Advanced Drainage Systems Announces Third Quarter Fiscal 2020 Results

HILLIARD, Ohio–(BUSINESS WIRE)–Advanced Drainage Systems, Inc. (NYSE: WMS) (“ADS” or the “Company”), a leading provider of innovative water management solutions in the stormwater and on-site septic waste water industries, today announced financial results for the third quarter ended December 31, 2019.

Third Quarter Fiscal 2020 Results

  • Net sales increased 23.7% to $393.4 million
  • Net income of $23.7 million as compared to $16.6 million in the prior year
  • Adjusted EBITDA (Non-GAAP) increased 88.5% to $91.3 million

Fiscal 2020 Year-to-Date Results

  • Net sales increased 17.1% to $1,303.0 million
  • Net loss of $195.3 million as compared to net income of $79.6 million in the prior year

    • Includes $246.8 million of additional one-time ESOP stock-based compensation expense
  • Adjusted EBITDA (Non-GAAP) increased 48.5% to $289.8 million
  • Cash provided by operating activities increased $148.3 million to $296.3 million
  • Free cash flow (Non-GAAP) increased $133.1 million to $250.0 million

Scott Barbour, President and Chief Executive Officer of ADS commented, “We generated very strong results for the third quarter with sales growth of 24%, reflecting strong organic* growth of 5% as well higher than expected contributions from Infiltrator Water Technologies. Once again, we outperformed our construction and agriculture end markets with robust organic sales growth across the United States. In our construction markets, sales grew 4% due to the successful execution of our material conversion strategies, best-in-class solutions and continued focus on key growth regions of the United States. In addition, agriculture sales increased 29% as our organizational changes, new products and focused execution allowed us to capitalize on market tailwinds, including prevented plant acres and pent-up demand. Overall, our strong year-to-date performance puts us in a very good position to achieve the goals we laid out for fiscal 2020 as well as our longer-term financial targets.”

Barbour continued, “We also generated very strong profitability and free cash flow during the third quarter, driven by the traditional legacy ADS levers of strong growth, disciplined pricing, favorable material cost and disciplined execution, as well as higher than expected contribution from Infiltrator Water Technologies. When combined with effective working capital management, we generated significant free cash flow during the period, which allowed us to pay down our debt by an additional $50 million in October and reduce our leverage to 3.0x on a reported basis, ahead of our target to be at or below 3.0x by the end of calendar 2020. On a trailing-twelve-month proforma basis leverage was 2.5x. We continue to work new levers to drive improved profitability as we gain traction on our logistics and transportation initiatives while remaining committed to operational excellence throughout our organization.”

Barbour finished, “In the fourth quarter, we expect to build on the momentum achieved year-to-date as we continue to benefit from the outperformance of both our legacy ADS business and Infiltrator Water Technologies. As a result, we are confident that fiscal 2020 full-year reported net sales and adjusted EBITDA will be at the higher end of our previously-increased guidance ranges.”

*Organic growth (Non-GAAP) excludes net sales growth from Infiltrator Water Technologies.

Third Quarter Fiscal 2020 Results

Net sales increased $75.3 million, or 23.7%, to $393.4 million, as compared to $318.1 million in the prior year. Domestic pipe sales increased $11.2 million, or 5.7%, to $207.9 million. Allied & Other sales increased $6.4 million, or 7.7%, to $88.9 million. These increases were driven by strong performance in both the U.S. construction and agriculture end markets. Infiltrator Water Technologies contributed an additional $72.1 million to net sales in the quarter.

Gross profit increased $51.0 million, or 70.4%, to $123.4 million as compared to $72.4 million in the prior year. The increase is primarily due to the acquisition of Infiltrator Water Technologies, favorable material cost and increases in both pipe and allied product sales.

Adjusted EBITDA (Non-GAAP) increased $42.9 million, or 88.5%, to $91.3 million, as compared to $48.4 million in the prior year. The increase is primarily due to the factors mentioned above. Infiltrator Water Technologies contributed an additional $26.5 million to Adjusted EBITDA in the quarter. As a percentage of net sales, Adjusted EBITDA was 23.2% as compared to 15.2% in the prior year.

Year-to-Date Fiscal 2020 Results

Net sales increased $190.5 million, or 17.1%, to $1,303.0 million, as compared to $1,112.5 million in the prior year. Domestic pipe sales increased $63.5 million, or 9.2%, to $751.5 million. Allied & Other sales increased $30.5 million, or 10.7%, to $315.4 million. These increases were driven by strong performance in both the U.S. construction and agriculture end markets. International net sales decreased $14.0 million or 10.0% to $125.6 million as compared to $139.6 million in the prior year, driven primarily by a decrease in Mexico sales. Infiltrator Water Technologies contributed an additional $137.0 million to net sales.

