wms-ex991

HILLIARD, Ohio – (February 7, 2019) – Advanced Drainage Systems, Inc. (NYSE: WMS) (“ADS” or the “Company”), a leading global manufacturer of water management products and solutions for non-residential, residential, infrastructure and agricultural applications, today announced financial results for the third fiscal quarter ended December 31, 2018.

Scott Barbour, President and Chief Executive Officer of ADS commented, “We are on track to meet our financial guidance for the year, despite unseasonably wet weather conditions throughout the United States and Canada in November and December which shifted sales some volume from our fiscal third quarter to our fiscal fourth quarter. As we look ahead, we remain focused on improved execution and key strategies to drive above-market growth, while continuing to mitigate inflationary pressures, increase profitability and drive shareholder value. We are confident in the health of our core construction end markets and have a clear line of sight to execute on the guidance we are reaffirming today.”

Barbour continued, “This quarter’s domestic construction market growth of 6% was driven by strength in our non-residential and residential end markets as well as broad-based growth across both Pipe and Allied Products. The agriculture market remained challenged this quarter partially due to weather conditions in key geographies such as the Midwest and Ontario. However, despite the lower than anticipated sales volume, our third quarter Adjusted EBITDA margin was on track to our plan. Recall, the third quarter margin in the prior year was a high-water mark, benefitting from pricing actions we took in September 2017 to get ahead of inflationary pressure on resin due to the hurricanes.”

Net sales decreased 0.8% to $318.1 million, as compared to $320.8 million in the prior year. Domestic net sales increased 0.8% to $279.2 million as compared to $276.9 million in the prior year, driven by strength in construction market sales. International net sales decreased 11.4% to $38.9 million as compared to $44.0 million in the prior year, driven primarily by sales in Canada.

Gross profit decreased 7.0% to $72.4 million, as compared to $77.8 million the prior year quarter. As a percentage of net sales, gross profit decreased 150 basis points to 22.8%, compared to 24.3% in the prior year. The decrease is primarily due to higher inflationary costs on resin, transportation and wages, among others.

Adjusted EBITDA (Non-GAAP) decreased 13.5% to $48.4 million, as compared to $56.0 million in the prior year quarter. As a percentage of net sales, Adjusted EBITDA decreased 230 basis points to 15.2% as compared to 17.5% in the prior year. The decrease in Adjusted EBITDA margin was largely attributed to the factors mentioned above.

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.”

Net sales increased 3.0% to $1,112.5 million, as compared to $1,080.2 million in the prior year. Domestic net sales increased 2.6% to $972.9 million as compared to $948.3 million in the prior year, primarily driven by solid construction market demand, favorable pricing and strong Allied product sales. International net sales increased 5.7% to $139.6 million as compared to $132.0 million in the prior year, driven by growth in Mexico and our Exports business.

Gross profit increased 5.1% to $267.5 million, as compared to $254.4 million the prior year. As a percentage of net sales, gross profit increased 50 basis points to 24.0% compared to 23.5% in the prior year. The increase is primarily due to favorable pricing and cost containment, partially offset by higher inflationary costs on resin, transportation and wages, among others.

Adjusted EBITDA (Non-GAAP) increased 6.5% to $195.1 million, as compared to $183.2 million in the prior year. As a percentage of net sales, Adjusted EBITDA increased 50 basis points to 17.5% as compared to 17.0% in the prior year. The increase in Adjusted EBITDA margin was largely attributed to the factors mentioned above.

Net cash provided by operating activities increased 6.6% to $148.0 million, as compared to $138.9 million in the prior year. Free cash flow (Non-GAAP) increased 12.6% to $116.9 million, as compared to $103.8 million in the prior year. Net debt (total debt and capital lease obligations net of cash) was $294.1 million as of December 31, 2018, a decrease of $68.1 million from March 31, 2018.

