Advanced Drainage Systems Announces Second Quarter Fiscal 2023 Results

Rhea-AI Summary

Advanced Drainage Systems (NYSE: WMS) reported strong fiscal second-quarter results for the period ended September 30, 2022. Net sales rose 25.2% to $884.2 million, driven by sales growth in construction and agriculture markets. Net income surged 101% to $153.4 million, while Adjusted EBITDA increased 59.7% to $263.2 million. The year-to-date results showed similar growth, with net sales up 30.7% to $1.798 billion. Despite ongoing inflationary pressures, the company aims for revenue guidance of $3.100 billion to $3.200 billion for fiscal 2023, maintaining Adjusted EBITDA forecasts.

Positive

• Net sales increased 25.2% to $884.2 million in Q2 2023.
• Net income surged 101% to $153.4 million.
• Adjusted EBITDA rose 59.7% to $263.2 million.
• Year-to-date net sales increased 30.7% to $1,798.4 million.
• Cash provided by operating activities increased 360.6% to $437.0 million.

Negative

• Lowered revenue guidance for fiscal 2023 to $3.100 billion to $3.200 billion.
• Impact of the uncertain macroeconomic environment on certain geographies and product lines.

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 onsite septic wastewater industries today announced financial results for the fiscal second quarter ended September 30, 2022.

Second Quarter Fiscal 2023 Results

• Net sales increased 25.2% to $884.2 million
• Net income increased 101.0% to $153.4 million
• Adjusted EBITDA (Non-GAAP) increased 59.7% to $263.2 million

Year-to-Date Fiscal 2023 Results

• Net sales increased 30.7% to $1,798.4 million
• Net income increased 122.8% to $341.9 million
• Adjusted EBITDA (Non-GAAP) increased 69.7% to $562.2 million
• Cash provided by operating activities increased 360.6% to $437.0 million
• Free cash flow (Non-GAAP) increased $330.4 million to $361.5 million

Scott Barbour, President and Chief Executive Officer of ADS commented, "We achieved record second quarter revenue and Adjusted EBITDA this quarter. Sales growth of 25% was driven by favorable pricing at both ADS and Infiltrator, strong volume growth in Allied Products, and growth in the residential and agriculture end markets. In addition, we continued to make progress bringing down elevated levels of backlog, and lead times have improved in most geographies and product lines. The favorable top line growth we achieved in the second quarter was broad based across our construction and agriculture end markets, with notable strength in our priority states."

Barbour continued, "As we entered September and into October, we began to see the impact of the uncertain macroeconomic environment in isolated pockets across certain geographies and product lines. In particular, our Infiltrator and retail businesses began to feel the impact of channel destocking as well as some project slowdowns within our non-residential business in certain geographies. However, demand remains strong for residential land development and horizontal construction, particularly for warehouses and distribution centers. And while inflationary pressures have been persistent throughout the year, we are beginning to see some abatement, which when combined with our productivity initiatives position us well moving into the second half of Fiscal 2023.”

Barbour concluded, "Taking this into account, we are lowering our fiscal year guidance for revenue to our original Fiscal 2023 guidance of $3.100 billion to $3.200 billion. While uncertainty remains around general economic conditions, our leading indicators including project identification, quoting, book-to-bill and order trends give us confidence we can achieve the updated revenue guidance issued today. Importantly, our Adjusted EBITDA guidance remains unchanged as we execute on actions to improve cost and efficiency within the business."

Second Quarter Fiscal 2023 Results

Net sales increased $177.7 million, or 25.2%, to $884.2 million, as compared to $706.5 million in the prior year quarter. Domestic pipe sales increased $116.5 million, or 30.3%, to $501.0 million. Domestic allied products & other sales increased $56.5 million, or 38.8%, to $202.2 million. Infiltrator sales increased $4.8 million, or 3.3%, to $150.7 million. These increases were driven by double-digit sales growth in the U.S. construction and agriculture end markets. International sales increased $9.9 million, or 15.6%, to $73.5 million, driven by growth in the Canadian, Mexican and Exports businesses.

