ADVANCED DRAINAGE SYSTEMS, INC. [WMS] Filings

10-Q 1 wms-20220630.htm 10-Q wms-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-36557

ADVANCED DRAINAGE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


Delaware			51-0105665
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

4640 Trueman Boulevard, Hilliard, Ohio 43026

(Address of Principal Executive Offices, Including Zip Code)

(614) 658-0050

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	WMS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 27, 2022, the registrant had 83,571,171 shares of common stock outstanding, which excludes 248,382 shares of unvested restricted common stock. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS.”

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

Page

Condensed Consolidated Balance Sheets as of June 30, 2022 and March 31, 2022

Condensed Consolidated Statements of Operations for the three months ended June 30, 2022 and 2021

Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2022 and 2021

Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2022 and 2021

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity for the three months ended June 30, 2022 and 2021

Notes to the Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Unregistered Sale of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

- ii -

PART I. FINANCIAL INFORMATION

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except par value)


	June 30, 2022		March 31, 2022
ASSETS
Current assets:
Cash	$	463,696	$	20,125
Receivables (less allowance for doubtful accounts of $7,868 and $8,198, respectively)	427,620		341,753
Inventories	489,492		494,324
Other current assets	20,532		15,696
Total current assets	1,401,340		871,898
Property, plant and equipment, net	636,042		619,383
Other assets:
Goodwill	619,626		610,293
Intangible assets, net	449,115		431,385
Other assets	119,240		116,799
Total assets	$	3,225,363	$	2,649,758
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations	$	18,113	$	19,451
Current maturities of finance lease obligations	5,227		5,089
Accounts payable	274,606		224,986
Other accrued liabilities	148,605		134,877
Accrued income taxes	58,207		6,838
Total current liabilities	504,758		391,241
Long-term debt obligations (less unamortized debt issuance costs of $12,879 and $1,648, respectively)	1,279,176		908,705
Long-term finance lease obligations	11,429		11,393
Deferred tax liabilities	166,741		168,435
Other liabilities	66,472		64,939
Total liabilities	2,028,576		1,544,713
Commitments and contingencies (see Note 9)
Mezzanine equity:
Redeemable common stock: $0.01 par value; 11,619 and 0 shares outstanding, respectively	188,828		—
Redeemable convertible preferred stock: $0.01 par value; 0 and 47,070 shares authorized, respectively; 0 and 44,170 shares issued; 0 and 15,630 shares outstanding, respectively	—		195,384
Total mezzanine equity	188,828		195,384
Stockholders’ equity:
Common stock; $0.01 par value: 1,000,000 shares authorized; 76,607 and 75,529 shares issued, respectively; 72,386 and 72,309 shares outstanding, respectively	11,623		11,612
Paid-in capital	1,079,701		1,065,628
Common stock in treasury, at cost	(408,861)		(318,691)
Accumulated other comprehensive loss	(28,289)		(24,386)
Retained earnings	335,822		158,876
Total ADS stockholders’ equity	989,996		893,039
Noncontrolling interest in subsidiaries	17,963		16,622
Total stockholders’ equity	1,007,959		909,661
Total liabilities, mezzanine equity and stockholders’ equity	$	3,225,363	$	2,649,758

See accompanying Notes to Condensed Consolidated Financial Statements.

- 3 -

Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except per share data)


	Three Months Ended June 30,
	2022		2021
Net sales	$	914,186	$	669,300
Cost of goods sold	562,079		468,179
Gross profit	352,107		201,121
Operating expenses:
Selling, general and administrative	86,520		76,221
Loss (gain) on disposal of assets and costs from exit and disposal activities	303		(11)
Intangible amortization	13,677		15,645
Income from operations	251,607		109,266
Other expense:
Interest expense	11,072		7,907
Derivative gains and other income, net	(1,902)		(2,014)
Income before income taxes	242,437		103,373
Income tax expense	55,065		26,455
Equity in net income of unconsolidated affiliates	(1,110)		(205)
Net income	188,482		77,123
Less: net income attributable to noncontrolling interest	1,336		1,136
Net income attributable to ADS	187,146		75,987
Weighted average common shares outstanding:
Basic	83,144		71,534
Diluted	84,389		73,124
Net income per share:
Basic	$	2.25	$	0.89
Diluted	$	2.22	$	0.87

