Advanced Drainage Systems(WMS) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Advanced Drainage Systems, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, cash flows, and stockholders' equity, with accompanying notes for the periods ended December 31, 2021 Condensed Consolidated Balance Sheets Total assets increased to $2.56 billion as of December 31, 2021, from $2.41 billion, primarily due to higher inventories and property, plant, and equipment, while total liabilities rose to $1.54 billion from $1.35 billion due to increased long-term debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Mar 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $807,019 | $742,978 | | Inventories | $465,518 | $300,961 | | Total Assets | $2,555,759 | $2,413,832 | | Total Current Liabilities | $364,084 | $318,270 | | Long-term Debt Obligations | $931,765 | $782,220 | | Total Liabilities | $1,535,249 | $1,350,406 | | Total Stockholders' Equity | $814,768 | $833,515 | Condensed Consolidated Statements of Operations Net sales for Q3 FY2022 grew 47.1% to $715.4 million, with net income attributable to ADS increasing to $73.7 million, while nine-month net sales rose 35.9% to $2.09 billion, reaching $225.0 million in net income Three Months Ended December 31, (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $715,357 | $486,145 | | Gross Profit | $208,977 | $168,505 | | Income from Operations | $110,314 | $82,963 | | Net Income Attributable to ADS | $73,678 | $53,774 | | Diluted EPS | $0.86 | $0.62 | Nine Months Ended December 31, (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $2,091,128 | $1,538,971 | | Gross Profit | $610,155 | $562,865 | | Income from Operations | $331,141 | $311,635 | | Net Income Attributable to ADS | $225,024 | $204,476 | | Diluted EPS | $2.61 | $2.38 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities for the nine months ended December 31, 2021, decreased to $193.8 million from $448.8 million, while investing activities used $150.0 million and financing activities used $216.6 million, primarily due to stock repurchases Cash Flow Summary for Nine Months Ended December 31, (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $193,847 | $448,776 | | Net Cash Used in Investing Activities | ($150,040) | ($57,159) | | Net Cash Used in Financing Activities | ($216,574) | ($343,116) | | Net Change in Cash | ($172,836) | $49,763 | - Significant financing activities in the first nine months of fiscal 2022 included $292.0 million in common stock repurchases and net borrowings of $133.5 million from the Revolving Credit Agreement[14] Notes to the Condensed Consolidated Financial Statements These notes detail the company's business segments, the $49.4 million acquisition of Jet Polymer Recycling, revenue recognition, debt structure, and segment performance, alongside subsequent events like a new $1.0 billion stock repurchase program and ESOP loan repayment plans - On December 3, 2021, the Company acquired Jet Polymer Recycling, Inc. for a total consideration of $49.4 million to expand its plastic recycling capabilities, with preliminary goodwill recorded at $12.6 million[25][26][28] Net Sales by Reportable Segment - Nine Months Ended Dec 31, (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Pipe | $1,150,655 | $815,201 | 41.1% | | Infiltrator | $353,567 | $252,600 | 40.0% | | International | $170,999 | $126,638 | 35.0% | | Allied Products & Other | $415,907 | $344,532 | 20.7% | | Total Consolidated | $2,091,128 | $1,538,971 | 35.9% | - Subsequent to the quarter end, in February 2022, the Board approved a new $1.0 billion stock repurchase program, replacing the previous one which had no remaining capacity[73] - The company plans to repay the remaining balance of its ESOP loan on March 31, 2022, after which 16.1 million shares of preferred stock will convert into 12.4 million shares of common stock[74] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q3 and nine-month FY2022 financial performance, driven by double-digit sales growth across segments due to pricing and demand, noting gross profit increases despite inflationary pressures, and detailing liquidity, decreased operating cash flow, and financing activities Executive Summary Q3 FY2022 net sales surged 47.1% to $715.4 million, with net income up 37.8% to $74.5 million and Adjusted EBITDA increasing 26.9% to $176.2 million, while nine-month net sales rose 35.9% to $2.09 billion and