Gross profit increased $119.9 million, or 59.9%, to $320.0 million as compared to $200.1 million in the prior year. The increase in gross profit is primarily due to the increase in sales volume and favorable pricing on pipe, onsite septic and allied products. This increase was partially offset by inflationary pressures on manufacturing and transportation costs.

Adjusted EBITDA (Non-GAAP) increased $98.4 million, or 59.7%, to $263.2 million, as compared to $164.8 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 29.8% as compared to 23.3% in the prior year.

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.”

Year-to-Date Fiscal 2023 Results

Net sales increased $422.6 million, or 30.7%, to $1,798.4 million, as compared to $1,375.8 million in the prior year quarter. Domestic pipe sales increased $267.3 million, or 35.2%, to $1,025.8 million. Domestic allied products & other sales increased $128.4 million, or 47.1%, to $401.1 million. Infiltrator sales increased $44.4 million, or 16.3%, to $317.0 million. These increases were driven by double-digit sales growth in the U.S. construction end markets. International sales increased $16.0 million, or 12.4%, to $145.0 million, driven by strong sales growth in the Mexican and Exports businesses.

Gross profit increased $270.9 million, or 67.5%, to $672.1 million as compared to $401.2 million in the prior year. The increase in gross profit is primarily due to the favorable pricing on pipe, onsite septic and allied products. This was partially offset by inflationary pressures of higher material and transportation costs along with higher manufacturing costs.

Adjusted EBITDA (Non-GAAP) increased $230.9 million, or 69.7%, to $562.2 million, as compared to $331.4 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 31.3% as compared to 24.1% in the prior year.

Balance Sheet and Liquidity

Net cash provided by operating activities was $437.0 million, as compared to $94.9 million in the prior year. Free cash flow (Non-GAAP) was $361.5 million, as compared to $31.1 million in the prior year. Net debt (total debt and finance lease obligations net of cash) was $853.9 million as of September 30, 2022, a decrease of $70.6 million from March 31, 2022.

On June 9, 2022 the Company issued $500.0 million aggregate principal amount of 6.375% Senior Notes due 2030. Some of the proceeds of this issuance were used to repay the outstanding borrowings under its senior secured revolving credit facility.

ADS had total liquidity of $1,045.7 million, comprised of cash of $457.4 million as of September 30, 2022 and $588.4 million of availability under committed credit facilities. As of September 30, 2022, the Company’s trailing-twelve-month leverage ratio was 1.0 times Adjusted EBITDA.

In the six months ended September 30, 2022, the Company repurchased 1.9 million shares of its common stock for a total cost of $195.2 million. As of September 30, 2022, approximately $804.8 million of common stock may be repurchased under the authorization.

Fiscal 2023 Outlook

Based on current visibility, backlog of existing orders and business trends, the Company updated its financial targets for fiscal 2023. Net sales are now expected to be in the range of $3.100 billion to $3.200 billion. Adjusted EBITDA is unchanged and expected to be in the range of $900 to $940 million. Capital expenditures are expected to be approximately $175 million.

Conference Call Information

Webcast: Interested investors and other parties can listen to a webcast of the live conference call by logging in through the Investor Relations section of the Company's website at https://investors.ads-pipe.com/events-and-presentations. An online replay will be available on the same website following the call.

Teleconference: To participate in the live teleconference, participants may register at https://www.netroadshow.com/events/login?show=22275fee&confId=43001. After registering, participants will receive a confirmation through email, including dial in details and unique conference call codes for entry. Registration is open through the live call. To ensure participants are connected for the full call, please register at least 10 minutes before the start of the call.