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


	Three Months Ended June 30,
	2022		2021
Net income	$	188,482	$	77,123
Currency translation (loss) gain	(3,898)		2,041
Comprehensive income	184,584		79,164
Less: other comprehensive income attributable to noncontrolling interest	5		615
Less: net income attributable to noncontrolling interest	1,336		1,136
Total comprehensive income attributable to ADS	$	183,243	$	77,413

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -

Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Three Months Ended June 30,
	2022		2021
Cash Flows from Operating Activities
Net income	$	188,482	$	77,123
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	35,578		34,656
Deferred income taxes	(1,272)		64
Loss (gain) on disposal of assets and costs from exit and disposal activities	303		(11)
ESOP and stock-based compensation	6,273		20,806
Amortization of deferred financing charges	344		95
Fair market value adjustments to derivatives	(90)		(675)
Equity in net income of unconsolidated affiliates	(1,110)		(205)
Other operating activities	(3,535)		450
Changes in working capital:
Receivables	(79,616)		(67,388)
Inventories	8,039		(28,985)
Prepaid expenses and other current assets	(4,840)		(7,442)
Accounts payable, accrued expenses, and other liabilities	101,209		75,860
Net cash provided by operating activities	249,765		104,348
Cash Flows from Investing Activities
Capital expenditures	(36,189)		(25,546)
Acquisition, net of cash acquired	(47,492)		—
Other investing activities	13		53
Net cash used in investing activities	(83,668)		(25,493)
Cash Flows from Financing Activities
Payments on syndicated Term Loan Facility	(1,750)		(1,750)
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	(3,548)		—
Payments on finance lease obligations	(1,721)		(5,379)
Repurchase of common stock	(57,699)		(102,013)
Cash dividends paid	(10,170)		(9,451)
Dividends paid to noncontrolling interest holder	—		(957)
Proceeds from exercise of stock options	1,249		1,336
Payment of withholding taxes on vesting of restricted stock units	(22,809)		(12,976)
Other financing activities	—		(131)
Net cash provided by (used in) financing activities	277,677		(131,321)
Effect of exchange rate changes on cash	(203)		290
Net change in cash	443,571		(52,176)
Cash at beginning of period	20,125		195,009
Cash at end of period	$	463,696	$	142,833
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	5,055	$	2,605
Cash paid for interest	4,714		3,714
Non-cash operating, investing and financing activities:
Repurchase of common stock pending settlement	9,662		13,365
Acquisition of property, plant and equipment under finance lease and incurred lease obligations	1,754		9,382
Balance in accounts payable for the acquisition of property, plant and equipment	16,881		6,578

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY

(Unaudited) (In thousands)


	Common Stock				Paid -In Capital		Common Stock in Treasury				Accumulated Other Compre-hensive Loss		Retained (Deficit) Earnings		Total ADS Stockholders’ Equity		Non- controlling Interest in Subsidiaries		Total Stock- holders’ Equity		Redeemable Convertible Preferred Stock				Deferred Compensation Unearned ESOP Shares				Total Mezzanine Equity
	Shares		Amount				Shares		Amount												Shares		Amount		Shares		Amount
Balance at April 1, 2021	72,071		$	11,578	$	918,587	501		$	(10,959)	$	(24,220)	$	(75,202)	$	819,784	$	13,731	$	833,515	19,275		$	240,944	966		$	(11,033)	$	229,911
Net income	—		—		—		—		—		—		75,987		75,987		1,136		77,123		—		—		—		—		—
Other comprehensive income	—		—		—		—		—		1,426		—		1,426		615		2,041		—		—		—		—		—
Redeemable convertible preferred stock dividends	—		—		—		—		—		—		(1,550)		(1,550)		—		(1,550)		—		—		—		—		—
Common stock dividends ($0.11 per share)	—		—		—		—		—		—		(7,901)		(7,901)		—		(7,901)		—		—		—		—		—
Dividends paid to noncontrolling interest holder	—		—		—		—		—		—		—		—		(957)		(957)		—		—		—		—		—
Share repurchases	—		—		—		1,056		(115,378)		—		—		(115,378)		—		(115,378)
Allocation of ESOP shares to participants for compensation	—		—		12,064		—		—		—		—		12,064		—		12,064		—		—		(167)		2,091		2,091
Exercise of common stock options	48		—		1,336		—		—		—		—		1,336		—		1,336		—		—		—		—		—
Restricted stock awards	99		1		—		29		(3,231)		—		—		(3,230)		—		(3,230)		—		—		—		—		—
Performance-based restricted stock units	245		2		—		92		(9,745)		—		—		(9,743)		—		(9,743)
Stock-based compensation expense	—		—		6,651		—		—		—		—		6,651		—		6,651		—		—		—		—		—
ESOP distribution in common stock	764		8		12,404		—		—		—		—		12,412		—		12,412		(993)		(12,412)		—		—		(12,412)
Other	—		—		(79)		—		—		—		—		(79)		—		(79)		—		—		—		—		—
Balance at June 30, 2021	$	73,227	$	11,589	$	950,963	$	1,678	$	(139,313)	$	(22,794)	$	(8,666)	$	791,779	$	14,525	$	806,304	$	18,282	$	228,532	$	799	$	(8,942)	$	219,590


