Business context and reporting period
Advanced Drainage Systems, Inc. designs, manufactures and markets thermoplastic corrugated pipe and water-management products. This Form 10-Q covers the quarter and six months ended September 30, 2014 (the second quarter of fiscal 2015); comparisons are with the corresponding 2013 periods. Results are reported for Domestic and International segments.
The company completed its IPO on July 30, 2014. It received approximately $72.3 million in net proceeds and used them to repay revolving-credit-facility borrowings. The filing’s financial statements are unaudited.
Financial performance and liquidity
Amounts below are in millions except per-share data. Adjusted EBITDA and System-Wide Net Sales are non-GAAP measures.
| Metric | Three months ended Sept. 30, 2014 | Change year over year | Six months ended Sept. 30, 2014 | Change year over year |
|---|---|---|---|---|
| Net sales | $364.7 | +9.4% | $693.0 | +10.6% |
| Gross profit / margin | $82.4 / 22.6% | $73.2 / 22.0% | $154.5 / 22.3% | $139.2 / 22.2% |
| Operating income / margin | $41.2 / 11.3% | $34.3 / 10.3% | $70.8 / 10.2% | $66.9 / 10.7% |
| Net income attributable to ADS | $22.4 | +29.3% | $36.6 | +9.0% |
| GAAP diluted EPS | $0.51 | Up from $0.26 | $0.45 | Down from $0.53 |
| Adjusted EBITDA | $60.5 | +17.2%; 16.6% of sales | $109.7 | +8.5%; 15.8% of sales |
| Operating cash flow | Quarterly value not separately provided | $10.8 | Up from $3.3 |
Domestic sales and gross profit drove growth. Second-quarter Domestic sales rose 8.0%, while International sales rose 21.3%; International gross profit was nearly flat, and six-month International gross profit declined 7.8%. Sales were strongest in non-residential construction and infrastructure; agricultural sales were weaker. For the quarter, pipe selling prices increased 4.5%. Resin prices increased 4.5% in the quarter and 5.0% over six months.
At September 30, cash was $6.6 million, total current assets $514.9 million, and current liabilities $190.5 million. Working capital was $324.4 million. Total debt was $397.6 million, down $56.5 million from March 31; long-term debt was $386.4 million. Management reported $139.8 million of liquidity, including $133.2 million available under revolving facilities, and stated that available resources and operating cash flow should meet needs for at least 12 months. The company was in compliance with debt covenants.
Six-month investing cash outflow was $25.7 million, including $15.6 million of capital expenditures and $7.6 million invested in unconsolidated affiliates. Financing cash inflow was $17.8 million. Capital expenditures were $15.6 million versus $21.7 million a year earlier. Management expected approximately $35 million of fiscal 2015 capital expenditures, primarily funded from operations.
Material changes versus the prior comparable period
- Quarterly gross margin increased 0.6 percentage points, supported by sales mix and lower freight as a share of sales. Six-month gross margin improved 0.1 percentage points.
- Quarterly net income attributable to ADS increased 29.3%; six-month net income increased 9.0%. However, six-month GAAP EPS fell because the preferred-stock fair-value adjustment reduced income available to common shareholders by $11.1 million, or $0.22 per share. The quarterly fair-value adjustment was favorable by $7.3 million, or $0.14 per share, boosting quarterly common EPS.
- Six-month Adjusted EBITDA increased 8.5%, or 13.9% excluding the prior-year $4.8 million DrainTech sale gain; the reported margin declined to 15.8% from 16.1% (15.4% on the comparable prior-year basis excluding that gain).
- Receivables increased $97.4 million from March 31, principally with sales growth, contributing to working-capital needs. Six-month operating cash flow nevertheless improved year over year.
- The IPO converted redeemable common stock to permanent equity and changed the preferred stock’s redemption status; share issuance and preferred-stock accounting affect comparisons of equity and per-share results.
Outlook, commentary, risks and contingencies
No revenue or earnings guidance was provided. Management cited continued product conversion opportunities and growth potential in Allied Products and international markets, while noting that South American joint-venture sales faced weak mining activity, construction slowdown and reduced public spending. It expected fiscal 2015 capital expenditures of about $35 million and stated liquidity was adequate for at least the next 12 months.
Principal disclosed risks include resin price and availability, the ability to pass cost increases through to customers, construction and infrastructure cyclicality, seasonality and weather, competition, customer concentration, foreign-exchange movements, and risks from international operations and joint ventures. A 1% increase in variable interest rates would raise annual forecast interest expense by approximately $1.9 million at reported borrowings. The company uses interest-rate, resin and diesel derivatives; derivative liabilities totaled approximately $1.1 million at September 30.
Commitments included $80.6 million of operating lease payments, $20.2 million of near-term resin purchase obligations and approximately $11.4 million of commitments for major property and equipment purchases. ADS guaranteed 50% of South American joint-venture debt; that venture had approximately $12.3 million outstanding. ADS also guaranteed up to $12.0 million of ADS Mexicana credit-facility obligations and up to $7.0 million of Tigre ADS debt. Management said pending litigation was not expected to materially affect results or financial condition; its estimated maximum loss contingency was $0.4 million.
Unusual items include IPO-related costs and proceeds, accelerated vesting and increased share-based compensation, the prior-year DrainTech sale gain, and large preferred-stock fair-value adjustments. Management reported disclosure controls were effective at September 30, 2014 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether receivables growth converts to cash and whether seasonal working-capital needs remain manageable.
- How resin-cost changes, pricing and product mix affect gross margins, especially in International operations amid Canadian-dollar weakness.
- The reconciliation and exclusions in non-GAAP Adjusted EBITDA and Adjusted Earnings per Fully Converted Share, and the impact of preferred-stock fair-value accounting on GAAP EPS.
- Debt availability, covenant headroom, variable-rate exposure and the effect of planned capital expenditures on leverage and liquidity.
- Joint-venture performance, guarantee exposure and the status of disclosed purchase, lease and litigation commitments.
- Share count and dilution: the filing reported 52.9 million common shares outstanding at October 31, 2014 and approximately 73.3 million shares on an as-converted basis including unvested restricted stock and ESOP preferred stock.