UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number: 001-36557
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices, Including Zip Code)
(614 ) 658-0050
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☒ | Accelerated Filer | ☐ | ||||||||||||
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ||||||||||||
| Emerging Growth Company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 1, 2024, the registrant had 77,523,433 shares of common stock outstanding, which excludes 184,236 shares of unvested restricted common stock. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS.”
TABLE OF CONTENTS
| Page | ||||||||||||||
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Forward-Looking Statements
This 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,” “target,” “outlook,” “continue,” “intends,” “plans,” “projects,” “estimates,” “anticipates” or other comparable terms or the negative of those terms or similar expressions. 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 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;
•disruption or volatility in general business and economic conditions in the markets in which we operate;
•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;
•uncertainties surrounding the integration and realization of anticipated benefits of acquisitions;
•the effect of any claims, litigation, investigations or proceedings, including those described under “Item 1. Legal Proceedings” of this Form 10-Q;
•the effect of weather or seasonality;
•the loss of any of our significant customers;
•the risks of doing business internationally;
•the risks of conducting a portion of our operations through joint ventures;
•our ability to expand into new geographic or product markets;
•the risk associated with manufacturing processes;
•the effect of global climate change;
•our ability to protect against cybersecurity incidents and disruptions or failures of our IT systems;
•our ability to assess and monitor the effects of artificial intelligence, machine learning, and robotics on our business and operations;
•our ability to manage our supply purchasing and customer credit policies;
•our ability to control labor costs and to attract, train and retain highly qualified employees and key personnel;
•our ability to protect our intellectual property rights;
•changes in laws and regulations, including environmental laws and regulations;
•our ability to appropriately address any environmental, social or governance concerns that may arise from our activities;
•the risks associated with our current levels of indebtedness, including borrowings under our existing credit agreement and outstanding indebtedness under our existing senior notes; and
•other risks and uncertainties, including those listed under “Item 1A. Risk Factors” in the Fiscal 2024 Form 10-K.
All forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
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PART I. FINANCIAL INFORMATION
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except par value)
| June 30, 2024 | March 31, 2024 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | $ | |||||||||
Receivables (less allowance for doubtful accounts of $ | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Other assets: | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of debt obligations | $ | $ | |||||||||
| Current maturities of finance lease obligations | |||||||||||
| Accounts payable | |||||||||||
| Other accrued liabilities | |||||||||||
| Accrued income taxes | |||||||||||
| Total current liabilities | |||||||||||
Long-term debt obligations (less unamortized debt issuance costs of $ | |||||||||||
| Long-term finance lease obligations | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (see Note 8) | |||||||||||
| Mezzanine equity: | |||||||||||
Redeemable common stock: $ | |||||||||||
| Total mezzanine equity | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock; $ shares issued, respectively; | |||||||||||
| Paid-in capital | |||||||||||
| Common stock in treasury, at cost | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total ADS stockholders’ equity | |||||||||||
| Noncontrolling interest in subsidiaries | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities, mezzanine equity and stockholders’ equity | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per share data)
| Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
Loss (gain) on disposal of assets and costs from exit and disposal activities | ( | ||||||||||
| Intangible amortization | |||||||||||
| Income from operations | |||||||||||
| Other expense: | |||||||||||
| Interest expense | |||||||||||
| Interest income and other, net | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Income tax expense | |||||||||||
| Equity in net income of unconsolidated affiliates | ( | ( | |||||||||
| Net income | |||||||||||
| Less: net income attributable to noncontrolling interest | |||||||||||
| Net income attributable to ADS | $ | $ | |||||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| Net income per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
| Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income | $ | $ | |||||||||
| Currency translation (loss) gain | ( | ||||||||||
| Comprehensive income | |||||||||||
Less: other comprehensive income attributable to noncontrolling interest | ( | ||||||||||
| Less: net income attributable to noncontrolling interest | |||||||||||
| Total comprehensive income attributable to ADS | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
| Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Gain on disposal of assets and costs from exit and disposal activities | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Amortization of deferred financing charges | |||||||||||
| Fair market value adjustments to derivatives | ( | ||||||||||
| Equity in net income of unconsolidated affiliates | ( | ( | |||||||||
| Other operating activities | ( | ||||||||||
| Changes in working capital: | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable, accrued expenses, and other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from disposition of assets | |||||||||||
| Other investing activities | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Payments on syndicated Term Loan Facility | ( | ( | |||||||||
| Payments on Equipment Financing | ( | ( | |||||||||
| Payments on finance lease obligations | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Payment of withholding taxes on vesting of restricted stock units | ( | ( | |||||||||
| Other financing activities | ( | — | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net change in cash | |||||||||||
| Cash and restricted cash at beginning of period | |||||||||||
| Cash and restricted cash at end of period | $ | $ | |||||||||
| RECONCILIATION TO BALANCE SHEET | |||||||||||
| Cash | $ | ||||||||||
| Restricted cash (included in Other assets in the Condensed Consolidated Balance Sheets) | |||||||||||
| Total cash and restricted cash | $ | ||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY
(Unaudited) (In thousands)
Common Stock | Paid -In Capital | Common Stock in Treasury | Accumulated Other Compre-hensive Loss | Retained Earnings | Total ADS Stockholders’ Equity | Non- controlling Interest in Subsidiaries | Total Stock- holders’ Equity | Redeemable Common Stock | Total Mezzanine Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | — | — | — | — | ( | ( | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | ( | — | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| KSOP redeemable common stock conversion | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock awards | — | ( | — | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performance-based restricted stock units | — | ( | — | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | ( | — | — | — | — | ( | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 1, 2024 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | ( | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | — | — | — | — | ( | ( | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | ( | — | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| KSOP redeemable common stock conversion | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock awards | — | ( | — | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performance-based restricted stock units | — | ( | — | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ESPP Share Issuance | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | ( | — | — | — | — | ( | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Advanced Drainage Systems, Inc., incorporated in Delaware, and its subsidiaries (collectively referred to as “ADS” or the “Company”) designs, manufactures and markets innovative water management solutions in the stormwater and onsite septic wastewater industries, providing superior drainage solutions for use in the construction and agriculture marketplace. ADS’s products are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications.