Adjusted EBITDA grew 7.4% to $507.5 million Q3 Fiscal 2022 Performance Highlights | Metric | Q3 FY2022 | % Change YoY | | :--- | :--- | :--- | | Net Sales | $715.4 million | +47.1% | | Net Income | $74.5 million | +37.8% | | Adjusted EBITDA | $176.2 million | +26.9% | Nine-Month Fiscal 2022 Performance Highlights | Metric | YTD FY2022 | % Change YoY | | :--- | :--- | :--- | | Net Sales | $2,091.1 million | +35.9% | | Net Income | $227.9 million | +11.0% | | Adjusted EBITDA | $507.5 million | +7.4% | Results of Operations Net sales showed significant year-over-year growth for both the three and nine-month periods ended December 31, 2021, with Q3 consolidated net sales up 47.1% and gross profit increasing 24.0% despite inflationary pressures, while nine-month net sales grew 35.9% Net Sales Variance by Segment - Three Months Ended Dec 31, (in thousands) | Segment | 2021 | 2020 | % Variance | | :--- | :--- | :--- | :--- | | Pipe | $396,695 | $252,898 | 56.9% | | Infiltrator | $122,363 | $81,221 | 50.7% | | International | $50,143 | $42,407 | 18.2% | | Allied Products & Other | $146,156 | $109,619 | 33.3% | | Total Consolidated | $715,357 | $486,145 | 47.1% | - For Q3, consolidated gross profit increased by $40.5 million (24.0%), driven by higher sales from improved pricing, but was partially offset by inflationary pressures from higher material, transportation, and manufacturing costs[94] Net Sales Variance by Segment - Nine Months Ended Dec 31, (in thousands) | Segment | 2021 | 2020 | % Variance | | :--- | :--- | :--- | :--- | | Pipe | $1,150,655 | $815,201 | 41.1% | | Infiltrator | $353,567 | $252,600 | 40.0% | | International | $170,999 | $126,638 | 35.0% | | Allied Products & Other | $415,907 | $344,532 | 20.7% | | Total Consolidated | $2,091,128 | $1,538,971 | 35.9% | Liquidity and Capital Resources As of December 31, 2021, total liquidity was $226.2 million, with net cash from operations decreasing to $193.8 million from $448.8 million, primarily due to working capital investments, while capital expenditures rose to $100.4 million and the leverage ratio stood at 1.6x Key Liquidity Metrics - Nine Months Ended Dec 31, (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $193,847 | $448,776 | | Capital expenditures | ($100,367) | ($57,675) | | Free Cash Flow (Non-GAAP) | $93,480 | $391,101 | - As of December 31, 2021, the company had $204.0 million in available liquidity under its revolver, with $133.5 million in outstanding borrowings[130][131] - The company anticipates capital expenditures of approximately $130 to $150 million for the full fiscal year 2022[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rates, credit, and raw material prices, with a 1.0% increase in interest rates potentially raising annual interest expense by approximately $5.7 million based on December 31, 2021, debt levels - The company is exposed to interest rate risk on its variable-rate debt, where a 1.0% increase in interest rates would increase annual forecasted interest expense by approximately $5.7 million based on debt levels at December 31, 2021[168] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting during the quarter - Based on their evaluation, 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[170] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[171] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, which are not expected to have a material adverse impact on its financial position or results of operations - The Company states that it does not believe ongoing litigation, claims, and administrative proceedings will have a material adverse impact on its financial position or results of operations[173] Item 1A. Risk Factors This section refers readers to the risk factors disclosed in the Fiscal 2021 Form 10-K, indicating no material changes or new significant risks for the quarter - The report directs stakeholders to the risk factors described in the Fiscal 2021 Form 10-K for important risk disclosures[175] Item 2. Unregistered Sale of Equity Securities and Use of Proceeds The company did not repurchase common stock during the three months ended December 31, 2021, as the existing authorization was fully utilized, with a new program announced subsequently - No shares of common stock were repurchased during the three months ended December 31, 2021[176] - As of December 31, 2021, the company had no remaining repurchase authorization under its existing program[176]