About the Company

Advanced Drainage Systems is a leading manufacturer of innovative stormwater and onsite septic wastewater solutions that manages the world’s most precious resource: water. ADS provides superior drainage solutions for use in a wide variety of markets and applications including commercial, residential, infrastructure and agriculture. ADS delivers tremendous service to its customers with the industry’s largest company-owned fleet, an expansive sales team, and a vast manufacturing network of approximately 70 manufacturing plants and 37 distribution centers. ADS is the largest plastic recycling company in North America, ensuring over half a billion pounds of plastic is kept out of landfills every year. Founded in 1966, ADS’ water management solutions are designed to last for decades. To learn more, visit the Company’s website at www.adspipe.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; the risks related to the COVID-19 pandemic or other pandemics in the future; 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; 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; cybersecurity risks; 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; 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 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
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
	Three Months Ended September 30,								Six Months Ended September 30,
(In thousands, except per share data)	2022				2021				2022				2021
Net sales	$	884,209			$	706,471			$	1,798,395			$	1,375,771
Cost of goods sold		564,246				506,414				1,126,325				974,593
Gross profit		319,963				200,057				672,070				401,178
Operating expenses:
Selling, general and administrative		88,639				73,951				175,159				150,172
(Gain) loss on disposal of assets and costs from exit and disposal activities		(102	)			(901	)			201				(912	)
Intangible amortization		13,841				15,446				27,518				31,091
Income from operations		217,585				111,561				469,192				220,827
Other expense:
Interest expense		18,261				8,437				29,333				16,344
Derivative losses (gains) and other expense (income), net		395				202				(1,507	)			(1,812	)
Income before income taxes		198,929				102,922				441,366				206,295
Income tax expense		47,508				26,816				102,573				53,271
Equity in net income of unconsolidated affiliates		(1,956	)			(206	)			(3,066	)			(411	)
Net income		153,377				76,312				341,859				153,435
Less: net income attributable to noncontrolling interest		1,370				953				2,706				2,089
Net income attributable to ADS		152,007				75,359				339,153				151,346
Dividends to participating securities		—				(1,636	)			—				(3,276	)
Net income available to common stockholders and participating securities		152,007				73,723				339,153				148,070
Undistributed income allocated to participating securities		—				(10,494	)			—				(21,430	)
Net income available to common stockholders	$	152,007			$	63,229			$	339,153			$	126,640
Weighted average common shares outstanding:
Basic		83,466				70,464				83,306				70,993
Diluted		84,498				71,924				84,485				72,614
Net income per share:
Basic	$	1.82			$	0.90			$	4.07			$	1.78
Diluted	$	1.80			$	0.88			$	4.01			$	1.74
Cash dividends declared per share	$	0.12			$	0.11			$	0.24			$	0.22

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
	As of
(Amounts in thousands)	September 30, 2022				March 31, 2022
ASSETS
Current assets:
Cash	$	457,357			$	20,125
Receivables, net		387,952				341,753
Inventories		479,171				494,324
Other current assets		23,400				15,696
Total current assets		1,347,880				871,898
Property, plant and equipment, net		653,432				619,383
Other assets:
Goodwill		619,487				610,293
Intangible assets, net		435,281				431,385
Other assets		121,519				116,799
Total assets	$	3,177,599			$	2,649,758
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations	$	16,765			$	19,451
Current maturities of finance lease obligations		5,358				5,089
Accounts payable		236,603				224,986
Other accrued liabilities		169,774				134,877
Accrued income taxes		10,800				6,838
Total current liabilities		439,300				391,241
Long-term debt obligations, net		1,275,211				908,705
Long-term finance lease obligations		13,893				11,393
Deferred tax liabilities		164,945				168,435
Other liabilities		68,580				64,939
Total liabilities		1,961,929				1,544,713
Mezzanine equity:
Redeemable common stock		159,928				—
Redeemable convertible preferred stock		—				195,384
Total mezzanine equity		159,928				195,384
Stockholders’ equity:
Common stock		11,642				11,612
Paid-in capital		1,119,453				1,065,628
Common stock in treasury, at cost		(536,697	)			(318,691	)
Accumulated other comprehensive loss		(33,775	)			(24,386	)
Retained earnings		477,790				158,876
Total ADS stockholders’ equity		1,038,413				893,039
Noncontrolling interest in subsidiaries		17,329				16,622
Total stockholders’ equity		1,055,742				909,661
Total liabilities, mezzanine equity and stockholders’ equity	$	3,177,599			$	2,649,758

