Advanced Drainage Systems Announces Second Quarter Fiscal 2024 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 onsite septic wastewater industries today announced financial results for the fiscal second quarter ended September 30, 2023.

Second Quarter Fiscal 2024 Results

• Net sales decreased 11.8% to $780.2 million
• Net income decreased 10.7% to $137.0 million
• Net income per diluted share decreased 4.8% to $1.71
• Adjusted EBITDA (Non-GAAP) decreased 6.4% to $246.3 million
• Adjusted Earnings per share (Non-GAAP) decreased 4.8% to $1.71

Year-to-Date Fiscal 2024 Results

• Net sales decreased 13.4% to $1,558.3 million
• Net income decreased 9.0% to $310.9 million
• Net income per diluted share decreased 3.0% to $3.89
• Adjusted EBITDA (Non-GAAP) decreased 6.2% to $527.6 million
• Adjusted Earnings per share (Non-GAAP) decreased 6.0% to $3.78
• Cash provided by operating activities increased 5.0% to $458.9 million
• Free cash flow (Non-GAAP) increased 4.1% to $376.2 million

Scott Barbour, President and Chief Executive Officer of ADS commented, "In the second quarter, we saw better than expected performance in the Infiltrator business and Allied products portfolio continue, despite demand headwinds from higher interest rates, credit tightening and economic uncertainty. Results from the ADS pipe portfolio remain in line with expectations. Importantly, we demonstrated the resilience of the business model through the 180 basis point expansion in Adjusted EBITDA margin, even with the lower demand environment. The margin performance this quarter benefited from sales mix, as well as previous investments in the business including automation and tooling, effective management of price/cost as well as continuous improvement within our operations."

"Demand for our innovative solutions continues to be driven by the secular trend of larger-scale and more frequent water-related climate events. ADS plays an important role in providing sustainable water management solutions, while additionally being a valued resource as regulations develop. The secular trend to manage storm water, combined with our material conversion strategy, gives us confidence in our strategic investments to support the long-term growth of the business. For instance, we announced this morning we are building a manufacturing facility in Lake Wales, Florida that will position us to continue to grow in Florida and the Southeast, a very important geographic region of the United States."

Barbour concluded, "With the first half of Fiscal 2024 behind us, we have narrowed our revenue target towards the upper end of the previous range and increased the Adjusted EBITDA mid-point guidance for the year. This reflects a continuation of demand trends experienced during the first half of the year, as well as confidence in our ability to manage margin performance, as demonstrated this quarter. Consistent with the previous guidance, our uncertainty remains as to the impact of tightening credit standards and higher interest rates on the non-residential and residential markets in the second half of the fiscal year. We will continue to focus on execution, delivering service to our customers and pursuing growth through attractive products, markets and partnerships, investing in capital and resources at both ADS and Infiltrator for when the market rebounds."

Second Quarter Fiscal 2024 Results

Net sales decreased $104.0 million, or 11.8%, to $780.2 million, as compared to $884.2 million in the prior year quarter. Domestic pipe sales decreased $70.6 million, or 14.1%, to $430.4 million. Domestic allied products & other sales decreased $18.9 million, or 9.3%, to $183.3 million. Infiltrator sales decreased $17.0 million, or 11.3%, to $133.7 million. The decrease in domestic net sales was primarily driven by lower demand in the U.S. construction and agriculture end markets. International sales decreased $4.0 million, or 5.5%, to $69.4 million.

Gross profit decreased $17.3 million, or 5.4%, to $302.7 million as compared to $320.0 million in the prior year. The decrease in gross profit is primarily due to the decrease in volume and unfavorable fixed cost absorption, partially offset by favorable material costs.

Net income per diluted share decreased $0.09, or 4.8%, to $1.71, as compared to $1.80 per share in the prior year quarter, primarily due to the factors mentioned above.

Adjusted EBITDA (Non-GAAP) decreased $17.0 million, or 6.4%, to $246.3 million, as compared to $263.2 million in the prior year, primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 31.6% as compared to 29.8% 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 decreased $240.1 million, or 13.4%, to $1,558.3 million, as compared to $1,798.4 million in the prior year quarter. Domestic pipe sales decreased $166.9 million, or 16.3%, to $859.0 million. Domestic allied products & other sales decreased $34.4 million, or 8.6%, to $366.7 million. Infiltrator sales decreased $41.8 million, or 13.2%, to $275.2 million. The decrease in domestic net sales was driven by lower demand in the U.S. construction and agriculture end markets. International sales decreased $22.8 million, or 15.7%, to $122.2 million.