	Common Stock			Paid -In Capital		Common Stock in Treasury			Accumulated Other Compre-hensive Loss		Retained (Deficit) Earnings		Total ADS Stockholders’ Equity		Non- controlling Interest in Subsidiaries		Total Stock- holders’ Equity		Redeemable Common Stock			Redeemable Convertible Preferred Stock			Total Mezzanine Equity
	Shares	Amount				Shares	Amount												Shares	Amount		Shares	Amount
Balance at April 1, 2022	75,529	$	11,612	$	1,065,628	3,220	$	(318,691)	$	(24,386)	$	158,876	$	893,039	$	16,622	$	909,661	—	$	—	15,630	$	195,384	$	195,384
Net income	—	—		—		—	—		—		187,146		187,146		1,336		188,482		—	—		—	—		—
Other comprehensive (loss) income	—	—		—		—	—		(3,903)		—		(3,903)		5		(3,898)		—	—		—	—		—
Common stock dividends ($0.12 per share)	—	—		—		—	—		—		(10,200)		(10,200)		—		(10,200)		—	—		—	—		—
Share repurchases	—	—		—		772	(67,361)		—		—		(67,361)		—		(67,361)		—	—		—	—		—
ESOP share conversion	—	—		—		—	—		—		—		—		—		—		12,022	195,384		(15,630)	(195,384)		—
KSOP redeemable common stock conversion	403	4		6,552		—	—		—		—		6,556		—		6,556		(403)	(6,556)		—	—		(6,556)
Exercise of common stock options	67	1		1,248		—	—		—		—		1,249		—		1,249		—	—		—	—		—
Restricted stock awards	81	1		—		24	(2,458)		—		—		(2,457)		—		(2,457)		—	—		—	—		—
Performance-based restricted stock units	527	5		—		205	(20,351)		—		—		(20,346)		—		(20,346)		—	—		—	—		—
Stock-based compensation expense	—	—		6,273		—	—		—		—		6,273		—		6,273		—	—		—	—		—
Balance at June 30, 2022	76,607	$	11,623	$	1,079,701	4,221	$	(408,861)	(28,289)		$	335,822	$	989,996	$	17,963	$	1,007,959	11,619	$	188,828	—	$	—	$	188,828

See accompanying Notes to Condensed Consolidated Financial Statements.

- 7 -

Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Advanced Drainage Systems, Inc. and subsidiaries (collectively referred to as “ADS” or the “Company”), incorporated in Delaware, designs, manufactures and markets innovative water management solutions in the stormwater and onsite septic waste water industries, providing superior drainage solutions for use in the construction and agriculture marketplace. ADS’s products are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications.

The Company is managed and reports results of operations in three reportable segments: Pipe, Infiltrator Water Technologies Ultimate Holdings, Inc ("Infiltrator") and International. The Company also reports the results of its Allied Products and all other business segments as Allied Products and Other.

Historically, sales of the Company’s products have been higher in the first and second quarters of each fiscal year due to favorable weather and longer daylight conditions accelerating construction activity during these periods. Seasonal variations in operating results may also be impacted by inclement weather conditions, such as cold or wet weather, which can delay projects.

Basis of Presentation - The Company prepares its Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Condensed Consolidated Balance Sheet as of March 31, 2022 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 2022 (“Fiscal 2022 Form 10-K”). The accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as of June 30, 2022 and the results of operations for the three months ended June 30, 2022 and cash flows for the three months ended June 30, 2022. The interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, including the notes thereto, filed in the Company’s Fiscal 2022 Form 10-K.

Principles of Consolidation - The Condensed Consolidated Financial Statements include the Company, its wholly-owned subsidiaries, its majority-owned subsidiaries and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company uses the equity method of accounting for equity investments where it exercises significant influence but does not hold a controlling financial interest. Such investments are recorded in Other assets in the Condensed Consolidated Balance Sheets and the related equity earnings from these investments are included in Equity in net income of unconsolidated affiliates in the Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.