The Company is managed and reports results of operations in three reportable segments: Pipe, Infiltrator Water Technologies Ultimate Holdings, Inc. (“Infiltrator”) and International. The Company also reports the results of its Allied Products and all other business segments as Allied Products and Other.
Historically, sales of the Company’s products have been higher in the first and second quarters of each fiscal year due to favorable weather and longer daylight conditions accelerating construction activity during these periods. Seasonal variations in operating results may also be impacted by inclement weather conditions, such as cold or wet weather, which can delay projects.
Principles of Consolidation - The Condensed Consolidated Financial Statements include the Company, its wholly-owned subsidiaries, its majority-owned subsidiaries and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company uses the equity method of accounting for equity investments where it exercises significant influence but does not hold a controlling financial interest. Such investments are recorded in Other assets in the Condensed Consolidated Balance Sheets and the related equity earnings from these investments are included in Equity in net income of unconsolidated affiliates in the Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.
Recent Accounting Guidance
Improvements to Reportable Segment Disclosures - In November 2023, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) to amend ASC 280, Segment Reporting to enhance segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The amendments must be applied retrospectively to all periods presented in the financial statements. The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.
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2.REVENUE RECOGNITION
Revenue Disaggregation - The Company disaggregates net sales by Domestic, International and Infiltrator and further disaggregates Domestic and International by product type, consistent with its reportable segment disclosure. This disaggregation level best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Refer to “Note 11. Business Segments Information” for the Company’s disaggregation of Net sales by reportable segment.
Contract Balances - The Company recognizes a contract asset representing the Company’s right to recover products upon the receipt of returned products and a contract liability for the customer refund. The following table presents the balance of the Company’s contract asset and liability as of the periods presented:
| (In thousands) | June 30, 2024 | March 31, 2024 | |||||||||
| Contract asset - product returns | $ | $ | |||||||||
| Refund liability | |||||||||||
3.LEASES
Nature of the Company’s Leases - The Company has operating and finance leases for plants, yards, corporate offices, tractors, trailers and other equipment. The Company’s leases have remaining terms of less than one year to 13 years. A portion of the Company’s yard leases include an option to extend the leases for up to five years . The Company has included renewal options which are reasonably certain to be exercised in its right-of-use assets and lease liabilities.
4.INVENTORIES
Inventories as of the periods presented consisted of the following:
| (In thousands) | June 30, 2024 | March 31, 2024 | |||||||||
| Raw materials | $ | $ | |||||||||
| Finished goods | |||||||||||
| Total inventories | $ | $ | |||||||||
5.NET INCOME PER SHARE AND STOCKHOLDERS' EQUITY
Net Income per Share - The following table presents information necessary to calculate net income per share for the periods presented, as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive:
| Three Months Ended June 30, | |||||||||||
| (In thousands, except per share data) | 2024 | 2023 | |||||||||
| NET INCOME PER SHARE—BASIC: | |||||||||||
Net income available to common stockholders – Basic | $ | $ | |||||||||
Weighted average number of common shares outstanding – Basic | |||||||||||
| Net income per common share – Basic | $ | $ | |||||||||
| NET INCOME PER SHARE—DILUTED: | |||||||||||
Net income available to common stockholders – Diluted | $ | $ | |||||||||
Weighted average number of common shares outstanding – Basic | |||||||||||
| Assumed restricted stock | |||||||||||
| Assumed exercise of stock options | |||||||||||
| Assumed performance-based restricted stock units | |||||||||||
Weighted average number of common shares outstanding – Diluted | |||||||||||
| Net income per common share – Diluted | $ | $ | |||||||||
Potentially dilutive securities excluded as anti-dilutive | |||||||||||
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6.RELATED PARTY TRANSACTIONS
ADS Mexicana - ADS conducts business in Mexico and Central America through its joint venture, ADS Mexicana, S.A. de C.V. (“ADS Mexicana”). ADS owns 51 % of the outstanding stock of ADS Mexicana and consolidates ADS Mexicana for financial reporting purposes.
