Advanced Drainage Systems, Inc.: Form 10-Q for the period ended Dec 31, 2022

Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q ("Form 10-Q"), the terms “we,” “our,” “us,” “ADS” and the “Company” refer to Advanced Drainage Systems, Inc. and its directly- and indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean only Advanced Drainage Systems, Inc. exclusive of its subsidiaries. We consolidate our joint ventures for purposes of GAAP, except for our South American Joint Venture.

Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, references to “year” pertain to our fiscal year. For example, 2023 refers to fiscal 2023, which is the period from April 1, 2022 to March 31, 2023.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our Condensed Consolidated Financial Statements and related footnotes included elsewhere in this Form 10-Q and with the audited Consolidated Financial Statements included in our Fiscal 2022 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 19, 2022. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in the forward-looking statements. For more information, see the section below entitled “Forward Looking Statements.”

Overview

ADS is the leading manufacturer of innovative water management solutions in the stormwater and onsite septic wastewater industries, providing superior drainage solutions for use in the construction and agriculture marketplaces. Our innovative products, for which we hold many patents, are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, industry-acclaimed engineering support, overall product breadth and scale plus manufacturing excellence.

Executive Summary

Third Quarter Fiscal 2023 Results

• Net sales decreased 8.4% to $655.2 million
• Net income increased 11.7% to $83.2 million
• Adjusted EBITDA, a non-GAAP measure, decreased 3.6% to $169.7 million

Net sales decreased $60.2 million, or 8.4%, to $655.2 million, as compared to $715.4 million in the prior year quarter. Domestic pipe sales decreased $24.3 million, or 6.1%, to $375.7 million. Domestic allied products & other sales increased $1.6 million, or 1.1%, to $149.0 million. Infiltrator sales decreased $44.8 million, or 30.1%, to $103.9 million. The decrease in domestic net sales was driven by sales in the U.S. construction end markets. International sales increased $3.1 million, or 5.6%, to $59.0 million, driven by growth in the Canadian and Mexican businesses.

Gross profit increased $14.9 million, or 7.1%, to $223.9 million as compared to $209.0 million in the prior year. The increase in gross profit is primarily due to the favorable pricing on pipe, onsite septic and allied products as well as favorable material cost. This increase was partially offset by a decrease in volume, inflationary cost pressures and higher manufacturing costs.

Adjusted EBITDA, a non-GAAP measure, decreased $6.4 million, or 3.6%, to $169.7 million, as compared to $176.2 million in the prior year. The decrease is primarily due to the factors mentioned above, as well as an increase in selling, general and administrative expenses. As a percentage of Net sales, Adjusted EBITDA was 25.9% as compared to 24.6% in the prior year.

Year-to-date Fiscal 2023 Results

• Net sales increased 17.3% to $2,453.6 million
• Net income increased 86.5% to $425.0 million
• Adjusted EBITDA, a non-GAAP measure, increased 44.2% to $732.0 million

Net sales increased $362.4 million, or 17.3%, to $2,453.6 million, as compared to $2,091.1 million in the prior year quarter. Domestic pipe sales increased $243.0 million, or 21.0%, to $1,401.6 million. Domestic allied products & other sales increased $129.9 million, or 30.9%, to $550.2 million. Infiltrator sales decreased $0.4 million, or 0.1%, to $420.9 million. The increase in domestic net sales was driven by double-digit sales growth in the U.S. construction end markets.

International sales increased $19.2 million, or 10.4%, to $203.9 million, driven by strong sales growth in the Canadian, Mexican and Exports businesses.

Gross profit increased $285.8 million, or 46.8%, to $896.0 million as compared to $610.2 million in the prior year. The increase in gross profit is primarily due to the favorable pricing on pipe, onsite septic and allied products as well as favorable material cost. This increase was partially offset by a decrease in volume, inflationary cost pressures and higher manufacturing costs.

Adjusted EBITDA, a non-GAAP measure, increased $224.4 million, or 44.2%, to $732.0 million, as compared to $507.5 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of Net sales, Adjusted EBITDA was 29.8% as compared to 24.3% in the prior year.

Results of Operations

Comparison of the Three Months Ended December 31, 2022 to the Three Months Ended December 31, 2021

The following table summarizes our operating results as a percentage of Net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.

(In thousands)

Net sales - The following table presents Net sales to external customers by reportable segment for the three months ended December 31, 2022 and 2021.