Based on current visibility, backlog of existing orders and business trends, the Company reaffirmed its net sales and Adjusted EBITDA targets for fiscal 2019. Net sales are expected to be in the range of $1.375 billion to $1.425 billion and Adjusted EBITDA is expected to be in the range of $225 to $240 million. Capital expenditures are expected to be approximately $40 to $50 million.

The Company will host an investor conference call and webcast on Thursday, February 7, 2019 at 10:00 a.m. Eastern Time. The live call can be accessed by dialing 1-844-484-0244 (US toll-free) or 1-647-689-5142 (international) and asking to be connected to the Advanced Drainage Systems, Inc. call. The live webcast will also be accessible via the "Events Calendar” section of the Company’s Investor Relations website, www.investors.ads-pipe.com. An archived version of the webcast will be available for one year following the call.

Advanced Drainage Systems is the leading manufacturer of high performance thermoplastic corrugated pipe, providing a comprehensive suite of water management products and superior drainage solutions for use in the construction and infrastructure marketplace. Its innovative products are used across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure applications. The Company has established a leading position in many of these end markets by leveraging its national sales and distribution platform, overall product breadth and scale and manufacturing excellence. Founded in 1966, the Company operates a global network of approximately 55 manufacturing plants and over 30 distribution centers. To learn more about ADS, please visit the Company’s website at www.ads-pipe.com.

Certain statements in this press release may be deemed to be forward-looking statements. These statements are not historical facts but rather are based on the Company’s current expectations, estimates and projections regarding the Company’s business, operations and other factors relating thereto. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “confident” and similar expressions are used to identify these forward-looking statements. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include: fluctuations in the price and availability of resins and other raw materials and our ability to pass any increased costs of raw materials on to our customers in a timely manner; volatility in general business and economic conditions in the markets in which we operate, including, without limitation, factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence; cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending; the risks of increasing competition in our existing and future markets, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials; our ability to continue to convert current demand for concrete, steel and PVC pipe products into demand for our high performance thermoplastic corrugated pipe and Allied Products; the effect of weather or seasonality; the loss of any of our significant customers; the risks of doing business internationally; the risks of conducting a portion of our operations through joint ventures; our ability to expand into new geographic or product markets; our ability to achieve the acquisition component of our growth

strategy; the risk associated with manufacturing processes; our ability to manage our assets; the risks associated with our product warranties; our ability to manage our supply purchasing and customer credit policies; the risks associated with our self-insured programs; our ability to control labor costs and to attract, train and retain highly-qualified employees and key personnel; our ability to protect our intellectual property rights; changes in laws and regulations, including environmental laws and regulations; our ability to project product mix; the risks associated with our current levels of indebtedness; fluctuations in our effective tax rate, including from the recently enacted Tax Cuts and Jobs Act; changes to our operating results, cash flows and financial condition attributable to the recently enacted Tax Cuts and Jobs Act; our ability to meet future capital requirements and fund our liquidity needs; the risk that additional information may arise that would require the Company to make additional adjustments or revisions or to restate the financial statements and other financial data for certain prior periods and any future periods, any delay in the filing of any filings with the Securities and Exchange Commission (“SEC”); the review of potential weaknesses or deficiencies in the Company’s disclosure controls and procedures, and discovering weaknesses of which we are not currently aware or which have not been detected and the other risks and uncertainties described in the Company’s filings with the SEC. New risks and uncertainties emerge from time to time and it is not possible for the Company to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this press release. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company’s expectations, objectives or plans will be achieved in the timeframe anticipated or at all. Investors are cautioned not to place undue reliance on the Company’s forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
(Amounts in thousands, except per share data)	2018			2017			2018			2017
Net sales	$	318,113		$	320,832		$	1,112,515		$	1,080,240
Cost of goods sold		245,714			243,006			845,052			825,874
Gross profit		72,399			77,826			267,463			254,366
Operating expenses:
Selling		23,260			22,903			72,156			70,348
General and administrative		22,116			23,788			65,082			74,351
Loss on disposal of assets and costs from exit and disposal activities		144			1,924			1,572			10,468
Intangible amortization		1,976			2,012			5,945			6,071
Income from operations		24,903			27,199			122,708			93,128
Other expense:
Interest expense		5,695			3,086			14,028			12,620
Derivative loss (gains) and other expense (income), net		634			(963	)		(86	)		(4,456	)
Income before income taxes		18,574			25,076			108,766			84,964
Income tax expense (benefit)		2,490			(7,371	)		28,968			15,812
Equity in net (income) loss of unconsolidated affiliates		(466	)		(768	)		225			(496	)
Net income		16,550			33,215			79,573			69,648
Less: net income attributable to noncontrolling interest		738			1,110			2,811			1,938
Net income attributable to ADS		15,812			32,105			76,762			67,710
Dividends to redeemable convertible preferred stockholders		(467	)		(456	)		(1,442	)		(1,415	)
Dividends paid to unvested restricted stockholders		(25	)		(12	)		(55	)		(47	)
Net income available to common stockholders and participating securities		15,320			31,637			75,265			66,248
Undistributed income allocated to participating securities		(1,027	)		(2,766	)		(6,048	)		(5,588	)
Net income available to common stockholders	$	14,293		$	28,871		$	69,217		$	60,660