Gross profit decreased $37.9 million, or 5.6%, to $634.1 million as compared to $672.1 million in the prior year. The decrease in gross profit is primarily due to the decrease in volume and unfavorable fixed cost absorption, partially offset by favorable material costs.

Net income per diluted share decreased $0.12, or 3.0%, to $3.89, as compared to $4.01 per share in the prior year quarter. Results for the fiscal 2024 include a $14.9 million gain on the sale of assets, which after considering the income tax impact of this gain impacted net income per diluted share by $0.14.

Adjusted EBITDA (Non-GAAP) decreased $34.7 million, or 6.2%, to $527.6 million, as compared to $562.2 million in the prior year, primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 33.9% as compared to 31.3% in the prior year.

Balance Sheet and Liquidity

Net cash provided by operating activities was $458.9 million, as compared to $437.0 million in the prior year. Free cash flow (Non-GAAP) was $376.2 million, as compared to $361.5 million in the prior year. Net debt (total debt and finance lease obligations net of cash) was $850.2 million as of September 30, 2023, a decrease of $257.6 million from March 31, 2023.

ADS had total liquidity of $1,059.3 million, comprised of cash of $470.4 million as of September 30, 2023 and $588.9 million of availability under committed credit facilities. As of September 30, 2023, the Company’s trailing-twelve-month leverage ratio was 1.0 times Adjusted EBITDA.

In the six months ended September 30, 2023, the Company repurchased 1.0 million shares of its common stock for a total cost of $101.6 million. As of September 30, 2023, approximately $315.9 million of common stock may be repurchased under the Company's existing share repurchase authorization.

Fiscal 2024 Outlook

Based on current visibility, backlog of existing orders and business trends, the Company updated its financial targets for fiscal 2024. Net sales are now expected to be in the range of $2.700 billion to $2.800 billion. Adjusted EBITDA is expected to be in the range of $800 to $850 million. The outlook for capital expenditures is unchanged, expected to be in the range of $200 million to $225 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://conferencingportals.com/event/TTnYXFWe using Conference ID: 45786. 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 and its subsidiary, Infiltrator Water Technologies, provide superior stormwater drainage and onsite septic wastewater products used in a wide variety of markets and applications including commercial, residential, infrastructure and agriculture, while delivering unparalleled customer service. ADS manages the industry’s largest company-owned fleet, an expansive sales team, and a vast manufacturing network of approximately 70 manufacturing plants and 40 distribution centers. The company is one of the largest plastic recycling companies 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; 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 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)	2023			2022			2023			2022
Net sales	$	780,220		$	884,209		$	1,558,266		$	1,798,395
Cost of goods sold		477,543			564,246			924,129			1,126,325
Gross profit		302,677			319,963			634,137			672,070
Operating expenses:
Selling, general and administrative		91,725			88,639			178,236			175,159
Loss (gain) on disposal of assets and costs from exit and disposal activities		123			(102	)		(13,181	)		201
Intangible amortization		12,792			13,841			25,594			27,518
Income from operations		198,037			217,585			443,488			469,192
Other expense:
Interest expense		21,941			18,261			43,653			29,333
Derivative (gain) loss and other (income) expense, net		(7,506	)		395			(11,055	)		(1,507	)
Income before income taxes		183,602			198,929			410,890			441,366
Income tax expense		47,476			47,508			102,534			102,573
Equity in net income of unconsolidated affiliates		(901	)		(1,956	)		(2,576	)		(3,066	)
Net income		137,027			153,377			310,932			341,859
Less: net income attributable to noncontrolling interest		1,225			1,370			1,478			2,706
Net income attributable to ADS	$	135,802		$	152,007		$	309,454		$	339,153
Weighted average common shares outstanding:
Basic		78,606			83,466			78,756			83,306
Diluted		79,307			84,498			79,475			84,485
Net income per share:
Basic	$	1.73		$	1.82		$	3.93		$	4.07
Diluted	$	1.71		$	1.80		$	3.89		$	4.01
Cash dividends declared per share	$	0.14		$	0.12		$	0.28		$	0.24