As part of the Company’s capital allocation strategy, the Company paid a dividend of $1.09 per share in the first quarter of fiscal 2020, including a $1.00 special dividend to all shareholders of record. The Employee Stock Ownership Plan (“ESOP”) used a portion of its proceeds to payback a portion of its loan from the Company, resulting in an allocation of approximately 11.6 million shares to participants and $246.8 million of non-cash, stock-based compensation expense. The Company recorded $168.6 million of this expense in Cost of goods sold – ESOP special dividend compensation and $78.1 million of this expense in Selling, general and administrative – ESOP special dividend compensation.

Gross profit decreased $59.7 million to $207.7 million due to the $168.6 million ESOP compensation expense described above. Excluding the one-time ESOP compensation, gross profit increased $108.9 million, or 40.7%, primarily due to an increase in both pipe and allied product sales as well as favorable pricing and material cost. This was partially offset by unfavorable inventory absorption cost due to retention of key manufacturing employees during the fourth quarter of fiscal 2019 despite lower production volume.

Adjusted EBITDA (Non-GAAP) increased $94.7 million, or 48.5%, to $289.8 million, as compared to $195.1 million in the prior year, primarily as a result of the factors mentioned above. Infiltrator Water Technologies contributed an additional $51.6 million to Adjusted EBITDA in the quarter. As a percentage of net sales, Adjusted EBITDA was 22.2% as compared to 17.5% in the prior year.

Net cash provided by operating activities increased $148.3 million to $296.3 million, as compared to $148.0 million in the prior year, primarily due to improvements in profitability and working capital. Free cash flow (Non-GAAP) increased $133.1 million to $250.0 million, as compared to $116.9 million in the prior year. Net debt (total debt and finance lease obligations net of cash) was $970.9 million as of December 31, 2019, an increase of $660.6 million from March 31, 2019. Additional information regarding the Company’s debt is included below under the header “Infiltrator Water Technologies Acquisition.”

Reconciliations of GAAP to Non-GAAP financial measures for Adjusted EBITDA and Free Cash Flow have been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

Infiltrator Water Technologies Acquisition

On July 31, 2019, ADS acquired Infiltrator Water Technologies, a leader in on-site septic wastewater treatment for a purchase price of $1.08 billion. Infiltrator Water Technologies is a leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. The results of operations of Infiltrator Water Technologies are included in the consolidated results after July 31, 2019. For the three and nine months ended December 31, 2019, the Company incurred $1.8 million and $22.6 million, respectively, of transaction costs associated with the acquisition.

In conjunction with the acquisition, the Company issued and sold 10,350,000 shares of common stock at $29.75 per share for proceeds of $294 million, net of offering costs, completed a $350 million senior notes offering and entered into a new senior secured credit facility. The new senior secured credit facility includes a $700 million term loan and $350 million of availability under a revolving credit facility. As a result of these transactions, the Company recorded $37.3 million of nonrecurring interest expense associated with the extinguishment of debt in the second quarter of fiscal 2020.

Fiscal 2020 Outlook

Based on year-to-date performance, current visibility, backlog of existing orders and business trends, the Company expects full-year fiscal 2020 net sales and Adjusted EBITDA to be at the higher end of previously communicated guidance ranges. Guidance below includes the legacy ADS business and eight months of Infiltrator Water Technologies included in fiscal 2020.

  • Net sales are expected to be in the range of $1.600 billion to $1.650 billion
  • Adjusted EBITDA is expected to be in the range of $325 million to $345 million
  • Capital expenditures are expected to be in the range of $75 million to $85 million

Webcast Information

The Company will host an investor conference call and webcast on Thursday, February 6, 2020 at 10:00 a.m. Eastern Time. The live call can be accessed by dialing 1-844-484-0244 (US toll-free) or 1-647-689-5142 (international) and asking to be connected to the Advanced Drainage Systems, Inc. call. The live webcast will also be accessible via the “Events Calendar” section of the Company’s Investor Relations website, www.investors.ads-pipe.com. An archived version of the webcast will be available for one year following the call.

