Advanced Drainage Systems Announces Fiscal First Quarter 2015 Results

Released : 09/03/2014

HILLIARD, Ohio--(BUSINESS WIRE)-- Advanced Drainage Systems, Inc. (NYSE: WMS) (“ADS” or the “Company”), a leading global manufacturer of water management products and solutions for commercial, residential, infrastructure and agricultural applications, today announced financial results for the fiscal first quarter ended June 30, 2014.

Fiscal First Quarter 2015 Highlights

  • Quarterly net sales increased 12.0%
  • Adjusted EBITDA of $49.2 million
  • Earnings per diluted share of $(0.09)
  • Adjusted earnings per fully converted share of $0.25
  • Company provides fiscal year 2015 guidance

Joseph A. Chlapaty, Chairman and Chief Executive Officer of ADS commented, “I am pleased with our performance this quarter as we delivered strong top line growth aided by solid order activity in the domestic non-residential and residential construction markets. Although we are cautiously optimistic about the strength and pace of recovery in the U.S. housing market, we are not reliant on the residential market for growth and have performed well in all economic and housing market cycles. Our strong results this quarter extend our long track record of delivering above-market growth, underscore the strength of our competitive position and demonstrate our continued track record in driving material conversion.”

Chlapaty added, “We are extremely proud of the success our Company has achieved over the past fifty years, and most recently in our first quarter prior to the completion of our successful IPO in late July. However, we are even more excited about our future. As we move further into fiscal 2015, we are focused on executing our strategic growth plan, which centers on driving market conversion and utilizing our Allied Products to deliver holistic solutions. These initiatives, coupled with the ongoing recovery in the construction markets, positions us well to continue to gain market share while enhancing our significant operating leverage over time.”

Fiscal First Quarter 2015 Results

Net sales were $328.3 million for the fiscal first quarter of 2015, a 12.0% increase compared to fiscal first quarter 2014 net sales of $293.1 million. The growth this quarter was primarily driven by improved demand in the domestic construction markets for both Pipe and Allied Products, which offset slower demand in the international markets in which we operate. Allied Products sales increased 13.4% compared to prior year sales of continuing products (excluding $2.9 million of Allied Product lines sold in fiscal 2014).

Gross profit increased $6.0 million, or 9.1%, to $72.0 million for the fiscal first quarter of 2015, compared to $66.0 million for the same period last year. As a percentage of net sales, gross profit was 21.9% compared to 22.5% for the prior year period. The slight decrease in overall gross margin percentage was largely attributed to lower pipe gross margins due to higher raw material and freight costs, and lower international margins, partially offset by stronger margins in Allied Products.

Selling, general and administrative ("SG&A") expenses for the fiscal first quarter of 2015 increased $4.4 million, or 12.6%, to $39.8 million from $35.4 million for the fiscal first quarter of 2014. As a percentage of net sales, SG&A expenses totaled 12.1% in the first quarter of fiscal 2015, flat compared to the prior year. The increase in SG&A expenses was driven primarily by higher variable selling expenses tied to sales volume, an increase in non-cash stock based compensation, as well as higher professional fees and other corporate expenses related to being a public company.

The Company reported Adjusted EBITDA of $49.2 million in the fiscal first quarter of 2015 compared to Adjusted EBITDA of $49.5 million in the fiscal first quarter of 2014. Results for the fiscal first quarter of 2014 included a $4.8 million one-time gain related to the sale of a non-core product line. Excluding this one-time gain, Adjusted EBITDA increased 10.1% or $4.5 million as compared to the prior year period.

Net income attributable to ADS for the fiscal first quarter of 2015 was $14.2 million, 12.6% lower compared to net income attributable to ADS of $16.3 million for the fiscal first quarter of 2014. Earnings per basic and diluted share for the fiscal first quarter of 2015 was $(0.09) based on weighted average common shares of 47.5 million shares. The loss per share for the fiscal first quarter 2015 is primarily related to a non-cash charge of $18.4 million for the increase in the fair value of the Company’s redeemable convertible preferred stock held in the Company’s ESOP, which is presented in Mezzanine Equity. This charge does not affect net income recorded in the financial statements, but is included in the determination of basic and diluted earnings per share. Excluding this fair value charge and other miscellaneous adjustments to income available to common shareholders, adjusted earnings per fully converted share for the fiscal first quarter of 2015 was $0.25. A reconciliation of earnings per share (GAAP) to net income per fully converted share (Non-GAAP) is presented below:

  Quarter   Quarter
Ended Ended
Amounts in (000) Except Per Share Data 6/30/20136/30/2014
 