On June 6, 2022, the Company and ADS Mexicana amended the Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a borrowing capacity of $9.5 million. The Intercompany Note matures on June 8, 2027. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49 % of any unpaid borrowings. The interest rates under the Intercompany Note are determined by certain base rates or Secured Overnight Financing Rate (“SOFR”) plus an applicable margin based on the Leverage Ratio. As of both June 30, 2024 and March 31, 2024, there were no borrowings outstanding under the Intercompany Note.
South American Joint Venture - The Tuberias Tigre - ADS Limitada joint venture (the “South American Joint Venture”) manufactures and sells HDPE corrugated pipe in certain South American markets. ADS owns 50 % of the South American Joint Venture. ADS is the guarantor of 50 % of the South American Joint Venture’s credit arrangement, and the debt guarantee is shared equally with the joint venture partner. The Company’s maximum potential obligation under this guarantee is $5.5 million as of June 30, 2024. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $11.0 million. The Company does not anticipate any required contributions related to the balance of this credit arrangement. As of June 30, 2024 and March 31, 2024, there was no outstanding principal balance for the South American Joint Venture’s credit facility including letters of credit.
7.DEBT
Long-term debt as of the periods presented consisted of the following:
| (In thousands) | June 30, 2024 | March 31, 2024 | |||||||||
| Term Loan Facility | $ | $ | |||||||||
| Senior Notes due 2027 | |||||||||||
| Senior Notes due 2030 | |||||||||||
| Revolving Credit Facility | |||||||||||
| Equipment Financing | |||||||||||
| Total | |||||||||||
| Less: Unamortized debt issuance costs | ( | ( | |||||||||
| Less: Current maturities | ( | ( | |||||||||
| Long-term debt obligations | $ | $ | |||||||||
Senior Secured Credit Facilities - In May 2022, the Company entered into a Second Amendment (the “Second Amendment”) to the Company's Base Credit Agreement with Barclays Bank PLC, as administrative agent under the Term Loan Facility and PNC Bank, National Association, as new administrative agent under the Revolving Credit Facility. Among other things, the Second Amendment (i) amended the Base Credit Agreement by increasing the Revolving Credit Facility (the “Amended Revolving Credit Facility”) from $350 million to $600 million (including an increase of the sub-limit for the swing-line sub-facility from $50 million to $60 million), (ii) extended the maturity date of the Revolving Credit Facility to May 26, 2027, (iii) revised the “applicable margin” to provide an additional step-down to 175 basis points (for Term Benchmark based loans) and 75 basis points (for base rate loans) in the event the consolidated senior secured net leverage ratio is less than 2.00 to 1.00, and (iv) reset the “incremental amount” and the investment basket in non-guarantors and joint ventures. The Second Amendment also revised the reference interest rate from LIBOR to SOFR for both the Amended Revolving Credit Facility and the Term Loan Facility. Letters of credit outstanding at June 30, 2024 and March 31, 2024 amounted to $10.5 million and $11.2 million, respectively, and reduced the availability of the Revolving Credit Facility.
Senior Notes due 2027 - On September 23, 2019, the Company issued $350.0 million aggregate principal amount of 5.0 % Senior Notes due 2027 (the “2027 Notes”) pursuant to an Indenture, dated September 23, 2019 (the “2027 Indenture”), among the Company, the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as Trustee (the “Trustee”).
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Senior Notes due 2030 - On June 9, 2022, the Company issued $500.0 million aggregate principal amount of 6.375 % Senior Notes due 2030 (the “2030 Notes”) pursuant to an Indenture, dated June 9, 2022 (the “2030 Indenture”), among the Company, the Guarantors and the Trustee.
Equipment Financing - The assets under the Equipment Financing acquired are titled to the Company and included in Property, plant and equipment, net on the Company's Condensed Consolidated Balance Sheet. The equipment financing has an initial term of between 12 and 84 months, based on the life of the equipment, and bears a weighted average interest of 1.6 % as of June 30, 2024. The current portion of the equipment financing is $4.5 million, and the long-term portion is $5.1 million at June 30, 2024.
Valuation of Debt - The carrying amounts of current financial assets and liabilities approximate fair value because of the immediate or short-term maturity of these items. The following table presents the carrying and fair value of the Company’s 2027 Notes, 2030 Notes and Equipment Financing for the periods presented:
| June 30, 2024 | March 31, 2024 | ||||||||||||||||||||||
| (In thousands) | Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||||||||
| Senior Notes due 2027 | $ | $ | $ | $ | |||||||||||||||||||
| Senior Notes due 2030 | |||||||||||||||||||||||
| Equipment Financing | |||||||||||||||||||||||
| Total fair value | $ | $ | $ | $ | |||||||||||||||||||
The fair values of the 2027 Notes and 2030 Notes were determined based on quoted market data for the Company’s 2027 Notes and 2030 Notes, respectively. The fair value of the Equipment Financing was determined based on a comparison of the interest rate and terms of such borrowings to the rates and terms of similar debt available for the period. The categorization of the framework used to evaluate the 2027 Notes, 2030 Notes and Equipment Financing are considered Level 2. The Company believes the carrying amount of the remaining long-term debt, including the Term Loan Facility and Revolving Credit Facility, is not materially different from its fair value as the interest rates and terms of the borrowings are similar to currently available borrowings.