About the Company

Advanced Drainage Systems is a leading provider of innovative water management solutions in the stormwater and on-site septic waste water industries, providing superior drainage solutions for use in the construction and agriculture marketplace. For over 50 years, the Company has been manufacturing a variety of innovative and environmentally friendly alternatives to traditional materials. Its innovative products are used across a broad range of end markets and applications, including non-residential, residential, infrastructure and agriculture applications. The Company has established a leading position in many of these end markets by leveraging its national sales and distribution platform, overall product breadth and scale and manufacturing excellence. Founded in 1966, the Company operates a global network of 63 manufacturing plants and 32 distribution centers. To learn more about ADS, please visit the Company’s website at www.ads-pipe.com.

Forward Looking Statements

Certain statements in this press release may be deemed to be forward-looking statements. These statements are not historical facts but rather are based on the Company’s current expectations, estimates and projections regarding the Company’s business, operations and other factors relating thereto. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “confident” and similar expressions are used to identify these forward-looking statements. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include: fluctuations in the price and availability of resins and other raw materials and our ability to pass any increased costs of raw materials on to our customers in a timely manner; volatility in general business and economic conditions in the markets in which we operate, including, without limitation, factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence; cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending; the risks of increasing competition in our existing and future markets, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials; uncertainties surrounding the integration of acquisitions and similar transactions, including the recently completed acquisition of Infiltrator Water Technologies and the integration of Infiltrator Water Technologies; our ability to realize the anticipated benefits from the acquisition of Infiltrator Water Technologies; risks that the acquisition of Infiltrator Water Technologies and related transactions may involve unexpected costs, liabilities or delays; our ability to continue to convert current demand for concrete, steel and PVC pipe products into demand for our high performance thermoplastic corrugated pipe and Allied Products; the effect of weather or seasonality; the loss of any of our significant customers; the risks of doing business internationally; our ability to remediate the material weakness in our internal control over financial reporting, including remediation of the control environment for our joint venture affiliate ADS Mexicana, S.A. de C.V. as described in “Item 9A. Controls and Procedures” of our Annual Report on Form 10-K for the year ended March 31, 2019; the risks of conducting a portion of our operations through joint ventures; our ability to expand into new geographic or product markets, including risks associated with new markets and products associated with our recent acquisition of Infiltrator Water Technologies; our ability to achieve the acquisition component of our growth strategy; the risk associated with manufacturing processes; our ability to manage our assets; the risks associated with our product warranties; our ability to manage our supply purchasing and customer credit policies; the risks associated with our self-insured programs; our ability to control labor costs and to attract, train and retain highly-qualified employees and key personnel; our ability to protect our intellectual property rights; changes in laws and regulations, including environmental laws and regulations; our ability to project product mix; the risks associated with our current levels of indebtedness, including borrowings under our new Credit Agreement; the nature, cost and outcome of any future litigation and other legal proceedings, including any such proceedings related to our acquisition of Infiltrator Water Technologies, as may be instituted against the Company and others; fluctuations in our effective tax rate, including from the Tax Cuts and Jobs Act of 2017; changes to our operating results, cash flows and financial condition attributable to the Tax Cuts and Jobs Act of 2017; our ability to meet future capital requirements and fund our liquidity needs; the risk that additional information may arise that would require the Company to make additional adjustments or revisions or to restate the financial statements and other financial data for certain prior periods and any future periods; any delay in the filing of any filings with the Securities and Exchange Commission (“SEC”); the review of potential weaknesses or deficiencies in the Company’s disclosure controls and procedures, and discovering weaknesses of which we are not currently aware or which have not been detected; additional uncertainties related to accounting issues generally and the other risks and uncertainties described in the Company’s filings with the SEC. New risks and uncertainties emerge from time to time and it is not possible for the Company to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this press release. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company’s expectations, objectives or plans will be achieved in the timeframe anticipated or at all. Investors are cautioned not to place undue reliance on the Company’s forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Financial Statements

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

Three Months Ended

 

 

Nine Months Ended

 

 

December 31,

 

 

December 31,

 

(Amounts in thousands, except per share data)

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

$

393,424

 

 

$

318,113

 

 

$

1,303,037

 

 

$

1,112,515

 

Cost of goods sold

 

270,066

 

 

 

245,714

 

 

 

926,703

 

 

 

845,052

 

Cost of goods sold – ESOP special dividend compensation

 

 

 

 

 

 

 

168,610

 

 

 

 

Gross profit

 

123,358

 

 

 

72,399

 

 

 

207,724

 

 

 

267,463

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

29,967

 

 