Weighted average common shares outstanding:
Basic		57,180			55,917			56,925			55,497
Diluted		57,685			56,459			57,482			56,124
Net income per share:
Basic	$	0.25		$	0.52		$	1.22		$	1.09
Diluted	$	0.25		$	0.51		$	1.20		$	1.08
Cash dividends declared per share	$	0.08		$	0.07		$	0.24		$	0.21

	As of
(Amounts in thousands)	December 31, 2018			March 31, 2018
ASSETS
Current assets:
Cash	$	19,758		$	17,587
Receivables, net		152,538			171,961
Inventories		246,451			263,792
Other current assets		7,641			5,113
Total current assets		426,388			458,453
Property, plant and equipment, net		402,819			399,381
Other assets:
Goodwill		102,423			103,017
Intangible assets, net		38,554			44,437
Other assets		36,856			37,954
Total assets	$	1,007,040		$	1,043,242
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations	$	26,165		$	26,848
Current maturities of capital lease obligations		23,354			22,007
Accounts payable		66,361			105,521
Other accrued liabilities		67,567			60,560
Accrued income taxes		6,608			6,307
Total current liabilities		190,055			221,243
Long-term debt obligations, net		200,764			270,900
Long-term capital lease obligations		63,541			59,963
Deferred tax liabilities		35,472			32,304
Other liabilities		22,220			25,023
Total liabilities		512,052			609,433
Mezzanine equity:
Redeemable convertible preferred stock		285,117			291,247
Deferred compensation — unearned ESOP shares		(182,980	)		(190,168	)
Redeemable noncontrolling interest in subsidiaries		-			8,471
Total mezzanine equity		102,137			109,550
Stockholders’ equity:
Common stock		11,433			11,426
Paid-in capital		383,300			364,908
Common stock in treasury, at cost		(9,117	)		(8,277	)
Accumulated other comprehensive loss		(27,675	)		(21,247	)
Retained earnings (deficit)		22,017			(39,214	)
Total ADS stockholders’ equity		379,958			307,596
Noncontrolling interest in subsidiaries		12,893			16,663
Total stockholders’ equity		392,851			324,259
Total liabilities, mezzanine equity and stockholders’ equity	$	1,007,040		$	1,043,242

