Advanced Drainage Systems(WMS) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Advanced Drainage Systems, Inc. as of September 30, 2021, and for the three and six-month periods then ended Condensed Consolidated Balance Sheets As of September 30, 2021, total assets increased to $2.51 billion from $2.41 billion at March 31, 2021, driven by higher inventories and receivables, while total liabilities also increased to $1.58 billion from $1.35 billion, primarily due to a rise in accounts payable and long-term debt, and cash decreased significantly from $195.0 million to $14.0 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | March 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash | $14,005 | $195,009 | | Receivables, net | $361,466 | $236,191 | | Inventories | $425,244 | $300,961 | | Total current assets | $817,573 | $742,978 | | Total assets | $2,506,624 | $2,413,832 | | Liabilities & Equity | | | | Accounts payable | $257,576 | $171,098 | | Total current liabilities | $413,839 | $318,270 | | Long-term debt obligations | $901,511 | $782,220 | | Total liabilities | $1,575,103 | $1,350,406 | | Total stockholders' equity | $710,003 | $833,515 | Condensed Consolidated Statements of Operations For the three months ended September 30, 2021, net sales grew 29.8% year-over-year to $706.5 million, but gross profit decreased slightly to $200.1 million due to higher costs, with net income attributable to ADS at $75.4 million, down from $80.2 million in the prior-year quarter, and for the six-month period, net sales increased 30.7% to $1.38 billion, with net income remaining relatively flat at $151.3 million Three Months Ended September 30, (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $706,471 | $544,187 | | Gross profit | $200,057 | $205,857 | | Income from operations | $111,561 | $121,574 | | Net income attributable to ADS | $75,359 | $80,236 | | Diluted EPS | $0.88 | $0.93 | Six Months Ended September 30, (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $1,375,771 | $1,052,826 | | Gross profit | $401,178 | $394,360 | | Income from operations | $220,827 | $228,672 | | Net income attributable to ADS | $151,346 | $150,702 | | Diluted EPS | $1.74 | $1.76 | Condensed Consolidated Statements of Cash Flows For the six months ended September 30, 2021, net cash provided by operating activities was $94.9 million, a significant decrease from $286.2 million in the prior year, mainly due to unfavorable changes in working capital, particularly inventories and receivables, while net cash used in investing activities increased to $62.2 million due to higher capital expenditures, and financing activities used $213.6 million, largely for common stock repurchases Six Months Ended September 30, Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $94,878 | $286,168 | | Net cash used in investing activities | ($62,208) | ($28,504) | | Net cash used in financing activities | ($213,593) | ($227,793) | | Net change in cash | ($181,004) | $29,650 | - The decrease in operating cash flow was primarily driven by a $138.1 million increase in receivables and a $124.4 million increase in inventories[14] - The company repurchased $292.0 million of common stock during the six months ended September 30, 2021[14] Notes to the Condensed Consolidated Financial Statements The notes provide details on significant accounting policies, revenue recognition, leases, debt, and business segments, with the company operating in three reportable segments: Pipe, Infiltrator, and International, and Allied Products & Other reported separately, and the company repurchased $292.0 million of common stock in the first six months of fiscal 2022, with total long-term debt at $901.5 million as of September 30, 2021 - The company is managed in three reportable segments: Pipe, Infiltrator Water Technologies, and International, with Allied Products and other segments reported as 'Allied Products and Other'[19] - During the six months ended September 30, 2021, the Company repurchased 2.6 million shares of common stock for $292.0 million, utilizing all of its current repurchase authorization[36] Long-Term Debt Composition (in thousands) | Component | September 30, 2021 | March 31, 2021 | | :--- | :--- | :--- | | Term Loan Facility | $437,750 | $441,250 | | Senior Notes | $350,000 | $350,000 | | Revolving Credit Facility | $122,600 | $0 | | Total Long-term debt obligations | $901,511 | $782,220 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the second quarter and first half of fiscal 2022, noting strong net sales growth of 29.8% for the quarter and 30.7% for the six months, driven by favorable pricing and volume growth across key segments, despite gross profit and Adjusted EBITDA margins being compressed due to significant inflationary pressures on materials, transportation, and labor costs, while maintaining a healthy liquidity position despite significant cash use for share repurchases and increased working capital needs - Q2 FY2022 net sales increased 29.8% to $706.5 million, driven by double-digit growth in U.S. construction and agriculture end markets, as well as in Canadian and Mexican businesses[71] - Gross profit for Q2 FY2022 decreased 2.8% to $200.1 million, as favorable pricing offset material, diesel, and labor inflation, but increased use of third-party logistics services due to labor shortages negatively impacted profitability[72] - Adjusted EBITDA for Q2 FY2022 decreased 5.3% to $164.8 million, with the margin contracting to 23.3% from 32.0% in the prior year[73] Results of Operations For the three months ended September 30, 2021, consolidated net sales rose 29.8% to $706.5 million, led by a 41.5% increase in the Infiltrator segment and a 31.4% increase in the Pipe segment, but consolidated gross profit fell 2.8% to $200.1 million, as cost of goods sold surged 49.7% due to material and transportation cost inflation, and for the six-month period, net sales grew 30.7%, while gross profit increased by a modest 1.7% Net Sales by Segment - Three Months Ended Sep 30 (in thousands) | Segment | 2021 | 2020 | % Variance | | :--- | :--- | :--- | :--- | | Pipe | $381,853 | $290,496 | 31.4% | | Infiltrator | $123,499 | $87,294 | 41.5% | | International | $58,404 | $48,402 | 20.7% | | Allied Products & Other | $142,715 | $117,995 | 21.0% | | Total Consolidated | $706,471 | $544,187 | 29.8% | Gross Profit by Segment - Three Months Ended Sep 30 (in thousands) | Segment | 2021 | 2020 | % Variance | | :--- | :--- | :--- | :--- | | Pipe | $62,627 | $82,944 | (24.5)% | | Infiltrator | $55,350 | $49,946 | 10.8% | | International | $13,792 | $13,260 | 4.0% | | Allied Products & Other | $66,809 | $59,335 | 12.6% | | Total gross profit | $200,057 | $205,857 | (2.8)% | - Selling, general and administrative (SG&A) expenses for Q2 increased by $8.3 million to $74.0 million, primarily due to increased headcount and higher travel and entertainment expenses compared to the COVID-19 impacted prior year[83] Adjusted EBITDA Adjusted EBITDA, a non-GAAP measure, decreased by 5.3% to $164.8 million for the three months ended September 30, 2021, compared to $174.1 million in the prior year, with the Adjusted EBITDA margin contracting to 23.3% from 32.0%, and for the six-month period, Adjusted EBITDA was nearly flat at $331.4 million, with the margin decreasing to 24.1% from 31.7%, attributed to cost inflation pressures Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | Three Months Ended Sep 30, | Six Months Ended Sep 30, | | :--- | :--- | :--- | | | 2021 | 2020 | 2021 | 2020 | | Net income | $76,312 | $80,605 | $153,435 | $151,273 | | Depreciation and amortization | $34,194 | $35,778 | $68,850 | $71,559 | | Interest expense | $8,437 | $9,360 | $16,344 | $19,330 | | Income tax expense | $26,816 | $31,827 | $53,271 | $59,027 | | ESOP and stock-based compensation | $17,631 | $14,626 | $38,437 | $27,088 | | Other adjustments | $1,115 | $1,178 | $1,049 | $3,993 | | Adjusted EBITDA | $164,804 | $174,074 | $331,386 | $333,544 | Liquidity and Capital Resources As of September 30, 2021, the company had total liquidity of $228.9 million, including $14.0 million in cash and $214.9 million available under its revolving credit facility, with net cash from operations for the six-month period decreasing significantly to $94.9 million from $286.2 million year-over-year, driven by increased working capital, and capital expenditures are expected to be $130 million to $150 million for fiscal 2022, with the company in compliance with all debt covenants Key Liquidity Metrics - Six Months Ended Sep 30 (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $94,878 | $286,168 | | Capital expenditures | ($63,764) | ($28,959) | | Free Cash Flow (Non-GAAP) | $31,114 | $257,209 | - As of September 30, 2021, the company had $214.9 million in available liquidity under its revolver[117] - The company anticipates capital expenditures of approximately $130 million to $150 million in fiscal year 2022, primarily for facility expansions, equipment, and technology initiatives[121][122] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from changes in interest rates, raw material prices (resin), and foreign currency exchange rates, with no material changes from the risks disclosed in the Fiscal 2021 Form 10-K, and a hypothetical 1.0% increase in interest rates on variable-rate debt would increase annual interest expense by approximately $5.4 million based on borrowings as of September 30, 2020 - The company's primary market risks are related to interest rates, credit, raw material supply prices, and foreign currency exchange rates[152] - A 1.0% increase in interest rates on variable-rate debt would increase annual forecasted interest expense by approximately $5.4 million (based on Sep 30, 2020 borrowings), and if the Revolving Credit Facility were fully drawn, a 1.0% rate increase would change interest expense by approximately $9.9 million annually[153] Controls and Procedures Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes in the company's internal control over financial reporting during the quarter - The 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[155] - No changes occurred during the quarter ended September 30, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[156] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings that arise in the ordinary course of business, and management does not believe these proceedings will have a material adverse impact on the company's financial position or results of operations - The Company does not believe that ongoing litigation, claims, and administrative proceedings will have a material adverse impact on its financial position or results of operations[158] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2021, and the report refers readers to the risk factors detailed in that filing - No material changes to risk factors from the Fiscal 2021 Form 10-K are reported, with key risks including raw material price fluctuations, economic conditions, competition, and integration of acquisitions[149][160] Unregistered Sale of Equity Securities and Use of Proceeds In May 2021, the Board authorized a $250 million increase to the stock repurchase program, and during the three months ended September 30, 2021, the company repurchased 1.5 million shares for $176.7 million, with the authorized amount under the plan fully utilized as of August 30, 2021 Common Stock Repurchases (Q2 FY2022) | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan (thousands) | | :--- | :--- | :--- | :--- | | July 2021 | 1,080 | $116.46 | $50,895 | | August 2021 | 438 | $116.08 | $0 | | September 2021 | 0 | - | $0 | | Total | 1,518 | $116.35 | $0 | - The company repurchased 1.5 million shares of common stock at a cost of $176.7 million during the three months ended September 30, 2021[161] Defaults Upon Senior Securities None reported - None[163] Mine Safety Disclosures Not applicable - Not applicable[164] Other Information None reported - None[164] Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements, amendments to incentive plans, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - Exhibits filed include a Shareholder Agreement, Registration Rights Agreement, an amendment to the 2017 Omnibus Incentive Plan, a Separation and Release Agreement, and various certifications[167]