(Amounts in thousands)

Our consolidated Net sales for the three months ended December 31, 2022 decreased by $60.2 million, or 8.4%, compared to the same period in fiscal 2022. The decrease in Net sales was primarily a result of decreases in our Infiltrator segment and in our domestic Pipe segment.

Our Pipe and Infiltrator segments experienced decreased sales primarily due to lower volume offset by improved pricing/mix of products sold. The increase in our International segment was driven by growth in the Canadian and Mexican businesses. Growth in Allied Products & Other was driven mainly by the acquisition of Cultec partially offset by volume decreases.

Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the three months ended December 31, 2022 and 2021.

(Amounts in thousands)

Our consolidated Cost of goods sold for the three months ended December 31, 2022 decreased by $75.1 million, or 14.8%, and our consolidated Gross profit increased by $14.9 million, or 7.1%, compared to the same period in fiscal 2022. The increase in our gross profit was primarily due to improved pricing as well as favorable material cost partially offset by a decrease in volume, inflationary cost pressures along with higher manufacturing costs.

Selling, general and administrative expenses

(Amounts in thousands)

Selling, general and administrative expenses for three months ended December 31, 2022 increased $5.9 million from the same period in fiscal 2022 and as a percentage of sales, increased by 1.9%. The increase in Selling, general and administrative expenses is the result of increased headcount.

(Gain) loss on disposal of assets and costs from exit and disposal activities - The change in (Gain) loss on disposal of assets and costs from exit and disposal activities is primarily due to asset disposals in fiscal 2022.

Intangible amortization - Intangible amortization decreased $1.3 million due to the accelerated method of amortization for customer relationships.

Interest expense - Interest expense increased $11.2 million in the three months ended December 31, 2022 compared to the same period in the previous fiscal year. The increase was primarily due to increased average debt levels.

Derivative gains and other income, net - Derivative gains and other income increased by $3.1 million for the three months ended December 31, 2022 compared to the same period in the previous fiscal year primarily due to interest income.

Income tax expense - The following table presents the effective tax rates for the three months ended December 31, 2022 and 2021.

The change in the effective tax rate for the three months ended December 31, 2022 was primarily related to the transition of the Company’s Employee Stock Ownership Plan (“ESOP”) and the repayment of the ESOP loan in the prior year. See “Note 10. Income Taxes” for additional information.

Equity in net income of unconsolidated affiliates - The Equity in net income of unconsolidated affiliates decreased for the three months ended December 31, 2022 as compared to the same period in the previous fiscal year.

Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased for three months ended December 31, 2022 due to an increase in net income at our ADS Mexicana joint venture.

Comparison of the Nine Months Ended December 31, 2022 to the Nine Months Ended December 31, 2021

The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.

(In thousands)

Net sales - The following table presents Net sales to external customers by reportable segment for the nine months ended December 31, 2022 and 2021.

(Amounts in thousands)

Our consolidated Net sales for the nine months ended December 31, 2022 increased by $362.4 million, or 17.3%, compared to the same period in fiscal 2022. The increase in Net sales was primarily a result of growth in our domestic Pipe segment and Allied Products & Other.

Our Pipe and Infiltrator segments experienced growth primarily through improved pricing/mix of products sold partially offset by volume decreases. The increase in our International segment was driven by growth in the Canadian and Mexican businesses. Growth in Allied Products & Other was driven mainly by improved price/mix of products offerings and the acquisition of Cultec partially offset by volume decreases.

Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the nine months ended December 31, 2022 and 2021.

(Amounts in thousands)

Our consolidated Cost of goods sold for the nine months ended December 31, 2022 increased by $76.6 million, or 5.2%, and our consolidated Gross profit increased by $285.8 million, or 46.8%, compared to the same period in fiscal 2022. The increase in our gross profit was due to an increase in net sales from improved pricing partially offset by a decrease in volume, inflationary cost pressures and higher manufacturing costs.

Selling, general and administrative expenses

(Amounts in thousands)

Selling, general and administrative expenses for nine months ended December 31, 2022 increased $30.9 million from the same period in fiscal 2022 and as a percentage of sales, decreased by 0.4%. The increase in Selling, general and administrative expenses is the result of increased headcount to support business growth.

(Gain) loss on disposal of assets and costs from exit and disposal activities - The change in (Gain) loss on disposal of assets and costs from exit and disposal activities is primarily due to asset disposals in fiscal 2022.

Intangible amortization - Intangible amortization decreased $4.9 million due to the accelerated method of amortization for customer relationships.