8.COMMITMENTS AND CONTINGENCIES
Purchase Commitments - The Company has historically secured supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts typically ranged from 1 to 12 months and occur in the ordinary course of business. The Company does no t have any outstanding purchase commitments with fixed price and quantity as of June 30, 2024. The Company also enters into equipment purchase contracts with manufacturers.
Litigation and Other Proceedings - The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and administrative proceedings will have a material adverse impact on the Company’s financial position or results of operations. The Company records a liability when a loss is considered probable and the amount can be reasonably estimated.
9.INCOME TAXES
The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other one-time charges, as well as the occurrence of discrete events. For the three months ended June 30, 2024 and 2023, the Company utilized an effective tax rate of 23.7 % and 24.2 %, respectively, to calculate its provision for income taxes. State and local income taxes increased the effective rate for the three months ended June 30, 2024 and 2023. Additionally, the discrete income tax benefit related to the stock-based compensation windfall decreased the effective tax rate for the three months ended June 30, 2024.
10. STOCK-BASED COMPENSATION
ADS has several programs for stock-based payments to employees and non-employee members of its Board of Directors, including stock options, performance-based restricted stock units and restricted stock. The Company
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recognized stock-based compensation expense in the following line items of the Condensed Consolidated Statements of Operations for the periods presented:
| Three Months Ended June 30, | |||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Component of income before income taxes: | |||||||||||
| Cost of goods sold | $ | $ | |||||||||
| Selling, general and administrative expenses | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
The following table summarizes stock-based compensation expense by award type for the periods presented:
| Three Months Ended June 30, | |||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Stock-based compensation expense: | |||||||||||
| Stock Options | $ | $ | |||||||||
| Restricted Stock | |||||||||||
| Performance-based Restricted Stock Units | |||||||||||
| Employee Stock Purchase Plan | |||||||||||
| Non-Employee Directors | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
2017 Omnibus Incentive Plan - The 2017 Incentive Plan provides for the issuance of a maximum of 5.0 million shares of the Company’s common stock for awards made thereunder, which awards may consist of stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, cash-based awards, performance awards (which may take the form of performance cash, performance units or performance shares) or other stock-based awards.
Restricted Stock - During the three months ended June 30, 2024, the Company granted 0.1 million shares of restricted stock with a grant date fair value of $12.2 million.
Performance-based Restricted Stock Units (“Performance Units”) - During the three months ended June 30, 2024, the Company granted 0.1 million performance units at a grant date fair value of $9.2 million.
Options - During the three months ended June 30, 2024, the Company granted 0.1 million nonqualified stock options under the 2017 Incentive Plan with a grant date fair value of $7.9 million. The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The following table summarizes the assumptions used to estimate the fair value of stock-options during the period presented:
| Three Months Ended June 30, 2024 | |||||
| Common stock price | $ | ||||
| Expected stock price volatility | |||||
| Risk-free interest rate | |||||
| Weighted-average expected option life (years) | |||||
| Dividend yield | |||||
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11.BUSINESS SEGMENTS INFORMATION
The Company operates its business in three distinct reportable segments: “Pipe”, “International” and “Infiltrator.” “Allied Products & Other” represents the Company’s Allied Products and all other business segments. The Chief Operating Decision Maker (the “CODM”) evaluates segment reporting based on Net Sales and Segment Adjusted Gross Profit. The Company calculated Segment Adjusted Gross Profit as Net sales less Costs of goods sold, depreciation and amortization, stock-based compensation and non-cash charges. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources.
