expense from the special dividend in fiscal 2020
of $168.6 million allocated to Cost of goods sold. Gross profit excluding
Infiltrator Water Technologies and Cost of goods sold - ESOP special dividend
compensation, referred to as Legacy ADS gross profit, a Non-GAAP measure,
increased 29.5%.
For the Six Months Ended
September 30,
2020 2019 $ Variance % Variance
(In thousands)
Pipe $ 157,639 $ 101,561 $ 56,078 55.2 %
International 23,367 16,963 6,404 37.8
Allied Products & Other 118,663 112,931 5,732 5.1
Legacy ADS gross profit 299,669 231,455 68,214 29.5
Infiltrator Water Technologies 94,677 22,499 72,178 320.8
Cost of goods sold - ESOP special
dividend compensation - (168,610 ) 168,610 100.0
Intersegment eliminations 14 (978 ) 992 100.0
Total gross profit $ 394,360 $ 84,366 $ 309,994 367.4 %
• 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
therefore did not report any
prior to
• International gross profit increased primarily due to lower cost of
materials offset by the decreased sales discussed above.
• Allied Products & Other gross profit increased primarily due to the
increase in net sales discussed above and lower labor and overhead costs.
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Operating expenses
For the Six
Months Ended
2020 2019
Selling expenses 5.6 % 6.2 %
General and administrative expenses 6.5 % 8.7 %
Selling, general and administrative expenses 12.1 % 14.9 %
Selling expenses - As a percentage of net sales, selling expenses decreased to
5.6% in the six months ended September 30, 2020 compared to 6.2% in the six
months ended September 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 six months ended September 30, 2020 decreased $10.7 million from the prior
year period. The decrease was primarily due to a $19.5 million decrease in
transaction costs. The decrease was offset by a $7.4 million increase in general
and administrative expenses, including stock-based compensation, reported at
Infiltrator Water Technologies .
Selling, general and administrative - ESOP special dividend compensation - In
fiscal 2019, 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 - The
decrease in Loss on disposal of assets and costs from exit and disposal
activities is primarily due to asset disposals in fiscal 2020. See "Note 2. Loss
on Disposal of Assets and Costs from Exit and Disposal Activities" for
additional discussion.
Intangible amortization - Intangible amortization increased primarily due the
addition of intangible assets related to the acquisition of Infiltrator Water
Technologies .
Interest expense - Interest expense decreased $38.3 million in the six months
ended September 30, 2020 compared to the same period in the previous fiscal
year. The decrease was primarily due to $33.2 million of the write-off of
deferred financing costs and $4.2 million prepayment penalty related to the
extinguishment of debt instruments in the six months ended September 30, 2019 .
The remainder of the decrease is due to decreased debt levels.
Derivative gain (loss) and other income (expense), net - Derivative gain (loss)
and other income (expense) increased by $0.8 million for the six months ended
September 30, 2020 compared to the same period in the previous fiscal year.
Income tax expense (benefit) - The following table presents the effective tax
rates for the six months ended
For the Six Months Ended September 30,
2020 2019
Effective tax rate 28.1 % (9.4 )%
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
and the Acquisition. 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 for the six months ended
September 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 for the six months ended September 30, 2020
due to a net income at our ADS Mexicana joint venture.
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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.
Three Months Ended Six Months Ended
September 30, September 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Net income (loss) $ 80,605 $ 8,462 $ 151,273 $ (218,989 )
Depreciation and amortization 35,778 26,566 71,559 43,260
Interest expense 9,360 52,332 19,330 57,596
Income tax expense 31,827 (3,547 ) 59,027 18,823
EBITDA 157,570 83,813 301,189 (99,310 )
Loss on disposal of assets and costs
from exit
and disposal activities 627 2,004 2,274 2,711
ESOP and stock-based compensation
expense 14,626 8,657 27,088 16,082
ESOP special dividend compensation(a) - - - 246,752
Transaction costs(b) 718 16,590 1,374 20,835
Inventory step up related to the
Acquisition - 5,773 - 5,773
Strategic growth and operational
improvement initiatives(c) 361 701 2,116 2,896
COVID-19 related costs(d) 242 - 806 -
Other adjustments(e) (70 ) 626 (1,303 ) 2,721
Adjusted EBITDA $ 174,074 $ 118,164 $ 333,544 $ 198,460
Adjusted EBITDA Margin 32.0 % 23.8 % 31.7 % 21.8 %
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(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.
Three Months Ended Six Months Ended
September 30, September 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Legacy ADS Adjusted EBITDA
Pipe Adjusted Gross Profit $ 100,496 $ 74,246 $ 191,095 $ 131,739
International Adjusted Gross Profit 14,582 10,841 25,990 20,068
Allied Products & Other Adjusted Gross
Profit 60,380 57,621 120,848 114,808
Unallocated corporate and selling
expenses (48,449 ) (48,621 ) (93,093 ) (92,232 )
Legacy ADS Adjusted EBITDA $ 127,009 $ 94,087 $ 244,840 $ 174,383
Legacy Infiltrator Water Technologies
Adjusted EBITDA
Infiltrator Water Technologies Adjusted
Gross Profit 53,105 30,144 101,033 30,144
Unallocated corporate and selling
expenses (6,600 ) (5,089 ) (12,531 ) (5,089 )
Legacy Infiltrator Water Technologies
Adjusted EBITDA $ 46,505 $ 25,055 $ 88,502 $ 25,055
Intersegment eliminations 560 (978 ) 202 (978 )
Consolidated Adjusted EBITDA $ 174,074 $ 118,164 $ 333,544 $ 198,460 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.
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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 the trailing twelve
months Adjusted EBITDA divided by net debt.