Interest expense - Interest expense increased $24.2 million in the nine months ended December 31, 2022 compared to the same period in the previous fiscal year. The increase was primarily due to increased average debt levels.

Derivative gains and other income, net - Derivative gains and other income increased by $2.8 million for the nine months ended December 31, 2022 compared to the same period in the previous fiscal year primarily due to increased interest income.

Income tax expense - The following table presents the effective tax rates for the nine months ended December 31, 2022 and 2021.

The change in the effective tax rate for the nine months ended December 31, 2022 was primarily related to the transition of the Company’s ESOP and the repayment of the ESOP loan in the prior year. See “Note 10. Income Taxes” for additional information.

Equity in net income of unconsolidated affiliates - The Equity in net income of unconsolidated affiliates increased for the nine months ended December 31, 2022 as compared to the same period in the previous fiscal year due to an increase in the current period income at our South American Joint Venture.

Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased for nine months ended December 31, 2022 due to an increase in net income at our ADS Mexicana joint venture.

Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, have been presented in this Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP and should not be considered as alternatives to net income as measures of financial performance or cash flows from operations or any other performance measure derived in accordance with GAAP. We calculate Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.

Adjusted EBITDA and Adjusted EBITDA Margin are included in this Form 10-Q because they are key metrics used by management and our board of directors to assess our consolidated financial performance. These non-GAAP financial measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use these non-GAAP financial measures to supplement GAAP measures of performance to evaluate the effectiveness of our consolidated business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We use Adjusted EBITDA Margin to evaluate our ability to generate profitable sales.

Adjusted EBITDA and Adjusted EBITDA Margin contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs, cash expenditures to replace assets being depreciated and amortized and interest expense, or the cash requirements necessary to service interest on principal payments on our indebtedness. In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency transaction losses. Management compensates for these limitations by relying on our GAAP results and using non-GAAP measures on a supplemental basis.

The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods presented.

(In thousands)

(In thousands)

(a) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with business or asset acquisitions and dispositions.

(b) Includes derivative fair value adjustments, foreign currency transaction (gains) losses, interest income, the proportionate share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is accounted for under the equity method of accounting and executive retirement expense.

Liquidity and Capital Resources

Historically we have funded our operations through internally generated cash flow supplemented by debt financings, equity issuance and finance and operating leases. These sources have been sufficient historically to fund our primary liquidity requirements, including working capital, capital expenditures, debt service and dividend payments for our common stock. From time to time, we may explore additional financing methods and other means to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.

The following table presents key liquidity metrics utilized by management. The table includes the non-GAAP measure, Free Cash Flow, which is further discussed and defined below, and Leverage ratio which is calculated as net debt divided by the trailing twelve months Adjusted EBITDA.

(Amounts in thousands)

Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures. Free cash flow is a measure used by management and our Board of Directors to assess our ability to generate cash. Accordingly, free cash flow has been presented in this Form 10-Q as a supplemental measure of liquidity that is not required by, or presented in accordance with GAAP, because 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.

Free cash flow is not a GAAP measure of our liquidity and should not be considered as an alternative to cash flow from operating activities as a measure of liquidity or any other liquidity measure derived in accordance with GAAP. Our measure of free cash flow is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

The following table summarizes our available liquidity for the period presented.

(Amounts in thousands)

In addition to the available liquidity above, we have the ability to borrow up to $1.3 billion under our Senior Secured Credit Facility, subject to leverage ratio restrictions.

Working Capital and Cash Flows

As of December 31, 2022, we had $1,017.1 million in liquidity, including $426.7 million of cash, $590.4 million in borrowings available under our Revolving Credit Agreement, net of outstanding letters of credit. We believe that our cash on hand, together with the availability of borrowings under our Credit Agreement and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, and scheduled principal and interest payments on our indebtedness for at least the next twelve months.

Working Capital - Working capital increased to $787.1 million as of December 31, 2022, from $480.7 million as of March 31, 2022. The increase in working capital is primarily due to increased cash from the issuance of our 2030 Notes and a decrease in accounts payable and other accrued liabilities partially offset by a decrease in accounts receivable and inventory due to seasonality.

(Amounts in thousands)

- 25 -

Operating Cash Flows – Cash flows from operating activities increased $466.6 million during the nine months ended December 31, 2022 primarily driven by operating income and changes in net working capital.

Investing Cash Flows - Cash flows used in investing activities during the nine months ended December 31, 2022 increased by $24.8 million compared to the same period in fiscal 2022. The increase in cash used in investing activities was primarily due to capital expenditures.