Recent Accounting Guidance

There have been no new accounting pronouncements issued or adopted since the filing of the Fiscal 2022 Form 10-K that have significance, or potential significance, to the Condensed Consolidated Financial Statements.

2.ACQUISITIONS

Acquisition of Cultec - On April 29, 2022, the Company completed its acquisition of Cultec, Inc. (“Cultec”). Cultec was a family-owned technology leader in the stormwater and onsite septic wastewater industries. The acquisition of Cultec expands the Company’s portfolio of innovative water management solutions in the stormwater and onsite septic wastewater industries. The total fair value of consideration transferred was $47.5 million.

The following table summarizes the consideration transferred and the preliminary purchase price allocation of assets acquired and liabilities assumed. The purchase price allocation for assets acquired and liabilities assumed is preliminary and will be finalized when valuations are complete and final assessments of the fair value of acquired assets and assumed liabilities are completed. Such finalization may result in material changes from the preliminary purchase price allocation. The Company's estimates and assumptions are subject to change during the measurement

- 8 -

Table of Contents

period (up to one year from the closing date), as the Company continues to finalize the valuations of assets acquired and liabilities assumed.


(Amounts in thousands)	Initial Amount
Accounts receivable	$	5,957
Inventory	4,469
Intangible assets	31,400
Goodwill	9,660
Property, plant and equipment	1,986
Accounts payable	(5,539)
Accrued expenses	(75)
Other liabilities	(366)
Total fair value of consideration transferred	$	47,492

The preliminary goodwill of $9.7 million represents the excess of consideration transferred over the preliminary fair value of assets acquired and liabilities assumed and is attributable to expected operating efficiencies. The goodwill is deductible for income tax purposes and is assigned to Allied Products & Other.

The preliminary purchase price excludes transaction costs. During the three months ended June 30, 2022, the Company incurred $1.5 million of transaction costs related to the acquisition such as legal, accounting, valuation and other professional services. These costs are included in selling, general and administrative expenses in the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income.

The identifiable intangible assets recorded in connection with the closing of the acquisition of Cultec are based on preliminary valuations including customer relationships, patents and developed technology and tradename and trademarks totaling $31.4 million.


(Amounts in thousands)	Preliminary fair value
Customer relationships	$	2,800
Patents and developed technology	16,200
Tradename and trademarks	12,400
Total identifiable intangible assets	$	31,400

The Company has excluded certain disclosures required under ASC 805, Business Combinations as they are not material to the financial statements.

3.REVENUE RECOGNITION

Revenue Disaggregation - The Company disaggregates net sales by Domestic, International and Infiltrator and further disaggregates Domestic and International by product type, consistent with its reportable segment disclosure. This disaggregation level best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Refer to “Note 12. Business Segments Information” for the Company’s disaggregation of Net sales by reportable segment.

Contract Balances - The Company recognizes a contract asset representing the Company’s right to recover products upon the receipt of returned products and a contract liability for the customer refund. The following table presents the balance of the Company’s contract asset and liability as of the periods presented:


	June 30, 2022		March 31, 2022
	(In thousands)
Contract asset - product returns	$	1,061	$	978
Refund liability	2,940		2,356

4.LEASES

Nature of the Company’s Leases - The Company has operating and finance leases for plants, yards, corporate offices, tractors, trailers and other equipment. The Company’s leases have remaining terms of less than one year to

- 9 -

Table of Contents

28 years. A portion of the Company’s yard leases include an option to extend the leases for up to five years. The Company has included renewal options which are reasonably certain to be exercised in its right-of-use assets and lease liabilities.

5.INVENTORIES

Inventories as of the periods presented consisted of the following:


	June 30, 2022		March 31, 2022
	(In thousands)
Raw materials	$	148,527	$	156,050
Finished goods	340,965		338,274
Total inventories	$	489,492	$	494,324

6.NET INCOME PER SHARE AND STOCKHOLDERS' EQUITY

Employee Stock Ownership Plan ("ESOP") - As previously disclosed in the Fiscal 2022 Form 10-K, in April 2022 all currently outstanding 15.6 million shares of Preferred Stock held by the ESOP were converted into 12.0 million shares of the Company’s redeemable common stock at the Conversion rate of 0.7692. The Company’s 401(k) retirement plan (“KSOP”) holds these shares of common stock. When participants sell or forfeit these shares, the shares are no longer subject to the put option of the Internal Revenue Code and are no longer required to be classified in mezzanine equity.