 

23,260

 

 

 

86,303

 

 

 

72,156

 

General and administrative

 

37,023

 

 

 

22,116

 

 

 

116,486

 

 

 

65,082

 

Selling, general and administrative – ESOP special dividend compensation

 

 

 

 

 

 

 

78,142

 

 

 

 

Loss on disposal of assets and costs from exit and disposal activities

 

1,755

 

 

 

144

 

 

 

4,466

 

 

 

1,572

 

Intangible amortization

 

13,593

 

 

 

1,976

 

 

 

24,435

 

 

 

5,945

 

Income (loss) from operations

 

41,020

 

 

 

24,903

 

 

 

(102,108

)

 

 

122,708

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

13,191

 

 

 

5,695

 

 

 

70,787

 

 

 

14,028

 

Derivative gains and other income, net

 

39

 

 

 

634

 

 

 

118

 

 

 

(86

)

Income (loss) before income taxes

 

27,790

 

 

 

18,574

 

 

 

(173,013

)

 

 

108,766

 

Income tax expense

 

4,032

 

 

 

2,490

 

 

 

22,855

 

 

 

28,968

 

Equity in net income of unconsolidated affiliates

 

99

 

 

 

(466

)

 

 

(538

)

 

 

225

 

Net income (loss)

 

23,659

 

 

 

16,550

 

 

 

(195,330

)

 

 

79,573

 

Less: net income (loss) attributable to noncontrolling interest

 

371

 

 

 

738

 

 

 

149

 

 

 

2,811

 

Net income (loss) attributable to ADS

 

23,288

 

 

 

15,812

 

 

 

(195,479

)

 

 

76,762

 

Dividends to redeemable convertible preferred stockholders

 

(1,334

)

 

 

(467

)

 

 

(9,530

)

 

 

(1,442

)

Dividends paid to unvested restricted stockholders

 

(3

)

 

 

(25

)

 

 

(335

)

 

 

(55

)

Net income (loss) available to common stockholders and participating securities

 

21,951

 

 

 

15,320

 

 

 

(205,344

)

 

 

75,265

 

Undistributed income allocated to participating securities

 

(2,822

)

 

 

(1,027

)

 

 

 

 

 

(6,048

)

Net income (loss) available to common stockholders

$

19,129

 

 

$

14,293

 

 

$

(205,344

)

 

$

69,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

68,508

 

 

 

57,180

 

 

 

62,119

 

 

 

56,925

 

Diluted

 

69,298

 

 

 

57,685

 

 

 

62,119

 

 

 

57,482

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.28

 

 

$

0.25

 

 

$

(3.31

)

 

$

1.22

 

Diluted

$

0.28

 

 

$

0.25

 

 

$

(3.31

)

 

$

1.20

 

Cash dividends declared per share

$

0.09

 

 

$

0.08

 

 

$

1.27

 

 

$

0.24

 

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

As of

 

(Amounts in thousands)

December 31, 2019

 

 

March 31, 2019

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

$

98,312

 

 

$

8,891

 

Receivables, net

 

156,973

 

 

 

186,991

 

Inventories

 

261,347

 

 

 

264,540

 

Other current assets

 

9,153

 

 

 

6,091

 

Total current assets

 

525,785

 

 

 

466,513

 

Property, plant and equipment, net

 

488,386

 

 

 

398,891

 

Other assets:

 

 

 

 

 

 

 

Goodwill

 

668,154

 

 

 

102,638

 

Intangible assets, net

 

498,113

 

 

 

37,177

 

Other assets

 

68,737

 

 

 

36,940

 

Total assets

$

2,249,175

 

 

$

1,042,159

 

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of debt obligations

$

7,954

 

 

$

25,932

 

Current maturities of finance lease obligations

 

21,413

 

 

 

23,117

 

Accounts payable

 

78,292

 

 

 

93,577

 

Other accrued liabilities

 

106,527

 

 

 

61,901

 

Accrued income taxes

 

7,899

 

 

 

1,758

 

Total current liabilities

 

222,085

 

 

 

206,285

 

Long-term debt obligations, net

 

991,267

 

 

 

208,602

 

Long-term finance lease obligations

 

48,604

 

 

 

61,555

 

Deferred tax liabilities

 

156,707

 

 

 

45,963

 

Other liabilities

 

34,112

 

 

 

19,119

 

Total liabilities

 

1,452,775

 

 

 

541,524

 

Mezzanine equity:

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

275,896

 

 

 

282,638

 

