Advanced Drainage Systems, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2015—fiscal 2016 second quarter—and the six months then ended. It is not a 2014 Q2 filing. The report was signed May 31, 2016.
Business context
ADS designs, manufactures and markets thermoplastic corrugated pipe and water-management products. It reports Domestic and International segments; results are seasonal and construction activity is weather-sensitive. The quarter included BaySaver after ADS acquired a controlling interest on July 17, 2015.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Sep. 30, 2015 | Year-over-year | Six months ended Sep. 30, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $383.3 | +4.5% | $732.5 | +5.7% |
| Gross profit / margin | $83.7 / 21.8% | $69.8 / 19.0% | $156.3 / 21.3% | $130.6 / 18.8% |
| Income from operations | $33.4 | +1.7% | $63.0 | +13.3% |
| Net income attributable to ADS | $10.9 | −35.3% | $21.6 | −15.0% |
| GAAP diluted EPS | $0.17 | vs. $0.41 | $0.34 | vs. $0.25 |
| Adjusted EBITDA (non-GAAP) | $60.9 | +10.4% | $112.8 | +12.4% |
Quarterly operating margin was 8.7%, compared with 8.9% a year earlier. Quarterly adjusted EBITDA margin was 15.9%, versus 15.1%. Adjusted earnings per fully converted share, a non-GAAP measure, was $0.19 for the quarter and $0.38 for six months, down 29.8% and 13.9%, respectively. The filing cautions that non-GAAP measures are not substitutes for GAAP results.
Six-month operating cash flow was $16.9, investing cash outflow $25.1, and financing cash inflow $7.7; cash declined $0.1 to $3.5. Capital expenditures were $20.2. At September 30, total debt was $425.5, including $234.9 drawn on the revolving facility, $87.5 term debt and $100.0 senior notes. Cash plus reported revolver availability totaled $98.3. Current assets were $500.9 and current liabilities $228.5. Long-term and current capital lease obligations totaled $76.9.
Changes and drivers
- Sales growth reflected International growth, including Ideal Pipe, and higher Allied Products sales; Domestic pipe sales were nearly flat for the six-month period. International sales also faced currency headwinds: the weaker Canadian dollar reduced Canadian sales by $10.6 million over six months.
- Gross margin improved as lower resin costs and product mix, including Allied Products, supported profitability. Management reported raw material prices down about 4.6% over six months.
- Profit attributable to ADS fell despite higher sales and gross profit. Six-month derivative and other expense was $15.8 million, versus $0.5 million of income in the prior-year period, including $9.5 million of derivative fair-value losses, $6.5 million of hedge settlement losses and a $0.5 million BaySaver remeasurement loss.
- G&A expense rose $13.8 million over six months, including $8.7 million in professional fees related to the restatement. Other increases included acquisition-related costs and higher public-company overhead.
- ADS increased its BaySaver ownership from 55% to 65% and began consolidating it. The transaction included $3.2 million cash consideration plus estimated contingent consideration; the preliminary allocation included $10.8 million of identifiable intangibles and $2.5 million goodwill.
Outlook, risks and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $45 million and said available cash, borrowing capacity and operating cash flow should meet needs for at least 12 months.
- Management reported compliance with debt covenants at September 30, 2015. However, debt agreements had been amended to extend financial-reporting deadlines and modify certain covenant definitions following delayed filings and the restatement. Subsequent amendments and a later ADS Mexicana covenant waiver are described in the filing.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2015; previously identified material weaknesses in internal control over financial reporting remained, and remediation was ongoing.
- A shareholder securities class action and a formal SEC Division of Enforcement investigation into accounting practices were disclosed. The company said possible losses could be material but could not estimate a range.
- Key stated risks include resin price and supply volatility, construction cyclicality and seasonality, weather, competition, foreign exchange, joint-venture and acquisition risks, indebtedness, liquidity, and the possibility of further accounting adjustments or filing delays.
Important facts for investors to verify
- Confirm the intended filing period: this document reports fiscal 2016 Q2, not 2014 Q2.
- Review the restatement disclosures, identified control weaknesses, remediation progress and the status of required SEC filings. The cover page marks “No” for having filed all required reports during the preceding 12 months.
- Track the class action and SEC investigation, including any developments in potential exposure.
- Assess debt availability, covenant terms and compliance after the amendments, alongside capital-lease obligations and the low cash balance.
- Separate underlying operating trends from derivative losses, restatement expenses, acquisitions, currency effects and non-GAAP adjustments.