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	Six Months Ended September 30,
(Amounts in thousands)	2022				2021
Cash Flow from Operating Activities
Net income	$	341,859			$	153,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		71,500				68,850
Deferred income taxes		(3,117	)			15
(Gain) loss on disposal of assets and costs from exit and disposal activities		201				(912	)
ESOP and stock-based compensation		13,733				38,437
Amortization of deferred financing charges		398				191
Fair market value adjustments to derivatives		2,183				(446	)
Equity in net income of unconsolidated affiliates		(3,066	)			(411	)
Other operating activities		(713	)			441
Changes in working capital:
Receivables		(43,680	)			(138,063	)
Inventories		15,799				(124,429	)
Prepaid expenses and other current assets		(7,776	)			(6,738	)
Accounts payable, accrued expenses, and other liabilities		49,703				104,508
Net cash provided by operating activities		437,024				94,878
Cash Flows from Investing Activities
Capital expenditures		(75,545	)			(63,764	)
Acquisition, net of cash acquired		(48,010	)			—
Other investing activities		46				1,556
Net cash used in investing activities		(123,509	)			(62,208	)
Cash Flows from Financing Activities
Payments on syndicated Term Loan Facility		(3,500	)			(3,500	)
Proceeds from Revolving Credit Agreement		26,200				146,800
Payments on Revolving Credit Agreement		(140,500	)			(24,200	)
Proceeds from Amended Revolving Credit Agreement		97,000				—
Payments on Amended Revolving Credit Agreement		(97,000	)			—
Proceeds from Senior Notes due 2030		500,000				—
Debt issuance costs		(11,575	)			—
Payments on Equipment Financing		(7,104	)			—
Payments on finance lease obligations		(3,153	)			(10,437	)
Repurchase of common stock		(192,602	)			(292,000	)
Cash dividends paid		(20,367	)			(18,758	)
Dividends paid to noncontrolling interest holder		(1,727	)			(1,471	)
Proceeds from exercise of stock options		4,660				3,179
Payment of withholding taxes on vesting of restricted stock units		(25,512	)			(12,976	)
Other financing activities		—				(230	)
Net cash provided by (used in) financing activities		124,820				(213,593	)
Effect of exchange rate changes on cash		(1,103	)			(81	)
Net change in cash		437,232				(181,004	)
Cash at beginning of period		20,125				195,009
Cash at end of period	$	457,357			$	14,005

Selected Financial Data

The following tables set forth net sales by reportable segment for each of the periods indicated.

	Three Months Ended
	September 30, 2022											September 30, 2021
(In thousands)	Net Sales				Intersegment Net Sales				Net Sales from External Customers			Net Sales				Intersegment Net Sales				Net Sales from External Customers
Pipe	$	500,978			$	(10,770	)		$	490,208		$	384,521			$	(2,668	)		$	381,853
Infiltrator		150,735				(22,450	)			128,285			145,911				(22,412	)			123,499
International
International - Pipe		56,461				(7,339	)			49,122			50,141				(5,170	)			44,971
International - Allied Products & Other		17,002				—				17,002			13,433				—				13,433
Total International		73,463				(7,339	)			66,124			63,574				(5,170	)			58,404
Allied Products & Other		202,200				(2,608	)			199,592			145,719				(3,004	)			142,715
Intersegment Eliminations		(43,167	)			43,167				—			(33,254	)			33,254				—
Total Consolidated	$	884,209			$	—			$	884,209		$	706,471			$	—			$	706,471
	Six Months Ended
	September 30, 2022											September 30, 2021
	Net Sales				Intersegment Net Sales				Net Sales from External Customers			Net Sales				Intersegment Net Sales				Net Sales from External Customers
Pipe	$	1,025,835			$	(20,644	)		$	1,005,191		$	758,531			$	(4,571	)		$	753,960
Infiltrator		317,025				(51,356	)			265,669			272,653				(41,449	)			231,204
International
International - Pipe		109,880				(13,198	)			96,682			100,979				(8,084	)			92,895
International - Allied Products & Other		35,097				—				35,097			27,961				—				27,961
Total International		144,977				(13,198	)			131,779			128,940				(8,084	)			120,856
Allied Products & Other		401,109				(5,353	)			395,756			272,755				(3,004	)			269,751
Intersegment Eliminations		(90,551	)			90,551				—			(57,108	)			57,108				—
Total Consolidated	$	1,798,395			$	—			$	1,798,395		$	1,375,771			$	—			$	1,375,771

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). ADS management uses non-GAAP measures in its analysis of the Company’s performance. Investors are encouraged to review the reconciliation of non-GAAP financial measures to the comparable GAAP results available in the accompanying tables.