Net Income per Share - For the three months ended June 30, 2021, the Company was required to apply the two-class method to compute both basic and diluted net income per share. Holders of redeemable convertible preferred stock participated in dividends on an as-converted basis when declared on common stock. As a result, redeemable convertible preferred stock met the definition of participating securities. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders. The Company was not required to apply the two-class method to compute net income per share for the three months ended June 30, 2022 as the redeemable common stock and common stock have the same rights to earnings available to common stockholders.

- 10 -

Table of Contents

The following table presents information necessary to calculate net income per share for the periods presented, as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive:


	Three Months Ended June 30,
(In thousands, except per share data)	2022		2021
NET INCOME PER SHARE—BASIC:
Net income attributable to ADS	$	187,146	$	75,987
Adjustments for:
Dividends to participating securities	—		(1,635)
Net income available to common stockholders and participating securities	187,146		74,352
Undistributed income allocated to participating securities	—		(10,933)
Net income available to common stockholders – Basic	$	187,146	$	63,419
Weighted average number of common shares outstanding – Basic	83,144		71,534
Net income per common share – Basic	$	2.25	$	0.89
NET INCOME PER SHARE—DILUTED:
Net income available to common stockholders – Diluted	$	187,146	$	63,419
Weighted average number of common shares outstanding – Basic	83,144		71,534
Assumed restricted stock - nonparticipating	147		282
Assumed exercise of stock options	757		941
Assumed performance units	341		367
Weighted average number of common shares outstanding – Diluted	84,389		73,124
Net income per common share – Diluted	$	2.22	$	0.87
Potentially dilutive securities excluded as anti-dilutive	24		14,102

Stockholders’ Equity – During the three months ended June 30, 2022, the Company repurchased 0.8 million shares of common stock at a cost of $67.4 million. The repurchases were made under the Board of Directors’ authorization in February 2022 to repurchase up to an additional $1.0 billion of ADS Common Stock in accordance with applicable securities laws. As of June 30, 2022, approximately $932.6 million of common stock may be repurchased under the authorization. The repurchase program does not obligate the Company to acquire any particular amount of common stock and may be suspended or terminated at any time at the Company’s discretion.

7.RELATED PARTY TRANSACTIONS

ADS Mexicana - ADS conducts business in Mexico and Central America through its joint venture ADS Mexicana, S.A. de C.V. (“ADS Mexicana”). ADS owns 51% of the outstanding stock of ADS Mexicana and consolidates ADS Mexicana for financial reporting purposes.

On June 6, 2022, the Company and ADS Mexicana amended the Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a borrowing capacity of $9.5 million. The Intercompany Note matures on June 8, 2027. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are determined by certain base rates or Secured Overnight Financing Rate (“SOFR”) plus an applicable margin based on the Leverage Ratio. As of June 30, 2022 and March 31, 2022, there were no borrowings and $1.5 million borrowings, respectively, outstanding under the Intercompany Note.

South American Joint Venture - The Tuberias Tigre - ADS Limitada joint venture (the “South American Joint Venture”) manufactures and sells HDPE corrugated pipe in certain South American markets. ADS owns 50% of the South American Joint Venture. ADS is the guarantor of 50% of the South American Joint Venture’s credit arrangement, and the debt guarantee is shared equally with the joint venture partner. The Company’s maximum potential obligation under this guarantee is $11.0 million as of June 30, 2022. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $22.0 million. The Company does not anticipate any required contributions related to the balance of this credit arrangement. As of June 30, 2022 and March 31, 2022, the outstanding principal balances of the credit facility including letters of credit were $8.6 million and $9.9

- 11 -

Table of Contents

million, respectively. As of June 30, 2022, there were no U.S. dollar denominated loans. The weighted average interest rate as of June 30, 2022 was 5.8% on Chilean peso denominated loans.

8.DEBT

Long-term debt as of the periods presented consisted of the following:


	June 30, 2022		March 31, 2022
	(In thousands)
Term Loan Facility	$	432,500	$	434,250
Senior Notes due 2027	350,000		350,000
Senior Notes due 2030	500,000		—
Revolving Credit Facility	—		114,300
Equipment Financing	27,668		31,254
Total	1,310,168		929,804
Unamortized debt issuance costs	(12,879)		(1,648)
Current maturities	(18,113)		(19,451)
Long-term debt obligations	$	1,279,176	$	908,705

Senior Secured Credit Facilities – In July 2019, the Company entered into the credit agreement (the “Base Credit Agreement”) by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto. In September 2019, the Company amended the Base Credit Agreement (as amended the “Senior Secured Credit Facility”). The Senior Secured Credit Facility provides for a term loan facility in an initial aggregate principal amount of $700 million (the “Term Loan Facility”), a revolving credit facility in an initial aggregate principal amount of up to $350 million (the “Revolving Credit Facility”), a letter of credit sub-facility in the initial aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility (the “L/C Facility”) and a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving Credit Facility (together with the Term Loan Facility, the Revolving Credit Facility and the L/C Facility, the “Senior Secured Credit Facility”).