Capital expenditures totaled $126.9 million and $100.4 million for the nine months ended December 31, 2022 and 2021, respectively. Our capital expenditures for the nine months ended December 31, 2022 were used primarily to support facility expansions, equipment replacements and technology improvement initiatives.

We currently anticipate that we will make capital expenditures of approximately $175 million in fiscal year 2023, including approximately $80 million of open orders as of December 31, 2022. Such capital expenditures are expected to be financed using funds generated by operations.

Financing Cash Flows - During the nine months ended December 31, 2022, cash provided by financing activities included the issuance of $500.0 million of 2030 Notes and proceeds of $123.2 million on our revolving credit facilities. Cash used in financing activities during the nine months ended December 31, 2022 included repurchase of common stock of $375.0 million, payments of $237.5 million on our revolving credit facilities, $30.1 million of dividend payments, and $28.7 million for shares withheld for tax purposes.

During the nine months ended December 31, 2021, cash used included the repurchase of common stock of $292.0 million, repayment of $124.6 million on the Revolving Credit Facility, $13.1 million of shares withheld for tax purposes, $27.8 million of dividend payments and payments on our finance lease obligations of $49.4 million. Cash provided by financing activities included proceeds of $258.1 million on the Revolving Credit Facility.

Cash held by Foreign Subsidiaries - As of December 31, 2022, we had $33.2 million in cash that was held by our foreign subsidiaries, including $23.3 million held by our Canadian subsidiaries. We continue to evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested, except for Canada. We plan to repatriate earnings from Canada and believe that there will be no additional tax costs associated with the repatriation of such earnings other than any potential non-U.S. withholding taxes.

Financing Transactions

Senior Secured Credit Facility - In July 2019, the Company entered into 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. In May 2022, the Company entered into a Second Amendment to the Company’s Base Credit Agreement. The Senior Secured Credit Facility provides the Term Loan Facility in an initial aggregate principal amount of $700 million, the Revolving Credit Facility in an initial aggregate principal amount of up to $600 million, the L/C Facility in the initial aggregate available amount of up to $60 million, as a sublimit of such Revolving Credit 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. As of December 31, 2022, the outstanding principal drawn on Term Loan Facility was $429.0 million and there were no borrowings on the Revolving Credit Facility. The Company had $590.4 million available to be drawn on the Revolving Credit Facility, net of $9.7 million of outstanding letters of credit.

ADS Mexicana Revolving Credit Facility - The Company and ADS Mexicana amended its Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a capacity of $9.5 million on June 6, 2022. 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 LIBOR rates plus an applicable margin based on the Leverage Ratio. As of December 31, 2022 and March 31, 2022, there were no borrowings and $1.5 million of borrowings, respectively, outstanding under the Intercompany Note.

Issuance of Senior Notes due 2027 - On September 23, 2019, the Company issued $350.0 million aggregate principal amount of its 2027 Notes, pursuant to the 2027 Indenture among the Company, the Guarantors and 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 or to persons outside the United States under Regulation S of the Securities Act. The Company may redeem the 2027 Notes, in whole or in part, at any time on or after September 30, 2022 at established redemption prices.

Interest on the 2027 Notes is payable semi-annually in cash in arrears on March 31 and September 30 of each year, commencing on March 31, 2020, at a rate of 5.000% per annum. The 2027 Notes will mature on September 30, 2027. The Company used the majority of the net proceeds from the offering of the 2027 Notes for the repayment of $300.0 million of its outstanding borrowings under the Company’s Base Credit Agreement. The 2027 Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the 2027 Indenture or the 2027 Notes and certain provisions related to bankruptcy events. The 2027 Indenture also contains customary negative covenants.

Issuance of Senior Notes Due 2030 – On June 9, 2022 the Company issued $500.0 million aggregate principal amount of 6.375% 2030 Notes pursuant to an Indenture, dated June 9, 2022 (the "2030 Indenture"), among 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 the Securities Act or to persons outside the United States under Regulation S of the Securities Act.

Interest on the 2030 Notes is 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 2030 Notes will mature on July 15, 2030. The Company used the majority of the net proceeds from the offering of the 2030 Notes to repay in full the outstanding borrowings under its Revolving Credit Facility and 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 2030 Notes, in whole or in part, at any time on or after July 15, 2025 at certain specified redemption prices set forth in the 2030 Indenture. In addition, at any time prior to July 15, 2025, the Company may redeem the 2030 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2030 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 2030 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 2030 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 balance of $21.0 million and had an initial term of between 12 and 84 months, based on the life of the equipment. The equipment financing bears a weighted average interest of 1.5% as of December 31, 2022.