Reconciliation of Non-GAAP Financial Measures

This press release includes references to organic results, Adjusted EBITDA and Free Cash Flow, non-GAAP financial measures. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These measures are not intended to be substitutes for those reported in accordance with GAAP. Adjusted EBITDA and Free Cash Flow may be different from non-GAAP financial measures used by other companies, even when similar terms are used to identify such measures.

EBITDA and Adjusted EBITDA are non-GAAP financial measures that comprise net income before interest, income taxes, depreciation and amortization, stock-based compensation, non-cash charges and certain other expenses. The Company’s definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Adjusted EBITDA is a key metric used by management and the Company’s board of directors to assess financial performance and evaluate the effectiveness of the Company’s business strategies. Accordingly, management believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as the Company’s management and board of directors. In order to provide investors with a meaningful reconciliation, the Company has provided below reconciliations of Adjusted EBITDA to net income.

Free Cash Flow is a non-GAAP financial measure that comprises cash flow from operating activities less capital expenditures. Free Cash Flow is a measure used by management and the Company’s board of directors to assess the Company’s ability to generate cash. Accordingly, 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. In order to provide investors with a meaningful reconciliation, the Company has provided below a reconciliation of cash flow from operating activities to Free Cash Flow.

The following tables present a reconciliation of EBITDA and Adjusted EBITDA to Net Income and Free Cash Flow to Cash Flow from Operating Activities, the most comparable GAAP measures, for each of the periods indicated.

Reconciliation of Adjusted EBITDA to Net Income

	Three Months Ended September 30,								Six Months Ended September 30,
(Amounts in thousands)	2022				2021				2022			2021
Net income	$	153,377			$	76,312			$	341,859		$	153,435
Depreciation and amortization		35,922				34,194				71,500			68,850
Interest expense		18,261				8,437				29,333			16,344
Income tax expense		47,508				26,816				102,573			53,271
EBITDA		255,068				145,759				545,265			291,900
(Gain) loss on disposal of assets and costs from exit and disposal activities		(102	)			(901	)			201			(912	)
Stock-based compensation expense		7,460				5,618				13,733			12,269
ESOP compensation expense		—				12,013				—			26,168
Transaction costs		368				834				2,083			877
Other adjustments(a)		408				1,481				963			1,084
Adjusted EBITDA	$	263,202			$	164,804			$	562,245		$	331,386

(a)

Includes derivative fair value adjustments, foreign currency transaction (gains) losses, interest income, 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.

Reconciliation of Free Cash Flow to Cash flow from Operating Activities

	Six Months Ended September 30,
(Amounts in thousands)	2022				2021
Net cash flow from operating activities	$	437,024			$	94,878
Capital expenditures		(75,545	)			(63,764	)
Free cash flow	$	361,479			$	31,114

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20221103005385/en/

Michael Higgins

VP, Corporate Strategy & Investor Relations

(614) 658-0050

Michael.Higgins@adspipe.com

Source: Advanced Drainage Systems, Inc.

FAQ

What were Advanced Drainage Systems' earnings for the second quarter of fiscal 2023?

Advanced Drainage Systems reported net sales of $884.2 million and net income of $153.4 million for Q2 2023.

What is the fiscal 2023 revenue guidance for WMS?

The company has revised its fiscal 2023 revenue guidance to a range of $3.100 billion to $3.200 billion.

How much did Adjusted EBITDA increase in the second quarter for WMS?

Adjusted EBITDA increased 59.7% to $263.2 million in the second quarter of fiscal 2023.

What are the main drivers behind the sales growth for WMS?

Sales growth was driven by favorable pricing and strong volume in construction and agriculture end markets.

How did inflation affect Advanced Drainage Systems' financial results?

Inflationary pressures impacted manufacturing and transportation costs but were offset by strong sales growth.