The following table sets forth reportable segment information with respect to the amount of Net sales contributed by each class of similar products for the periods presented:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | ||||||||||||||||||||||||||||||||||
| (In thousands) | Net Sales | Intersegment Net Sales | Net Sales from External Customers | Net Sales | Intersegment Net Sales | Net Sales from External Customers | |||||||||||||||||||||||||||||
| Pipe | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Infiltrator | ( | ( | |||||||||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||
| International - Pipe | ( | ( | |||||||||||||||||||||||||||||||||
| International - Allied Products & Other | ( | ( | |||||||||||||||||||||||||||||||||
| Total International | ( | ( | |||||||||||||||||||||||||||||||||
| Allied Products & Other | ( | ( | |||||||||||||||||||||||||||||||||
| Intersegment Eliminations | ( | — | ( | — | |||||||||||||||||||||||||||||||
| Total Consolidated | $ | $ | — | $ | $ | $ | — | $ | |||||||||||||||||||||||||||
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The following sets forth certain financial information attributable to the reportable segments for the periods presented:
| Three Months Ended June 30, | |||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Segment Adjusted Gross Profit | |||||||||||
| Pipe | $ | $ | |||||||||
| Infiltrator | |||||||||||
| International | |||||||||||
| Allied Products & Other | |||||||||||
| Intersegment Eliminations | ( | ( | |||||||||
| Total | $ | $ | |||||||||
| Depreciation and Amortization | |||||||||||
| Pipe | $ | $ | |||||||||
| Infiltrator | |||||||||||
| International | |||||||||||
Allied Products & Other(a) | |||||||||||
| Total | $ | $ | |||||||||
| Capital Expenditures | |||||||||||
| Pipe | $ | $ | |||||||||
| Infiltrator | |||||||||||
| International | |||||||||||
Allied Products & Other(a) | |||||||||||
| Total | $ | $ | |||||||||
(a)Includes depreciation, amortization and capital expenditures not allocated to a reportable segment. The amortization expense of Infiltrator intangible assets is included in Allied Products & Other.
| Three Months Ended June 30, | |||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Reconciliation of Segment Adjusted Gross Profit: | |||||||||||
| Total Gross Profit | $ | $ | |||||||||
| Depreciation and Amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Total Segment Adjusted Gross Profit | $ | $ | |||||||||
12.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the three months ended June 30 were as follows:
| (In thousands) | 2024 | 2023 | |||||||||
| Supplemental disclosures of cash flow information - cash paid: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | |||||||||||
| Supplemental disclosures of noncash investing and financing activities: | |||||||||||
| Repurchase of common stock pending settlement | |||||||||||
| Share repurchase excise tax accrual | |||||||||||
| Acquisition of property, plant and equipment under finance lease | |||||||||||
| Balance in accounts payable for the acquisition of property, plant and equipment | |||||||||||
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13.SUBSEQUENT EVENTS
Common Stock Dividend - Subsequent to the end of the quarter, the Company declared a quarterly cash dividend of $0.16 per share of common stock. The dividend is payable on September 13, 2024, to stockholders of record at the close of business on August 30, 2024.
Share Repurchase Program - Subsequent to the end of the quarter, 0.1 million shares of common stock at a cost of $19.1 million were repurchased under the Board of Directors' authorization in February 2022.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q ("Form 10-Q"), the terms “we,” “our,” “us,” “ADS” and the “Company” refer to Advanced Drainage Systems, Inc. and its directly- and indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean only Advanced Drainage Systems, Inc. exclusive of its subsidiaries. We consolidate our joint ventures for purposes of GAAP, except for our South American Joint Venture.
Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, references to “year” pertain to our fiscal year. For example, 2025 refers to fiscal 2025, which is the period from April 1, 2024 to March 31, 2025.
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 Form 10-Q and with the audited Consolidated Financial Statements included in our Fiscal 2024 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 16, 2024. 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 entitled “Forward Looking Statements.”
Overview
ADS is the leading manufacturer of innovative water management solutions in the stormwater and onsite septic wastewater industries, providing superior drainage solutions for use in the construction and agriculture marketplaces. Our innovative products, for which we hold many patents, are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, industry-acclaimed engineering support, overall product breadth and scale plus manufacturing excellence.
Executive Summary
First Quarter Fiscal 2025 Results
•Net sales increased 4.8% to $815.3 million
•Net income decreased 6.7% to $162.3 million
•Net income per diluted share decreased 5.5% to $2.06
•Adjusted EBITDA, a non-GAAP measure, decreased 2.1% to $275.5 million
•Cash provided by operating activities decreased 24.8% to $183.4 million
•Free cash flow, a non-GAAP measure, decreased 37.7% to $125.7 million
Net sales increased $37.3 million, or 4.8%, to $815.3 million, as compared to $778.0 million in the prior year quarter. Domestic pipe sales increased $10.6 million, or 2.5%, to $431.4 million. Domestic allied products & other sales increased $13.9 million, or 7.6%, to $196.0 million. Infiltrator sales increased $7.3 million, or 5.9%, to $130.2 million. The overall increase in domestic net sales was primarily driven by demand in the U.S. construction end markets. International sales increased $5.5 million, or 10.4%, to $57.7 million.
Gross profit increased $1.0 million, or 0.3%, to $332.5 million as compared to $331.5 million in the prior year. The increase in gross profit is primarily due to favorable demand as well as stronger sales mix, as Infiltrator and Allied product sales increased more than Pipe sales. This favorability was partially offset by unfavorable pricing, material cost and transportation costs.
Selling, general and administrative expense increased $7.5 million, or 8.7% to $94.1 million, as compared to $86.5 million. This increase is primarily due to higher commissions from the increase in volume, as well as continued investments in talent to support strategic areas such as engineering and product development. As a percentage of sales, selling, general and administrative expense was largely flat at 11.5% as compared to 11.1% in the prior year.