Covenant Compliance - The Senior Secured Credit Facility requires, if the aggregate amount of outstanding exposure under the Revolving Facility exceeds $210.0 million at the end of any fiscal quarter, the Company to maintain a consolidated senior secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2020) not to exceed 4.25 to 1.00 for any four consecutive fiscal quarter periods.

The Senior Secured Credit Facility also includes other covenants, including negative covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Credit Agreement) ability to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of their property; (iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose of all or substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make certain investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new lines of business; (x) modify certain material contractual obligations, organizational documents, accounting policies or fiscal year; or (xi) create or permit restrictions on the ability of any subsidiary of any Loan Party (as defined in the Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.

The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory prepayments (subject to certain exceptions and limitations): (i) annual prepayments (beginning with the fiscal year ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii) 100% of the net cash proceeds from any non-ordinary course sale of assets and certain casualty or condemnation events; and (iii) 100% of the net cash proceeds of indebtedness not permitted to be incurred under the Senior Secured Credit Facility. For further information, see “Note 11. Debt” to the Consolidated Financial Statements in our Fiscal 2022 Form 10-K. We are in compliance with our debt covenants as of December 31, 2022.

Off-Balance Sheet Arrangements

Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 7. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of December 31, 2022, our South American Joint Venture had approximately $6.3 million of outstanding debt subject to our guarantees. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity, or capital resources.

Critical Accounting Policies and Estimates

There have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2022 Form 10-K, except as disclosed in "Note 1. Background and Summary of Significant Accounting Policies.”

Forward-Looking Statements

This Form 10-Q includes forward-looking statements. Some of the forward-looking statements can be identified by the use of terms such as “believes,” “expects,” “may,” “will,” “would,” “should,” “could,” “seeks,” “predict,” “potential,” “continue,” “intends,” “plans,” “projects,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this Form 10-Q and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects, growth strategies, and the industries in which we operate and include, without limitation, statements relating to our future performance.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations, financial condition, liquidity and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-Q. In addition, even if our actual consolidated results of operations, financial condition, liquidity and industry development are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those reflected in forward-looking statements relating to our operations and business, the risks and uncertainties discussed in this Form 10-Q (including under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and those described from time to time in our other filings with the SEC. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:

• fluctuations in the price and availability of resins and other raw materials and our ability to pass any increased costs of raw materials on to our customers in a timely manner;
• the risks related to the COVID-19 pandemic or other pandemics in the future;
• disruption or volatility in general business and economic conditions in the markets in which we operate;
• cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending;
• the risks of increasing competition in our existing and future markets;
• uncertainties surrounding the integration and realization of anticipated benefits of acquisitions and similar transactions;
• the effect of any claims, litigation, investigations or proceedings, including those described under “Item 1. Legal Proceedings” of this Form 10-Q;
• 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;
• 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, including those listed under “Item 1A. Risk Factors.” in the Fiscal 2022 Form 10-K.

All forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.

We are subject to various market risks, primarily related to changes in interest rates, credit, raw material supply prices and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions. Our exposure to market risk has not materially changed from what we previously disclosed in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2022 Form 10-K except as disclosed below.

Interest Rate Risk - We are subject to interest rate risk associated with our bank debt. Changes in interest rates impact the fair value of our fixed-rate debt, but there is no impact to earnings and cash flow. Alternatively, changes in interest rates do not affect the fair value of our variable-rate debt, but they do affect future earnings and cash flow. The Revolving Credit Facility and the Term Loan Facility bear variable interest rates. The Revolving Credit Facility and the Term Loan Facility bear interest either at SOFR or the Prime Rate, at our option, plus applicable pricing margins. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $4.2 million based on our borrowings as of December 31, 2022. Assuming the Revolving Credit Facility is fully drawn, each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately $10.2 million, for the twelve months ended December 31, 2022.

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for evaluating the effectiveness of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), rules 13a-15(e) and 15d-15(e). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the three months ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in “Part I, Item 1A — Risk Factors” of our Fiscal 2022 Form 10-K. These factors are further supplemented by those discussed in “Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2022 Form 10-K and in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and “Part II, Item 1 — Legal Proceedings” of this Form 10-Q.