	Nine Months Ended December 31,
(Amounts in thousands)	2018			2017
Cash Flow from Operating Activities
Net income	$	79,573		$	69,648
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		52,912			55,793
Deferred income taxes		2,316			(12,738	)
Loss on disposal of assets and costs from exit and disposal activities		1,572			10,468
ESOP and stock-based compensation		16,142			13,086
Amortization of deferred financing charges		561			746
Fair market value adjustments to derivatives		1,976			(1,988	)
Equity in net loss (income) of unconsolidated affiliates		225			(496	)
Other operating activities		(3,493	)		12,046
Changes in working capital:
Receivables		16,768			(14,817	)
Inventories		15,705			44,560
Prepaid expenses and other current assets		(2,562	)		2,105
Accounts payable, accrued expenses, and other liabilities		(33,673	)		(39,504	)
Net cash provided by operating activities		148,022			138,909
Cash Flows from Investing Activities
Capital expenditures		(31,130	)		(35,124	)
Cash paid for acquisitions, net of cash acquired		-			(1,990	)
Proceeds from sale of corporate-owned life insurance		-			5,959
Other investing activities		1,109			(570	)
Net cash used in investing activities		(30,021	)		(31,725	)
Cash Flows from Financing Activities
Proceeds from Revolving Credit Facility		331,600			397,450
Payments on Revolving Credit Facility		(376,600	)		(431,950	)
Payments on Term Loan		-			(72,500	)
Proceeds from Senior Notes		-			75,000
Payments on Senior Notes		(25,000	)		(25,000	)
Debt issuance costs		-			(2,268	)
Payments of notes, mortgages, and other debt		(700	)		(1,675	)
Payments on capital lease obligations		(17,791	)		(18,176	)
Acquisition of noncontrolling interest in BaySaver		(8,821	)		-
Cash dividends paid		(21,084	)		(13,511	)
Proceeds from exercise of stock options		3,937			7,606
Repurchase of common stock		-			(7,947	)
Other financing activities		(920	)		(1,558	)
Net cash provided by financing activities		(115,379	)		(94,529	)
Effect of exchange rate changes on cash		(451	)		(698	)
Net change in cash		2,171			11,957
Cash at beginning of period		17,587			6,450
Cash at end of period	$	19,758		$	18,407

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

	Three Months Ended							Nine Months Ended
(Amounts in thousands	December 31,				%			December 31,				%
except percentages)	2018		2017		Variance			2018		2017		Variance
Domestic
Pipe	$	196,675	$	198,713		(1.0	%)	$	688,025	$	683,512		0.7	%
Allied Products		82,504		78,159		5.6	%		284,921		264,741		7.6	%
Domestic net sales	$	279,179	$	276,872		0.8	%	$	972,946	$	948,253		2.6	%
International
Pipe	$	29,580	$	33,231		(11.0	%)	$	108,036	$	101,560		6.4	%
Allied Products		9,354		10,729		(12.8	%)		31,533		30,427		3.6	%
International net sales	$	38,934	$	43,960		(11.4	%)	$	139,569	$	131,987		5.7	%
Consolidated
Pipe	$	226,255	$	231,944		(2.5	%)	$	796,061	$	785,072		1.4	%
Allied Products		91,858		88,888		3.3	%		316,454		295,168		7.2	%
Net sales	$	318,113	$	320,832		(0.8	%)	$	1,112,515	$	1,080,240		3.0	%

The Company established an ESOP to enable employees to acquire stock ownership in ADS in the form of redeemable convertible preferred shares (“preferred shares”). All preferred shares will be converted to common shares by plan maturity, which will be no later than March 2023. The ESOP’s conversion of preferred shares into common shares will have a meaningful impact on net income, net income per share and common shares outstanding. The common shares outstanding will be greater after conversion.

The impact of the ESOP on net income includes the ESOP deferred compensation attributable to the preferred shares allocated to employee accounts during the period, which is a non-cash charge to our earnings and not deductible for income tax purposes.

The conversion of the preferred shares will increase the number of common shares outstanding. Preferred shares will convert to common shares at plan maturity, or upon retirement, disability, death or vested terminations over the life of the plan.

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.

This press release includes references to 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.