Net Income (loss) available to common shareholders $ 12,906 $ (4,169 )
 
Add: Adjustments to net income available to common shareholders   3,390   18,410  
Adjusted net income attributable to ADS - (Non-GAAP) 16,296 14,241
 
Add: Fair value of ESOP Compensation related to Convertible Preferred Stock 2,520 2,687
 
Adjusted net income - (Non-GAAP) $18,816$16,928  
 

Weighted Average Common Shares Outstanding:

47,190 47,536
Add: Unvested restricted stock shares 319 249
Convertible Preferred Stock shares   20,418   20,099  
 
Total Weighted Average Common Shares Outstanding - Fully Converted 67,927 67,884
 
Adjusted net income per share - Fully Converted - Basic (Non-GAAP) $ 0.28 $ 0.25
 

A reconciliation of GAAP to non-GAAP financial measures for Adjusted EBITDA and Adjusted earnings per fully converted share have been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

During the fiscal first quarter of 2015, the Company recorded net cash used by operating activities of $21.3 million compared to $30.0 million in the same period last year, with its traditional seasonal working capital build in the period. Compared to the prior year quarter, the lower use of net cash was realized primarily by an increase in accounts payable and accrued expenses offsetting higher accounts receivable from revenue growth.

Fiscal Year 2015 Outlook

Based on current market conditions, backlog of existing orders and business trends, the Company expects net sales for fiscal year 2015 to be in the range of $1.21 to $1.26 billion, and Adjusted EBITDA in the range of $165 to $175 million. Capital expenditures are expected to be approximately $35 million.

Mark Sturgeon, Executive Vice President and Chief Financial Officer of ADS noted, “As our guidance indicates, we believe our plans will produce sustainable, above-market net sales and Adjusted EBITDA growth. In addition, our strong balance sheet and ability to generate significant operating cash flows allows us to strategically deploy our capital to support growth and shareholder value. Our priorities for capital deployment in the future remain focused on investments and capital expenditures in our business to enhance organic growth, targeted acquisition opportunities that extend our product leadership and complement our existing package, and enhancements to shareholder returns including restarting our dividend program.”

Common Shares Outstanding

As of June 30, 2014, the Company had 67, 883, 736 fully converted weighted average shares of common stock outstanding. The following table illustrates the breakdown of the weighted average shares of common stock outstanding:

Weighted Average Shares Outstanding
Common Stock     47,535,532
Unvested Restricted Stock 249,108
Convertible Preferred Stock 20,099,096
Total Shares Outstanding 67,883,736
 

As of July 30, 2014 (Post-IPO), the Company had 73,201,560 fully converted shares of common stock outstanding. The following table illustrates the breakdown of the period ending shares of common stock outstanding:

Period Ending Shares Outstanding – Post IPO
Common Stock     52,876,151
Unvested Restricted Stock 226,313
Convertible Preferred Stock 20,099,096
Total Shares Outstanding 73,201,560
 

Webcast Information

The Company will host an investor conference call and webcast on Wednesday, September 3rd, 2014 at 10:00 a.m. Eastern Time. The live call can be accessed by dialing 1-877-317-6789 (US toll-free) or 1-412-317-6789 (international) and asking to be connected to the Advanced Drainage Systems, Inc. call. The live webcast will also be accessible via the "Events Calendar” section of the Company’s Investor Relations website, www.investors.ads-pipe.com. An archived version of the webcast will be available for 90 days following the call.

About ADS

Advanced Drainage Systems (ADS) is the leading manufacturer of high performance thermoplastic corrugated pipe, providing a comprehensive suite of water management products and superior drainage solutions for use in the construction and infrastructure marketplace. Its innovative products are used across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure applications. The Company has established a leading position in many of these end markets by leveraging its national sales and distribution platform, its overall product breadth and scale and its manufacturing excellence. Founded in 1966, the Company operates a global network of 58 manufacturing plants and 29 distribution centers. To learn more about the ADS, please visit the Company’s website at www.ads-pipe.com.

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). ADS management uses non-US GAAP measures in its analysis of the Company's performance. Investors are encouraged to review the reconciliation of non-US GAAP financial measures to the comparable US GAAP results available in the accompanying tables.