In May 2022, the Company entered into a Second Amendment (the "Second Amendment") to the Company's Base Credit Agreement with Barclays Bank PLC, as administrative agent under the Term Loan Facility, PNC Bank, National Association, as new administrative agent under the Revolving Credit Facility. Among other things, the Second Amendment (i) amended the Base Credit Agreement by increasing the Revolving Credit Facility (the "Amended Revolving Credit Facility") from $350 million to $600 million (including an increase of the sub-limit for the swing-line sub-facility from $50 million to $60 million), (ii) extended the maturity date of the Revolving Credit Facility to May 26, 2027, (iii) revised the “applicable margin” to provide an additional step-down to 175 basis points (for Term Benchmark based loans) and 75 basis points (for base rate loans) in the event the consolidated senior secured net leverage ratio is less than 2.00 to 1.00, and (iv) reset the “incremental amount” and the investment basket in non-guarantors and joint ventures. The Second Amendment also revises the reference interest rate from LIBOR to SOFR for both the Amended Revolving Credit Facility and the Term Loan Facility. Letters of credit outstanding at June 30, 2022 and March 31, 2022 amount to $5.2 million and $9.2 million, respectively, and reduced the availability of the Revolving Credit Facility.

Senior Notes due 2027 – On September 23, 2019, the Company issued $350.0 million aggregate principal amount of 5.0% Senior Notes due 2027 (the “2027 Notes”) pursuant to an Indenture, dated September 23, 2019 (the “2027 Indenture”), among the Company, the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as Trustee (the “Trustee”). The 2027 Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The 2027 Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) or to persons outside the United States under Regulation S of the Securities Act.

Senior Notes due 2030 – On June 9, 2022, the Company issued $500.0 million aggregate principal amount of 6.375% Senior Notes due 2030 (the “2030 Notes”) pursuant to an Indenture, dated June 9, 2022 (the "2030 Indenture"), amount the Company, the Guarantors and the Trustee. The 2030 Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act or to persons outside the United States under Regulation S of the Securities Act.

- 12 -

Table of Contents

Interest on the 2030 Notes will be payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing on January 15, 2023, at a rate of 6.375% per annum. The Senior Notes will mature on July 15, 2030. The Company used a portion of the net proceeds from the offering of the 2030 Notes to repay in full the outstanding borrowings under its Revolving Credit Facility and will use the remainder for general corporate purposes. The deferred financing costs associated with the 2030 Notes totaled $9.0 million and are recorded as a direct reduction from the carrying amount of the related debt.

The Company may redeem the Notes, in whole or in part, at any time on or after July 15, 2025 at certain specified redemption prices set forth in the Indenture. In addition, at any time prior to July 15, 2025, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium. At any time prior to July 15, 2025, the Company may also redeem up to 40% of the aggregate principal amount of Notes issued under the Indenture with net cash proceeds of certain equity offerings at a redemption price equal to 106.375% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

The 2030 Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the 2030 Indenture or the 2030 Notes and certain provisions related to bankruptcy events. The 2030 Indenture also contains customary negative covenants.

Equipment Financing – In November 2021, the Company purchased material handling equipment, trucks and trailers previously leased under a master lease agreement and classified as finance leases. The purchase was funded with debt through the Master Lease Agreement and Interim Funding Schedule with Fifth Third. The assets acquired are titled to the Company and included in Property, plant and equipment, net on the Company's Condensed Consolidated Balance Sheet. The equipment financing has a term of between 12 and 84 months, based on the life of the equipment, and bears a weighted average interest of 1.4%. The current portion of the equipment financing is $11.1 million and the long-term portion is $16.6 million at June 30, 2022.