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
(Amounts in thousands)	2018			2017			2018			2017
Net income	$	16,550		$	33,215		$	79,573		$	69,648
Depreciation and amortization		17,549			17,852			52,912			55,793
Interest expense		5,695			3,086			14,028			12,620
Income tax expense (benefit)		2,490			(7,371	)		28,968			15,812
EBITDA		42,284			46,782			175,481			153,873
Derivative fair value adjustments		1,067			(145	)		1,209			(735	)
Foreign currency transaction (gains) losses		(423	)		(430	)		224			(2,878	)
Loss on disposal of assets and costs from exit and disposal activities		144			1,924			1,572			10,468
Unconsolidated affiliates interest, tax, depreciation and amortization		587			637			1,237			2,060
Contingent consideration remeasurement		(8	)		1			(15	)		33
Stock-based compensation expense		1,658			1,640			5,029			5,140
ESOP deferred stock-based compensation		2,724			2,737			11,113			7,946
Executive retirement (benefit) expense		50			73			(228	)		982
Restatement-related (benefit) costs		(742	)		888			(1,938	)		3,390
Legal settlement		-			1,800			-			1,800
Transaction costs		83			92			404			1,149
Strategic growth and operational improvement initiatives		1,010			-			1,010			-
Adjusted EBITDA	$	48,434		$	55,999		$	195,098		$	183,228

	Three Months Ended December 31,
	2018						2017
(Amounts in thousands)	Domestic			International			Domestic			International
Net income	$	13,333		$	3,217		$	29,755		$	3,460
Depreciation and amortization		15,690			1,859			15,804			2,048
Interest expense		5,621			74			3,007			79
Income tax expense (benefit)		1,885			605			(9,117	)		1,746
EBITDA		36,529			5,755			39,449			7,333
Derivative fair value adjustments		1,067			-			(145	)		-
Foreign currency transaction (gains) losses		-			(423	)		-			(430	)
Loss on disposal of assets and costs from exit and disposal activities		89			55			1,940			(16	)
Unconsolidated affiliates interest, tax, depreciation and amortization		-			587			315			322
Contingent consideration remeasurement		(8	)		-			1			-
Stock-based compensation expense		1,658			-			1,640			-
ESOP deferred stock-based compensation		2,724			-			2,737			-
Executive retirement (benefit) expense		50			-			73			-
Restatement-related (benefit) costs		(742	)		-			888			-
Legal settlement		-			-			1,800			-
Transaction costs		83			-			92			-
Strategic growth and operational improvement initiatives		1,010			-			-			-
Adjusted EBITDA	$	42,460		$	5,974		$	48,790		$	7,209

	Nine Months Ended December 31,
	2018					2017
(Amounts in thousands)	Domestic			International		Domestic			International
Net income	$	70,539		$	9,034	$	61,837		$	7,811
Depreciation and amortization		47,281			5,631		49,725			6,068
Interest expense		13,812			216		12,363			257
Income tax expense (benefit)		26,660			2,308		12,583			3,229
EBITDA		158,292			17,189		136,508			17,365
Derivative fair value adjustments		1,209			-		(735	)		-
Foreign currency transaction gains (losses)		-			224		-			(2,878	)
Loss on disposal of assets and costs from exit and disposal activities		961			611		10,253			215
Unconsolidated affiliates interest, tax, depreciation and amortization		-			1,237		886			1,174
Contingent consideration remeasurement		(15	)		-		33			-
Stock-based compensation expense		5,029			-		5,140			-
ESOP deferred stock-based compensation		11,113			-		7,946			-
Executive retirement expense (benefit)		(228	)		-		982			-
Restatement-related costs		(1,938	)		-		3,390			-
Legal settlement		-			-		1,800			-
Transaction costs		398			6		1,149			-
Strategic growth and operational improvement initiatives		1,010			-		-			-
Adjusted EBITDA	$	175,831		$	19,267	$	167,352		$	15,876