Adjusted EBITDA, a non-GAAP measure, decreased $5.8 million, or 2.1%, to $275.5 million, as compared to $281.3 million in the prior year. As a percentage of Net sales, Adjusted EBITDA was 33.8% as compared to 36.2% in the prior year.
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Results of Operations
Comparison of the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023
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.
| Consolidated Statements of Operations data: | For the Three Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | |||||||||||||||||||||
| Net sales | $ | 815,336 | 100.0 | % | $ | 778,046 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 482,882 | 59.2 | 446,586 | 57.4 | |||||||||||||||||||
| Gross profit | 332,454 | 40.8 | 331,460 | 42.6 | |||||||||||||||||||
| Selling, general and administrative | 94,052 | 11.5 | 86,511 | 11.1 | |||||||||||||||||||
Loss (gain) on disposal of assets and costs from exit and disposal activities | 292 | — | (13,304) | (1.7) | |||||||||||||||||||
| Intangible amortization | 11,895 | 1.5 | 12,802 | 1.6 | |||||||||||||||||||
| Income from operations | 226,215 | 27.7 | 245,451 | 31.5 | |||||||||||||||||||
| Interest expense | 22,824 | 2.8 | 21,712 | 2.8 | |||||||||||||||||||
| Interest income and other, net | (7,116) | (0.9) | (3,549) | (0.5) | |||||||||||||||||||
| Income before income taxes | 210,507 | 25.8 | 227,288 | 29.2 | |||||||||||||||||||
| Income tax expense | 49,886 | 6.1 | 55,058 | 7.1 | |||||||||||||||||||
| Equity in net income of unconsolidated affiliates | (1,701) | (0.2) | (1,675) | (0.2) | |||||||||||||||||||
| Net income | 162,322 | 19.9 | 173,905 | 22.4 | |||||||||||||||||||
| Less: net income attributable to noncontrolling interest | 920 | 0.1 | 253 | — | |||||||||||||||||||
| Net income attributable to ADS | $ | 161,402 | 19.8 | % | $ | 173,652 | 22.3 | % | |||||||||||||||
Net sales - The following table presents Net sales to external customers by reportable segment for the three months ended June 30, 2024 and 2023.
| (Amounts in thousands) | 2024 | 2023 | $ Variance | % Variance | |||||||||||||||||||
| Pipe | $ | 431,425 | $ | 420,813 | $ | 10,612 | 2.5 | % | |||||||||||||||
| Infiltrator | 130,218 | 122,908 | 7,310 | 5.9 | |||||||||||||||||||
| International | 57,705 | 52,249 | 5,456 | 10.4 | |||||||||||||||||||
| Allied Products & Other | 195,988 | 182,076 | 13,912 | 7.6 | |||||||||||||||||||
| Total Consolidated | $ | 815,336 | $ | 778,046 | $ | 37,290 | 4.8 | % | |||||||||||||||
Our consolidated Net sales for the three months ended June 30, 2024 increased by $37.3 million, or 4.8%, compared to the same period in fiscal 2024. The overall increase in domestic net sales was primarily driven by the improvement in the U.S. construction end markets which resulted in volume growth for Pipe, Infiltrator and Allied Products & Other.
Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the three months ended June 30, 2024 and 2023.
| (Amounts in thousands) | 2024 | 2023 | $ Variance | % Variance | |||||||||||||||||||
| Pipe | $ | 123,052 | $ | 145,256 | $ | (22,204) | (15.3) | % | |||||||||||||||
| Infiltrator | 80,118 | 68,867 | 11,251 | 16.3 | |||||||||||||||||||
| International | 18,297 | 14,791 | 3,506 | 23.7 | |||||||||||||||||||
| Allied Products & Other | 112,162 | 104,601 | 7,561 | 7.2 | |||||||||||||||||||
| Intersegment eliminations | (1,175) | (2,055) | 880 | (42.8) | |||||||||||||||||||
| Total gross profit | $ | 332,454 | $ | 331,460 | $ | 994 | 0.3 | % | |||||||||||||||
Our consolidated Cost of goods sold for the three months ended June 30, 2024 increased by $36.3 million, or 8.1%, and our consolidated Gross profit increased by $1.0 million, or 0.3%, compared to the same period in fiscal 2024. The increase in
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our gross profit was primarily due to increased sales discussed above partially offset by unfavorable pricing, material cost and transportation costs.
Selling, general and administrative expenses
| Three Months Ended June 30, | |||||||||||
| (Amounts in thousands) | 2024 | 2023 | |||||||||
| Selling, general and administrative expenses | $ | 94,052 | $ | 86,511 | |||||||
| % of Net sales | 11.5 | % | 11.1 | % | |||||||
Selling, general and administrative expenses for the three months ended June 30, 2024 increased from the same period in fiscal 2024 and as a percentage of sales, increased by 0.4%. This increase is primarily due to higher commissions from the increase in volume, as well as continued investments in talent to support strategic areas such as engineering and product development.
Loss (gain) on disposal of assets and costs from exit and disposal activities - The gain on disposal in fiscal 2024 was due to the sale of Spartan Concrete.