Valuation of Debt - The carrying amounts of current financial assets and liabilities approximate fair value because of the immediate or short-term maturity of these items. The following table presents the carrying and fair value of the Company’s 2027 Notes, 2030 Notes and Equipment Financing for the periods presented:


	June 30, 2022				March 31, 2022
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In thousands)
Senior Notes due 2027	$	324,198	$	350,000	$	349,902	$	350,000
Senior Notes due 2030	489,580		500,000		—		—
Equipment Financing	26,784		27,668		29,302		31,254
Total fair value	$	840,562	$	877,668	$	379,204	$	381,254

The fair values of the 2027 Notes and 2030 Notes was determined based on a quoted market data for the Company’s 2027 Notes and 2030 Notes, respectively. The fair value of the Equipment Financing was determined based on a comparison of the interest rate and terms of such borrowings to the rates and terms of similar debt available for the period. The categorization of the framework used to evaluate the 2027 Notes, 2030 Notes and Equipment Financing are considered Level 2. The Company believes the carrying amount on the remaining long-term debt, including the Term Loan Facility and Revolving Credit Facility, is not materially different from its fair value as the interest rates and terms of the borrowings are similar to currently available borrowings.

9.COMMITMENTS AND CONTINGENCIES

Purchase Commitments - The Company has historically secured supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts typically ranged from 1 to 12 months and occur in the ordinary course of business. The Company also enters into equipment purchase contracts with manufacturers. The Company does not have any outstanding purchase commitments as of June 30, 2022.

Litigation and Other Proceedings – The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and administrative

- 13 -

Table of Contents

proceedings will have a material adverse impact on the Company’s financial position or results of operations. The Company records a liability when a loss is considered probable, and the amount can be reasonably estimated.

10.INCOME TAXES

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other one-time charges, as well as the occurrence of discrete events. For the three months ended June 30, 2022 and 2021, the Company utilized an effective tax rate of 22.7% and 25.6%, respectively, to calculate its provision for income taxes. Several items increased the effective rate including state and local income taxes for the three months ended June 30, 2022 and 2021. The Company’s ESOP also increased the effective rate for the three months ended June 30, 2021, which no longer impacts the effective tax rate after the repayment of the ESOP loan and the allocation of the remaining unallocated shares of Preferred Stock in the prior year. Additionally, discrete income tax benefits related to the stock-based compensation windfall decreased the rate for the three months ended June 30, 2022 and 2021.

11.STOCK-BASED COMPENSATION

ADS has several programs for stock-based payments to employees and non-employee members of its Board of Directors, including stock options, performance-based restricted stock units and restricted stock. Equity-classified restricted stock awards are measured based on the grant-date estimated fair value of each award. The Company accounts for all restricted stock granted to Directors as equity-classified awards. The Company recognized stock-based compensation expense in the following line items of the Condensed Consolidated Statements of Operations for the periods presented:


	Three Months Ended June 30,
	2022		2021
	(In thousands)
Component of income before income taxes:
Cost of goods sold	$	674	$	634
Selling, general and administrative expenses	5,599		6,017
Total stock-based compensation expense	$	6,273	$	6,651

The following table summarizes stock-based compensation expense by award type for the periods presented:


	Three Months Ended June 30,
	2022		2021
	(In thousands)
Stock-based compensation expense:
Stock Options	$	1,279	$	753
Restricted Stock	1,761		1,359
Performance-based Restricted Stock Units	2,740		4,188
Non-Employee Directors	493		351
Total stock-based compensation expense	$	6,273	$	6,651

2017 Omnibus Incentive Plan

On May 24, 2017, the Board of Directors approved the 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) which was approved by the Company’s stockholders on July 17, 2017. The 2017 Incentive Plan provides for the issuance of a maximum of 5.0 million shares of the Company’s common stock for awards made thereunder, which awards may consist of stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, cash-based awards, performance awards (which may take the form of performance cash, performance units or performance shares) or other stock-based awards.

Restricted Stock – During the three months ended June 30, 2022, the Company granted 0.1 million shares of restricted stock with a grant date fair value of $8.5 million.

- 14 -

Table of Contents

Performance-based Restricted Stock Units ("Performance Units") – During the three months ended June 30, 2022, the Company granted 0.1 million performance share units at a grant date fair value of $6.6 million.