Six Months Ended
September 30,
(Amounts in thousands) 2020 2019
Net cash provided by operating activities
(28,959 ) (25,622 )
Free Cash Flow 257,209 146,089
Total debt (debt and finance lease obligations) 948,863 Cash
203,883
Net debt (total debt less cash) 744,980
Leverage Ratio 1.5
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 increased $114.5 million to $286.2
million , as compared to $171.7 million in the prior year, primarily due to
improvements in profitability and lower cash transaction costs for the
Infiltrator Water Technologies acquisition. Free cash flow (Non-GAAP) increased
$111.1 million to $257.2 million , as compared to $146.1 million in the prior
year. Net debt (total debt and finance lease obligations net of cash) was $745.0
million as of September 30, 2020 .
The following table summarizes our available liquidity for the periods presented
.
(Amounts in thousands) September 30, 2020
Revolver capacity $ 350,000
Less: outstanding borrowings -
Less: letters of credit 11,005
Revolver available liquidity $ 338,995
In addition to the available liquidity above, we have the ability to borrow up
to
Working Capital and Cash Flows
As ofSeptember 30, 2020 , we had$542.9 million in liquidity, including$203.9 million of cash,$339.0 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. - 34 -
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Working Capital - Working capital decreased to$418.1 million as ofSeptember 30, 2020 , from$428.0 million as ofMarch 31, 2020 . The decrease in working capital is primarily due to decreased inventory and increased accounts payable and other current liabilities. These decreases were offset by increased cash and accounts receivable. Six Months Ended September 30, (Amounts in thousands) 2020 2019 Net cash provided by operating activities$ 286,168 $
171,711
Net cash used in investing activities (28,504 )
(1,114,355 ) Net cash (used in) provided by financing activities (227,793 ) 988,137
Operating Cash Flows - Cash flows from operating activities during the six
months ended
Investing Cash Flows - Capital expenditures during the six months endedSeptember 30, 2020 increased by$3.3 million compared to the same period in fiscal 2020. The net cash used in investing activities were primarily due to the acquisition ofInfiltrator Water Technologies in fiscal 2020. Our capital expenditures for the six months endedSeptember 30, 2020 were used primarily for new equipment and operational efficiency and productivity projects. Capital expenditures totaled$29.0 million and$25.6 million for the six months endedSeptember 30, 2020 and 2019, respectively.Infiltrator Water Technologies capital expenditures for the six months endedSeptember 30, 2020 was$18.0 million of our total capital expenditures. Our capital expenditures for the six months endedSeptember 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$80 to$90 million in fiscal year 2021. Such capital expenditures are expected to be financed using funds generated by operations. As ofSeptember 30, 2020 , there were no material contractual obligations or commitments related to these planned capital expenditures. Financing Cash Flows - During the six months endedSeptember 30, 2020 , cash used in financing activities included the repayment of$103.5 million on the Term Loan Facility, the repayment of$100.0 million on the Revolving Credit Facility, quarterly dividend payments of$15.4 million and payments on our finance lease obligations of$12.2 million . - 35 -
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During the six months endedSeptember 30, 2019 , cash provided by financing activities was$988.1 million due to the new Term Loan Facility, Senior Notes and common stock offering. These cash inflows were offset by the repayment of the Company's Second Amended and Restated Credit Agreement (the "PNC Credit Agreement") and Prudential Senior Notes, the special and quarterly dividend payments of$76.3 million and payments on our finance lease obligations of$12.3 million . The table below summarizes the cash flows from the Acquisition, and the related debt and equity transactions: (Amounts in thousands) Sources Uses Bridge Loan Facility$ 1,300,000 $ - Bridge Revolver 145,000 - PNC Credit Agreement draw 104,429 - Prudential Senior Notes payoff - (104,429 ) PNC Credit Agreement payoff - (239,240 ) Acquisition ofInfiltrator Water Technologies , fair value of consideration transferred - (1,146,526 ) Common stock offering, net of offering costs 293,648 - Bridge Loan Facility - payment - (300,000 ) Proceeds from Senior Notes Issuance 350,000 - Bridge Loan Facility - payment - (300,000 ) Term Loan Facility 700,000 - Bridge Loan Facility - payment - (700,000 ) Debt issuance costs - (34,606 ) Cash to Balance Sheet - (68,276 ) Total$ 2,893,077 $ (2,893,077 )
Cash held by Foreign Subsidiaries - As of
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.
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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 Six Months Ended
September 30, September 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Net income (loss) attributable to ADS $ 80,236 $ 7,589 $ 150,702 $ (218,767 )
ESOP special dividend compensation - - - 246,752 ESOP deferred stock-based compensation 9,130 5,486 15,993 11,070
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 Six Months Ended
September 30, September 30,
2020 2019 2020 2019
(Shares in millions) (Shares in millions)
Weighted average common shares outstanding 69.8 60.2 69.6 58.9
Conversion of redeemable convertible shares 16.3 17.2 16.4 17.3
Financing Transactions
New 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 September 30, 2020 , the outstanding principal drawn on Term Loan
Facility was $544.8 million and the no outstanding principal on the Revolving
Credit Facility. The Company had $339.0 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 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 September 30, 2020 and
March 31, 2020 , there were no borrowings 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
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30, 2027. The Company used the majority of the net proceeds from the offering of
the Senior Notes for the repayment of
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.
Covenant Compliance - The Senior Secured Credit Facility requires, if the
aggregate amount of outstanding exposure under the Revolving Facility exceeds
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 ofSeptember 30, 2020 , our South American Joint Venture had approximately$10.1 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 similartransactions, including the acquisition and integration of Infiltrator
Water Technologies;
• 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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