Interest expense - Interest expense increased $1.1 million in the three months ended June 30, 2024 compared to the same period in the previous fiscal year. The increase was primarily due to an increase in interest rates.
Interest income and other, net - Interest income and other, net increased by $3.6 million for the three months ended June 30, 2024 compared to the same period in the previous fiscal year primarily due to increased cash.
Income tax expense - The following table presents the effective tax rates for the periods presented:
| Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Effective tax rate | 23.7 | % | 24.2 | % | |||||||
The change in the effective tax rate for the three months ended June 30, 2024 was primarily related to the increase of the discrete income tax benefit related to the stock-based compensation windfall. See “Note 9. Income Taxes” for additional information.
Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, have been presented in this 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 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.
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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 presented.
Three Months Ended June 30, | |||||||||||
| (In thousands) | 2024 | 2023 | |||||||||
| Net income | $ | $ | |||||||||
| Depreciation and amortization | 41,098 | 37,240 | |||||||||
| Interest expense | |||||||||||
| Income tax expense | |||||||||||
| EBITDA | 276,130 | 287,915 | |||||||||
Loss (gain) on disposal of assets and costs from exit and disposal activities | ( | ||||||||||
| Stock-based compensation expense | 6,977 | 6,903 | |||||||||
Transaction costs(a) | 10 | 1,972 | |||||||||
Interest income | (6,565) | (3,489) | |||||||||
Other adjustments(b) | (1,346) | 1,316 | |||||||||
| Adjusted EBITDA | $ | 275,498 | $ | 281,313 | |||||||
| Adjusted EBITDA Margin | 33.8 | % | 36.2 | % | |||||||
(a)Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with business or asset acquisitions and dispositions.
(b)Includes derivative fair value adjustments, foreign currency transaction (gains) losses, the proportionate share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is accounted for under the equity method of accounting and executive retirement expense.
Liquidity and Capital Resources
Historically, we have funded our operations through internally generated cash flow supplemented by debt financings, equity issuance and finance and operating leases. These sources have been sufficient historically to fund our primary liquidity requirements, including working capital, capital expenditures, debt service and dividend payments for our 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.
Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures and is used by management and our Board of Directors to assess our ability to generate cash. Accordingly, free cash flow has been presented 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.
The following table presents a reconciliation of free cash flow to cash provided by operating activities, the most comparable GAAP measure, for each of the periods presented:
| Three Months Ended June 30, | |||||||||||
| (Amounts in thousands) | 2024 | 2023 | |||||||||
| Net cash provided by operating activities | $ | 183,426 | $ | 243,967 | |||||||
| Capital expenditures | (57,715) | (42,078) | |||||||||
| Free Cash Flow | $ | 125,711 | $ | 201,889 | |||||||
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The following table presents key liquidity metrics utilized by management including the leverage ratio which is calculated as net debt divided by the trailing twelve months Adjusted EBITDA:
| (Amounts in thousands) | June 30, 2024 | ||||
| Total debt (debt and finance lease obligations) | $ | 1,370,969 | |||
| Cash | 541,637 | ||||
| Net debt (total debt less cash) | 829,332 | ||||
| Leverage Ratio | 0.9 | ||||
The following table summarizes our available liquidity for the period presented:
| (Amounts in thousands) | June 30, 2024 | ||||
| Revolver capacity | $ | 600,000 | |||
| Less: outstanding borrowings | — | ||||
| Less: letters of credit | (10,450) | ||||
| Revolver available liquidity | $ | 589,550 | |||
In addition to the available liquidity above, we have the ability to borrow up to $1.3 billion under our Senior Secured Credit Facility, subject to leverage ratio restrictions.
As of June 30, 2024, we had $15.8 million in cash that was held by our foreign subsidiaries, including $7.8 million held by our Canadian subsidiaries. We continue to evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested, except for Canada. We plan to repatriate earnings from Canada and believe that there will be no additional tax costs associated with the repatriation of such earnings other than any potential non-U.S. withholding taxes.
Working Capital and Cash Flows
As of June 30, 2024, we had $1,131.2 million in liquidity, including $541.6 million of cash and $589.6 million in borrowings available under our Revolving Credit Agreement, net of outstanding letters of credit. We believe that our cash on hand, together with the availability of borrowings under our Credit Agreement and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, and scheduled principal and interest payments on our indebtedness for at least the next twelve months.
Working Capital - Working capital increased to $931.4 million as of June 30, 2024, from $860.3 million as of March 31, 2024. The increase in working capital is primarily due to an increase in cash, accounts receivable and inventory due to seasonality offset by changes in accrued taxes due to the timing of payments.
| Three Months Ended June 30, | |||||||||||
| (Amounts in thousands) | 2024 | 2023 | |||||||||
| Net cash provided by operating activities | $ | 183,426 | $ | 243,967 | |||||||
| Net cash used in investing activities | (57,217) | (21,944) | |||||||||
| Net cash used in financing activities | (73,895) | (73,512) | |||||||||
Operating Cash Flows - Cash flows from operating activities decreased $60.5 million during the three months ended June 30, 2024 primarily driven by changes in net working capital.