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
	As of
(Amounts in thousands)	September 30, 2023			March 31, 2023
ASSETS
Current assets:
Cash	$	470,409		$	217,128
Receivables, net		352,562			306,945
Inventories		385,090			463,994
Other current assets		23,855			29,422
Total current assets		1,231,916			1,017,489
Property, plant and equipment, net		773,993			733,059
Other assets:
Goodwill		620,165			620,193
Intangible assets, net		382,050			407,627
Other assets		129,850			122,757
Total assets	$	3,137,974		$	2,901,125
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations	$	12,950		$	14,693
Current maturities of finance lease obligations		11,698			8,541
Accounts payable		223,536			210,111
Other accrued liabilities		158,784			142,400
Accrued income taxes		20,899			3,057
Total current liabilities		427,867			378,802
Long-term debt obligations, net		1,264,197			1,269,391
Long-term finance lease obligations		31,729			32,272
Deferred tax liabilities		159,060			159,056
Other liabilities		72,942			66,744
Total liabilities		1,955,795			1,906,265
Mezzanine equity:
Redeemable common stock		133,349			153,220
Total mezzanine equity		133,349			153,220
Stockholders’ equity:
Common stock		11,663			11,647
Paid-in capital		1,173,574			1,134,864
Common stock in treasury, at cost		(1,039,717	)		(920,999	)
Accumulated other comprehensive loss		(29,658	)		(27,580	)
Retained earnings		913,551			626,215
Total ADS stockholders’ equity		1,029,413			824,147
Noncontrolling interest in subsidiaries		19,417			17,493
Total stockholders’ equity		1,048,830			841,640
Total liabilities, mezzanine equity and stockholders’ equity	$	3,137,974		$	2,901,125

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	Six Months Ended September 30,
(Amounts in thousands)	2023			2022
Cash Flow from Operating Activities
Net income	$	310,932		$	341,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		73,961			71,500
Deferred income taxes		519			(3,117	)
(Gain) loss on disposal of assets and costs from exit and disposal activities		(13,181	)		201
Stock-based compensation		16,234			13,733
Amortization of deferred financing charges		1,022			398
Fair market value adjustments to derivatives		(1,889	)		2,183
Equity in net income of unconsolidated affiliates		(2,576	)		(3,066	)
Other operating activities		756			(713	)
Changes in working capital:
Receivables		(43,530	)		(43,680	)
Inventories		79,215			15,799
Prepaid expenses and other current assets		(2,228	)		(7,776	)
Accounts payable, accrued expenses, and other liabilities		39,629			49,703
Net cash provided by operating activities		458,864			437,024
Cash Flows from Investing Activities
Capital expenditures		(82,625	)		(75,545	)
Proceeds from disposition of assets		19,979			—
Acquisition, net of cash acquired		—			(48,010	)
Other investing activities		446			46
Net cash used in investing activities		(62,200	)		(123,509	)
Cash Flows from Financing Activities
Payments on syndicated Term Loan Facility		(3,500	)		(3,500	)
Proceeds from Revolving Credit Agreement		—			26,200
Payments on Revolving Credit Agreement		—			(140,500	)
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		(4,458	)		(7,104	)
Payments on finance lease obligations		(5,452	)		(3,153	)
Repurchase of common stock		(101,564	)		(192,602	)
Cash dividends paid		(22,224	)		(20,367	)
Dividends paid to noncontrolling interest holder		—			(1,727	)
Proceeds from exercise of stock options		2,623			4,660
Payment of withholding taxes on vesting of restricted stock units		(8,811	)		(25,512	)
Net cash (used in) provided by financing activities		(143,386	)		124,820
Effect of exchange rate changes on cash		3			(1,103	)
Net change in cash		253,281			437,232
Cash at beginning of period		217,128			20,125
Cash at end of period	$	470,409		$	457,357