Options – During the three months ended June 30, 2022, The Company granted 0.1 million nonqualified stock options under the 2017 Incentive Plan with a grant date fair value of $5.5 million. The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The following table summarizes the assumptions used to estimate the fair value of stock-options during the periods presented:


			Three Months Ended June 30, 2022
Common stock price			$99.29
Expected stock price volatility			41.1%
Risk-free interest rate			2.9%
Weighted-average expected option life (years)			6
Dividend yield			0.48%

12.BUSINESS SEGMENTS INFORMATION

The Company operates its business in three distinct reportable segments: “Pipe”, “International” and “Infiltrator.” “Allied Products & Other” represents the Company’s Allied Products and all other business segments. The Chief Operating Decision Maker (the “CODM”) evaluates segment reporting based on Net Sales and Segment Adjusted Gross Profit. The Company calculated Segment Adjusted Gross Profit as net sales less costs of goods sold, depreciation and amortization, stock-based compensation and non-cash charges. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources.

Pipe – The Pipe segment manufactures and markets high performance thermoplastic corrugated pipe throughout the United States. The Company maintains and serves these markets through product distribution relationships with many of the largest national and independent waterworks distributors, buying groups and co-ops, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the United States.

Products include single wall pipe, N-12 HDPE pipe sold into the Storm sewer, Infrastructure and Agriculture markets, High Performance polypropylene pipe sold into the Storm sewer, Infrastructure and sanitary sewer markets. Products are designed primarily for storm water management in the construction and infrastructure marketplace across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure. Products are manufactured using HDPE and polypropylene plastic material.

Infiltrator – Infiltrator is a leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. Infiltrator products are used in onsite septic wastewater treatment systems in the United States and Canada.

International – The International segment manufactures and markets pipe and allied products in certain regions outside of the United States, including Company owned facilities in Canada, subsidiaries that distribute to Europe and the Middle East, exports and through the Company’s joint ventures with local partners in Mexico and South America. The Company’s Mexican joint venture, ADS Mexicana, primarily serves the Mexican and Central American markets, while its South American Joint Venture, Tigre-ADS, is the primary channel to serve the South American markets. The Company’s International product lines include single wall pipe, N-12 HDPE pipe, high performance PP pipe and certain geographies also sell our broad line of Allied Products.

Allied Products & Other – Allied Products and Other manufactures and markets products throughout the United States. Products include StormTech, Nyloplast, ARC Septic Chambers, Inserta Tee, BaySaver filters and water quality structures, Fittings, Cultec and FleXstorm. The Company maintains and serves these markets through product distribution relationships with many of the largest national and independent waterworks distributors, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the United States. The Company also sells through a broad variety of buying groups and co-ops in the United States. The Company aggregates operating segments within the Allied Products & Other segment disclosure. None of the operating segments within the Allied Products & Other businesses segment disclosure exceeds the quantitative thresholds for separate segment reporting.

- 15 -

Table of Contents

The following table sets forth reportable segment information with respect to the amount of Net sales contributed by each class of similar products for the periods presented:


	Three Months Ended
	June 30, 2022						June 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	$	524,857	$	(9,874)	$	514,983	$	374,010	$	(1,903)	$	372,107
Infiltrator	166,290		(28,906)		137,384		126,742		(19,037)		107,705
International
International - Pipe	53,419		(5,859)		47,560		50,838		(2,914)		47,924
International - Allied Products & Other	18,095		—		18,095		14,528		—		14,528
Total International	71,514		(5,859)		65,655		65,366		(2,914)		62,452
Allied Products & Other	198,909		(2,745)		196,164		127,036		—		127,036

ADVANCED DRAINAGE SYSTEMS, INC. [WMS] Filings
10-Q	[2022-08-04]
10-K	[2022-05-19]
10-Q	[2022-02-03]
10-Q	[2021-11-04]
10-Q	[2021-08-05]
10-K	[2021-05-27]
10-Q	[2021-02-04]
10-Q	[2020-11-05]
10-Q	[2020-08-06]
10-K	[2020-06-01]
10-Q	[2020-02-06]
10-Q	[2019-11-12]
10-Q	[2019-08-01]
10-K	[2019-05-30]
10-Q	[2019-02-07]
10-Q	[2018-11-08]
10-Q	[2018-08-09]
10-K	[2018-05-30]
10-Q	[2018-02-09]
10-Q	[2017-11-06]
10-Q	[2017-08-03]
10-K	[2017-05-30]
10-Q	[2017-02-09]
10-Q	[2017-01-20]
10-Q	[2017-01-10]
10-K	[2016-09-15]
10-Q	[2016-05-31]
10-Q	[2016-05-31]
10-Q	[2016-05-31]
10-K	[2016-03-29]
10-Q	[2015-02-09]
S-1	[2014-11-17]
10-Q	[2014-11-10]
10-Q	[2014-09-05]
S-1	[2014-04-02]