Investing Cash Flows - Cash flows used in investing activities during the three months ended June 30, 2024 increased by $35.3 million compared to the same period in fiscal 2024. The increase in cash used in investing activities was primarily due to the sale of Spartan Concrete in fiscal 2024.
Capital expenditures totaled $57.7 million and $42.1 million for the three months ended June 30, 2024 and 2023, respectively. Our capital expenditures for the three months ended June 30, 2024 were used primarily to support facility expansions, equipment replacements and technology improvement initiatives.
We currently anticipate that we will make capital expenditures of approximately $250 million to $300 million in fiscal year 2025, including approximately $110 million of open orders as of June 30, 2024. Such capital expenditures are expected to be financed using funds generated by operations.
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Financing Cash Flows - During the three months ended June 30, 2024, cash used in financing activities included the repurchase of common stock of $49.2 million, $12.4 million of dividend payments, and $10.6 million for shares withheld for tax purposes.
During the three months ended June 30, 2023, cash used in financing activities included the repurchase of common stock of $47.8 million, $11.1 million of dividend payments, and $8.7 million for shares withheld for tax purposes.
Financing Transactions - There have been no changes in our debt disclosures from those disclosed in “Liquidity and Capital Resources” in our Fiscal 2024 Form 10-K. We are in compliance with our debt covenants as of June 30, 2024.
Off-Balance Sheet Arrangements
Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 6. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of June 30, 2024, our South American Joint Venture had no 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 2024 Form 10-K, except as disclosed in "Note 1. Background and Summary of Significant Accounting Policies.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to various market risks, primarily related to changes in interest rates, credit, raw material supply prices and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions. Our exposure to market risk has not materially changed from what we previously disclosed in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2024 Form 10-K except as disclosed below.
Interest Rate Risk - We are subject to interest rate risk associated with our bank debt. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $4.1 million based on our borrowings as of June 30, 2024. Assuming the Revolving Credit Facility is fully drawn, each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately $10.1 million, for the twelve months ended June 30, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for evaluating the effectiveness of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), rules 13a-15(e) and 15d-15(e). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting - There were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the three months ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and administrative proceedings will have a material adverse impact on the Company’s financial position or results of operations.
Please see “Note 8. Commitments and Contingencies,” of the Condensed Consolidated Financial Statements of this Form 10-Q for more information regarding legal proceedings.
Item 1A. Risk Factors
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in “Part I, Item 1A — Risk Factors” of our Fiscal 2024 Form 10-K. These factors are further supplemented by those discussed in “Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2024 Form 10-K and in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and “Part II, Item 1 — Legal Proceedings” of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2022, our Board of Directors authorized a $1.0 billion common stock repurchase program. Repurchases of common stock will be made in accordance with applicable securities laws. During the three months ended June 30, 2024, the Company repurchased 0.3 million shares of common stock at a cost of $48.3 million. As of June 30, 2024, approximately $167.6 million of common stock may be repurchased under the authorization. The stock repurchase program does not obligate us to acquire any particular amount of common stock and may be suspended or terminated at any time at our discretion.
The following table provides information with respect to repurchases of our common stock by us and our “affiliated purchasers” (as defined by Rule 10b-18(a)(3) under the Exchange Act) during the three months ended June 30, 2024:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan | ||||||||||||||||||||||
| (amounts in thousands, except per share data) | ||||||||||||||||||||||||||
| April 1, 2024 to April 30, 2024 | 110 | $ | 163.73 | 110 | $ | 197,933 | ||||||||||||||||||||
| May 1, 2024 to May 31, 2024 | 85 | 170.87 | 85 | 183,409 | ||||||||||||||||||||||
| June 1, 2024 to June 30, 2024 | 95 | 166.31 | 95 | 167,610 | ||||||||||||||||||||||
| Total | 290 | $ | 166.67 | 290 | $ | 167,610 | ||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended June 30, 2024, no director or officer of the Company adopted terminated
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| Item 6. | Exhibits | ||||
The following exhibits are filed herewith or incorporated herein by reference.
Exhibit Number | Exhibit Description | |||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema. | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase. | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase. | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase. | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase. | |||||||
| 104 | The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, has been formatted in Inline XBRL and contained in Exhibit 101. | |||||||
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 8, 2024
| ADVANCED DRAINAGE SYSTEMS, INC. | ||||||||
| By: | /s/ D. Scott Barbour | |||||||
| D. Scott Barbour | ||||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| By: | /s/ Scott A. Cottrill | |||||||
| Scott A. Cottrill | ||||||||
| Executive Vice President, Chief Financial Officer and Secretary | ||||||||
| (Principal Financial Officer) | ||||||||
| By: | /s/ Tim A. Makowski | |||||||
| Tim A. Makowski | ||||||||
| Vice President, Controller, and Chief Accounting Officer | ||||||||
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