Selected Financial Data

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

	Three Months Ended
	September 30, 2023								September 30, 2022
(In thousands)	Net Sales			Intersegment Net Sales			Net Sales from External Customers		Net Sales			Intersegment Net Sales			Net Sales from External Customers
Pipe	$	430,389		$	(9,563	)	$	420,826	$	500,978		$	(10,770	)	$	490,208
Infiltrator		133,731			(17,553	)		116,178		150,735			(22,450	)		128,285
International
International - Pipe		52,405			(1,020	)		51,385		56,461			(7,339	)		49,122
International - Allied Products & Other		17,027			(26	)		17,001		17,002			—			17,002
Total International		69,432			(1,046	)		68,386		73,463			(7,339	)		66,124
Allied Products & Other		183,304			(8,474	)		174,830		202,200			(2,608	)		199,592
Intersegment Eliminations		(36,636	)		36,636			—		(43,167	)		43,167			—
Total Consolidated	$	780,220		$	—		$	780,220	$	884,209		$	—		$	884,209
	Six Months Ended
	September 30, 2023								September 30, 2022
	Net Sales			Intersegment Net Sales			Net Sales from External Customers		Net Sales			Intersegment Net Sales			Net Sales from External Customers
Pipe	$	858,961		$	(17,707	)	$	841,254	$	1,025,835		$	(20,644	)	$	1,005,191
Infiltrator		275,217			(36,131	)		239,086		317,025			(51,356	)		265,669
International
International - Pipe		89,583			(1,548	)		88,035		109,880			(13,198	)		96,682
International - Allied Products & Other		32,625			(26	)		32,599		35,097			—			35,097
Total International		122,208			(1,574	)		120,634		144,977			(13,198	)		131,779
Allied Products & Other		366,749			(9,457	)		357,292		401,109			(5,353	)		395,756
Intersegment Eliminations		(64,869	)		64,869			—		(90,551	)		90,551			—
Total Consolidated	$	1,558,266		$	—		$	1,558,266	$	1,798,395		$	—		$	1,798,395

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 Gross Profit to Gross Profit

	Three Months Ended September 30,					Six Months Ended September 30,
(Amounts in thousands)	2023			2022		2023			2022
Segment Adjusted Gross Profit
Pipe	$	125,856		$	146,153	$	286,505		$	314,732
Infiltrator		73,663			71,278		147,927			147,072
International		21,339			17,630		37,368			38,114
Allied Products & Other		106,239			106,030		212,424			215,071
Intersegment Elimination		(454	)		430		(2,509	)		(385	)
Total Segment Adjusted Gross Profit		326,643			341,521		681,715			714,604
Depreciation and amortization		22,622			20,800		45,421			41,102
Stock-based compensation expense		1,344			758		2,157			1,432
Total Gross Profit	$	302,677		$	319,963	$	634,137		$	672,070

Reconciliation of Adjusted EBITDA to Net Income

	Three Months Ended September 30,						Six Months Ended September 30,
(Amounts in thousands)	2023			2022			2023			2022
Net income	$	137,027		$	153,377		$	310,932		$	341,859
Depreciation and amortization		36,721			35,922			73,961			71,500
Interest expense		21,941			18,261			43,653			29,333
Income tax expense		47,476			47,508			102,534			102,573
EBITDA		243,165			255,068			531,080			545,265
Loss (gain) on disposal of assets and costs from exit and disposal activities		123			(102	)		(13,181	)		201
Stock-based compensation expense		9,331			7,460			16,234			13,733
Transaction costs		52			368			2,024			2,083
Interest income		(5,137	)		(1,991	)		(8,626	)		(2,108	)
Other adjustments^(a)		(1,284	)		2,399			32			3,071
Adjusted EBITDA	$	246,250		$	263,202		$	527,563		$	562,245

(a)

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.

Reconciliation of Free Cash Flow to Cash flow from Operating Activities

	Six Months Ended September 30,
(Amounts in thousands)	2023			2022
Net cash flow from operating activities	$	458,864		$	437,024
Capital expenditures		(82,625	)		(75,545	)
Free cash flow	$	376,239		$	361,479

Reconciliation of Diluted Earnings per Share to Adjusted Earnings per Share

The following table diluted presents earnings per share on an adjusted basis to supplement the Company's discussion of its results of operations herein. Adjusted earnings per share excludes (gains) losses on disposals of assets or business, restructuring expenses, impairment charges and transaction costs. Adjusted earnings per share are measures used by management and may be useful for investors to evaluate the Company's operational performance.

	Three Months Ended September 30,				Six Months Ended September 30,
	2023		2022		2023			2022
Diluted Earnings Per Share	$	1.71	$	1.80	$	3.89		$	4.01
Loss (gain) on disposal of assets and costs from exit and disposal activities		—		—		(0.17	)		—
Transaction costs		—		—		0.03			0.02
Income tax impact of adjustments ^(a)		—		—		0.03			(0.01	)
Adjusted Earnings per Share	$	1.71	$	1.80	$	3.78		$	4.02

(a)	The income tax impact of adjustments to each period is based on the statutory tax rate.