Advanced Drainage Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2014. Fiscal 2015 runs from April 1, 2014 to March 31, 2015. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
ADS designs, manufactures and markets thermoplastic corrugated pipe and related water-management products, principally in North and South America and Europe. It reports Domestic and International segments. The quarter included the company’s first public-company reporting periods following its July 2014 IPO.
Key financial results
| Metric | Three months ended Dec. 31, 2014 | Year-over-year change | Nine months ended Dec. 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $278.2 | +6.4% | $971.2 | +9.4% |
| Gross profit / gross margin | $50.1 / 18.0% | $49.8 / 19.0% prior year | $204.6 / 21.1% | $189.0 / 21.3% prior year |
| Income from operations | $9.0 | Down 22.3% | $79.7 | Up 1.6% |
| Net income (loss) attributable to ADS | $(0.4) | Prior year: $(10.3) | $36.3 | Up 55.7% |
| Basic / diluted EPS | $(0.01) / $(0.01) | Prior year: $(0.32) / $(0.32) | $0.44 / $0.43 | Prior year: $0.28 / $0.27 |
| Adjusted EBITDA (non-GAAP) | $27.7 | Down 6.0%; 10.0% of sales | $137.3 | Up 5.2%; 14.1% of sales |
| Operating cash flow | Not presented separately for the quarter | $85.4 | Prior year: $88.1 |
Quarterly sales growth came from Domestic (+5.2%) and International (+14.1%). Domestic non-residential and residential markets grew, while agricultural and infrastructure sales declined. International growth was led by Canada and Mexico. For the nine-month period, Domestic sales rose 9.2% and International sales 11.1%.
Quarterly gross profit grew only 0.7% despite higher sales, as cost of goods sold increased faster than revenue. Domestic resin prices rose 13.6% year over year in the quarter; International margins faced higher U.S.-dollar raw-material costs and Canadian-dollar weakness. Selling expense rose 16.2% in the quarter, partly reflecting higher volume and added sales coverage. Other miscellaneous expense included unfavorable derivative mark-to-market adjustments of approximately $6.1 million for the quarter and $6.2 million year to date.
Nine-month net income attributable to ADS benefited from lower income-tax expense compared with the prior year and higher operating results. The prior-year comparable period included a $4.8 million gain on sale of the DrainTech product line; excluding that gain, management said nine-month Adjusted EBITDA increased 9.2%.
Cash, debt and liquidity
- Cash at December 31 was $10.8 million, versus $3.9 million at March 31, 2014. Nine-month cash increased $6.8 million.
- Cash from operations was $85.4 million; investing used $31.9 million and financing used $46.2 million. Uses included $21.5 million of capital expenditures, $7.6 million of joint-venture investments and $115.6 million of debt repayments. Financing also included $79.1 million of IPO proceeds before other offering costs.
- Total debt was $338.4 million, down $115.6 million from March 31. Long-term debt was $326.7 million, with $11.7 million of current maturities. The balance included $138.8 million drawn on the revolver, a $93.1 million term loan and $100.0 million of senior notes.
- ADS reported $201.0 million of liquidity: $10.8 million cash and $190.2 million available under revolving facilities, including $12.0 million available to ADS Mexicana. The company reported a 2.28x leverage ratio and compliance with debt covenants at quarter-end.
- Working capital was $277.9 million, versus $263.9 million at March 31. The current ratio was approximately 3.0x, based on reported current assets and current liabilities.
Material changes, outlook and risks
- IPO and equity: The company’s July 2014 IPO generated $79.1 million after underwriting discounts and commissions; after other offering expenses, $72.1 million of net proceeds went to repay revolving debt. December secondary offerings were sales by existing stockholders; ADS received no proceeds. The IPO ended the redemption feature on redeemable common stock and materially changed the balance-sheet classification of equity.
- Post-period acquisition: On January 30, 2015, ADS acquired Ideal Pipe of Canada for C$56.8 million, financed through its existing credit line. Purchase accounting and pro forma results had not yet been completed or presented.
- Management outlook: ADS expected fiscal 2015 capital expenditures of approximately $35 million, funded from operations. Management stated that cash, available borrowing capacity and operating cash generation should cover working capital, planned capital spending, scheduled interest and preferred-stock dividends for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Operating and financial risks: The filing highlights resin and other input-price volatility, the ability to pass costs through, construction-market cyclicality and seasonality, weather, competition, international exposure and joint-venture performance. A 1% increase in rates on variable-rate debt was estimated to raise annual interest expense by about $1.4 million at quarter-end borrowings; a fully drawn revolver would increase the sensitivity to about $3.0 million annually.
- Commitments and contingencies: ADS had approximately $8.6 million of commitments for major property and equipment purchases and a $19.0 million resin purchase commitment for January–December 2015. Management said pending litigation was not expected to materially affect results or financial condition; the estimated maximum loss contingency was $0.4 million. ADS also guaranteed 50% of certain South American joint-venture debt; the venture had approximately $12.2 million outstanding.
- Unusual items: Quarter-end derivative liabilities included interest-rate swaps, diesel-fuel contracts, propylene swaps and currency forwards. The company recognized substantial adverse mark-to-market movements in derivatives, which affected reported quarterly earnings but were excluded from its Adjusted EBITDA reconciliation.
Most important facts for investors to verify
- Whether sales growth can translate into margin recovery given rising resin prices, freight trends and selling costs.
- The drivers, duration and cash-flow implications of the derivative losses and the company’s hedge positions.
- Debt and covenant capacity after the C$56.8 million Ideal Pipe acquisition, including the resulting leverage and integration costs.
- Whether International performance stabilizes amid Canadian-dollar weakness and softer South American markets.
- How much reported earnings and per-share results are affected by preferred-stock accounting, ESOP compensation and non-GAAP adjustments.