Advanced Drainage Systems, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2014 Q1,” but the filing is for the quarter ended December 31, 2015, the third quarter of fiscal 2016, and includes nine-month results through that date. Comparisons below are to the corresponding 2014 periods.
Business context and reporting period
ADS designs, manufactures, and markets corrugated thermoplastic pipe and related water-management products. It reports Domestic and International segments. Results are seasonal, with construction activity generally higher in the first and second fiscal quarters. The filing was signed May 31, 2016.
Financial performance
Amounts are in millions of dollars except per-share data. Segment Adjusted EBITDA and System-Wide Net Sales are non-GAAP measures.
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Net sales | $312.8 | $279.9 | $1,045.3 | $973.0 |
| Gross profit / margin | $73.3 / 23.4% | $49.2 / 17.6% | $229.6 / 22.0% | $179.8 / 18.5% |
| Income from operations / margin | $24.1 / 7.7% | $12.6 / 4.5% | $87.1 / 8.3% | $68.2 / 7.0% |
| Net income attributable to ADS | $8.0 | Loss of $3.3 | $29.6 | $22.1 |
| Basic / diluted EPS | $0.13 / $0.12 | Loss of $0.07 / $0.07 | $0.48 / $0.46 | $0.19 / $0.19 |
| Adjusted EBITDA | $48.2 | $33.8 | $161.0 | $134.1 |
| Operating cash flow | Not separately reported | Not separately reported | $129.4 | $90.3 |
- Quarterly sales rose 11.8%; nine-month sales rose 7.4%. Nine-month System-Wide Net Sales increased 6.3% to $1,103.3 million.
- Gross margin improvement reflected lower resin costs and higher sales. Management reported domestic raw-material costs down approximately 8.4% for the nine-month period; lower resin costs were especially beneficial in the quarter.
- Quarterly G&A increased 82.6% to $25.8 million, including $7.6 million of restatement-related professional fees. For nine months, G&A increased 58.2% to $69.2 million, including $16.3 million of those fees.
- Nine-month derivative losses and other expense rose to $18.3 million from $5.1 million, including $18.4 million of net hedging losses and a $0.5 million BaySaver step-acquisition loss. Quarterly derivative and other expense was $2.6 million, down from $5.6 million.
Balance sheet, liquidity and cash flow
- At December 31, 2015, cash was $6.4 million and working capital was $190.8 million, down from $249.2 million at March 31, 2015. Current assets were $402.3 million and current liabilities $211.5 million.
- Total debt obligations, excluding leases, were $337.4 million, down $62.5 million from March 31, 2015. Debt included $149.5 million drawn on ADS’s revolving facility, an $85.0 million term loan, $100.0 million of senior notes, and $2.9 million of industrial revenue bonds. Capital lease obligations totaled $74.6 million.
- Management reported liquidity of $182.9 million: $6.4 million cash and $176.5 million of available borrowings. It stated available liquidity, operating cash flow, and financing arrangements should meet anticipated needs for at least twelve months. The company reported compliance with debt covenants at December 31, 2015.
- Nine-month investing cash use was $35.4 million, including $30.0 million of capital expenditures and $3.2 million for the additional BaySaver interest. Financing cash use was $89.8 million, including $62.5 million of debt repayment, $14.9 million of lease payments, and $12.7 million of dividends. Cash increased $2.8 million to $6.4 million.
- Fiscal 2016 capital expenditures were expected to be approximately $45 million, principally funded from operations. The filing does not provide a specific sales or earnings forecast.
Material changes, outlook and risks
- ADS acquired an additional 10% of BaySaver in July 2015, bringing ownership to 65% and control; BaySaver has been consolidated since the acquisition. Ideal Pipe, acquired in January 2015, contributed to Canadian sales growth.
- Management attributed sales growth to demand across domestic end markets, Allied Products, and the Ideal Pipe acquisition. Mild winter weather supported domestic quarterly sales. Mexican sales weakened amid slower public spending; currency weakness reduced Canadian sales translated into U.S. dollars.
- Resin and diesel price changes, the ability to pass input-cost changes through to customers, construction cyclicality and weather, foreign-exchange movements, competition, customer concentration, joint-venture exposure, and indebtedness are identified risks. A 1% increase in rates on variable-rate debt was estimated to add approximately $1.6 million to annual interest expense at period-end borrowings.
- The company had a stockholder securities class action and an SEC Division of Enforcement investigation concerning accounting practices. ADS said outcomes could be unfavorable and losses could be material, but it could not estimate a loss range; it said it would defend the suit and cooperate with the investigation.
- Management disclosed that previously identified material weaknesses in internal control over financial reporting remained present and concluded disclosure controls and procedures were not effective as of the evaluation date. The company had amended debt agreements to extend financial-reporting deadlines following its restatement; it reported satisfying the amended reporting requirements by April 1, 2016.
- Other unusual items include the substantial restatement-related costs and the non-GAAP adjustments that exclude them. The filing also reports a $24.2 million commitment to purchase resin from January through December 2016 and guarantees of joint-venture debt, including a maximum $6.8 million obligation for the South American venture.
Most important facts for investors to verify
- Confirm the correct reporting period: this is fiscal 2016 third-quarter reporting, not 2014 Q1, and review the restated prior-period financial statements and related disclosures.
- Track remediation of material weaknesses and whether disclosure controls become effective; assess any further reporting delays or accounting revisions.
- Follow developments and potential financial exposure from the shareholder lawsuit and SEC investigation, for which the company could not estimate losses.
- Assess whether margin gains from lower resin costs are sustainable and how derivative settlements, currency movements, weather, and Canadian and Mexican demand affect results.
- Verify debt availability, covenant compliance, near-term maturities, capital-lease commitments, and the funding of planned capital expenditures and dividends.