Deferred compensation — unearned ESOP shares

 

(25,471

)

 

 

(180,316

)

Total mezzanine equity

 

250,425

 

 

 

102,322

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

11,549

 

 

 

11,436

 

Paid-in capital

 

817,028

 

 

 

391,039

 

Common stock in treasury, at cost

 

(10,200

)

 

 

(9,863

)

Accumulated other comprehensive loss

 

(24,969

)

 

 

(25,867

)

Retained (deficit) earnings

 

(261,986

)

 

 

17,582

 

Total ADS stockholders’ equity

 

531,422

 

 

 

384,327

 

Noncontrolling interest in subsidiaries

 

14,553

 

 

 

13,986

 

Total stockholders’ equity

 

545,975

 

 

 

398,313

 

Total liabilities, mezzanine equity and stockholders’ equity

$

2,249,175

 

 

$

1,042,159

 

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Nine Months Ended December 31,

 

(Amounts in thousands)

2019

 

 

2018

 

Cash Flow from Operating Activities

 

 

 

 

 

 

 

Net (loss) income

$

(195,330

)

 

$

79,573

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

74,432

 

 

 

52,912

 

Deferred income taxes

 

(1,098

)

 

 

2,316

 

Loss on disposal of assets and costs from exit and disposal activities

 

4,466

 

 

 

1,572

 

ESOP and stock-based compensation

 

27,365

 

 

 

16,142

 

ESOP Special Dividend Compensation

 

246,752

 

 

 

 

Amortization of deferred financing charges

 

34,380

 

 

 

561

 

Inventory step up related to Infiltrator Water Technologies acquisition

 

7,880

 

 

 

 

Fair market value adjustments to derivatives

 

903

 

 

 

1,976

 

Equity in net (income) loss of unconsolidated affiliates

 

(538

)

 

 

225

 

Other operating activities

 

(6,013

)

 

 

(3,493

)

Changes in working capital:

 

 

 

 

 

 

 

Receivables

 

50,865

 

 

 

16,768

 

Inventories

 

43,317

 

 

 

15,705

 

Prepaid expenses and other current assets

 

(1,417

)

 

 

(2,562

)

Accounts payable, accrued expenses, and other liabilities

 

10,354

 

 

 

(33,673

)

Net cash provided by operating activities

 

296,318

 

 

 

148,022

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Capital expenditures

 

(46,293

)

 

 

(31,130

)

Cash paid for acquisitions, net of cash acquired

 

(1,089,322

)

 

 

 

Other investing activities

 

(247

)

 

 

1,109

 

Net cash used in investing activities

 

(1,135,862

)

 

 

(30,021

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Proceeds from Term Loan Facility

 

1,300,000

 

 

 

 

Payments on Term Loan Facility

 

(1,300,000

)

 

 

 

Proceeds from syndication of Term Loan Facility

 

700,000

 

 

 

 

Payments on syndicated Term Loan Facility

 

(50,000

)

 

 

 

Proceeds from Senior Notes

 

350,000

 

 

 

 

Proceeds from Revolving Credit Agreement

 

177,900

 

 

 

 

Payments on Revolving Credit Agreement

 

(177,900

)

 

 

 

Debt issuance costs

 

(34,606

)

 

 

 

Proceeds from PNC Credit Agreement

 

253,900

 

 

 

331,600

 

Payments on PNC Credit Agreement

 

(388,300

)

 

 

(376,600

)

Payments on Prudential Senior Notes

 

(100,000

)

 

 

(25,000

)

Payments on finance lease obligations

 

(18,424

)

 

 

(17,791

)

Proceeds from common stock offering, net of offering costs

 

293,648

 

 

 

 

Acquisition of noncontrolling interest in BaySaver

 

 

 

 

(8,821

)

Cash dividends paid

 

(83,846

)

 

 

(21,084

)

Proceeds from exercise of stock options

 

6,280

 

 

 

3,937

 

Other financing activities

 

(236

)

 

 

(1,620

)

Net cash used in financing activities

 

928,416

 

 

 

(115,379

)

Effect of exchange rate changes on cash

 

549

 

 

 

(451

)

Net change in cash

 

89,421

 

 

 

2,171

 

Cash at beginning of period

 

8,891

 

 

 

17,587

 

Cash at end of period

$

98,312

 

 

$

19,758

 

Contacts

Michael Higgins

VP, Corporate Strategy & Investor Relations

(614) 658-0050

Mike.Higgins@ads-pipe.com

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