Forward Looking Statements

Certain statements in this press release may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the initial public offering. These statements are not historical facts but rather are based on the Company’s current expectations, estimates and projections regarding the Company’s business, operations and other factors relating thereto. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. 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; volatility in general business and economic conditions in the markets in which we operate, including, without limitation, factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence; 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, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials; our ability to continue to convert current demand for concrete, steel and PVC pipe products into demand for our high performance thermoplastic corrugated pipe and Allied Products; 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; our ability to manage our assets; the risks associated with our product warranties; our ability to manage our supply purchasing and customer credit policies; the risks associated with our self-insured programs; 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; our ability to project product mix; the risks associated with our current levels of indebtedness; our ability to meet future capital requirements and fund our liquidity needs; and the other risks and uncertainties described in the Company’s filings with the Securities and Exchange Commission. New risks and uncertainties emerge from time to time and it is not possible for the Company to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this press release. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company’s expectations, objectives or plans will be achieved in the timeframe anticipated or at all. Investors are cautioned not to place undue reliance on the Company’s forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Financial Statements

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended June 30,
(Amounts in thousands, except per share data)2013   2014
Net sales $ 293,102 $ 328,297
Cost of goods sold 227,099   256,264  
Gross profit 66,003 72,033
Operating expenses:
Selling 17,677 19,246
General and administrative 17,659 20,532
Gain on sale of business (4,848 ) -
Intangible amortization 2,861   2,641  
Income from operations 32,654 29,614
Other expense:
Interest expense 4,101 4,615
Other miscellaneous expense, net 529   14  
Income before income taxes 28,024 24,985
Income tax expense 11,066 9,695
Equity in net loss of unconsolidated affiliates 248   621  
Net income 16,710 14,669
Less net income attributable to non-controlling interest 414   428  
Net income attributable to ADS 16,296   14,241  
Change in fair value of Redeemable Convertible Preferred Stock (1,578 ) (18,373 )
Dividends to Redeemable Convertible Preferred Stockholders (216 ) (37 )
Dividends paid to unvested restricted stockholders (8 ) -  
Net income (loss) available to common stockholders and participating securities 14,494 (4,169 )
Undistributed income allocated to participating securities (1,588 ) -  
Net income (loss) available to common stockholders $ 12,906   $(4,169)
 
Weighted average common shares outstanding:
Basic 47,190 47,536
Diluted 47,689 47,536
Net income (loss) per share:
Basic $ 0.27 $ (0.09 )
Diluted $ 0.27 $ (0.09 )
Cash dividends declared per share $ - $ -
 
 
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 
As of
(Amounts in thousands, except par value)March 31, 2014   June 30, 2014
ASSETS
Current assets:
Cash $ 3,931 $ 4,720
Receivables (less allowance for doubtful accounts of $3,977 and $4,138, respectively) 150,713 218,037
Inventories 260,300 260,971
Deferred income taxes and other current assets 13,555   17,000  
Total current assets 428,499 500,728
Property, plant and equipment, net 292,082 290,761
Other assets:
Goodwill 86,297 86,299
Intangible assets, net 66,184 63,264
Other assets 64,533   71,277  
Total assets$937,595   $1,012,329  
 
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations $ 11,153 $ 11,667
Accounts payable 108,111 123,189
Other accrued liabilities 37,956 36,134
Accrued income taxes 7,372   11,244  
Total current liabilities 164,592 182,234
Long-term debt obligation 442,895 481,215
Deferred tax liabilities 69,169 67,913
Other liabilities 15,324   16,112  
Total liabilities 691,980 747,474
 
 
Mezzanine equity:
Redeemable Common Stock; $0.01 par value: 38,320 and 38,320 issued and outstanding, respectively 549,119 659,431
Redeemable Convertible Preferred Stock; $0.01 par value: 47,070 authorized; 44,170 issued and 26,129 and 26,129 outstanding, respectively 291,720 348,898
Deferred compensation – unearned ESOP shares (197,888 ) (233,106 )
Total mezzanine equity 642,951 775,223
 
Stockholders’ equity:

Common stock; $0.01 par value: 148,271 authorized: 109,951 issued: 9,141 and 9,263 outstanding respectively

11,957 11,957
Paid-in capital 22,547 -
Common stock in treasury, at cost (448,439 ) (447,992 )
Accumulated other comprehensive loss (5,977 ) (5,672 )
Retained earnings   (91,219 )
Total ADS stockholders’ equity (419,912 ) (532,926 )
Non-controlling interest in subsidiaries 22,576   22,558  
Total stockholders’ equity (397,336 ) (510,368 )
Total liabilities, mezzanine equity and stockholders’ equity$937,595   $1,012,329  
 
 
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended June 30,
(Amounts in thousands)2013   2014
Cash Flows from Operating Activities $ (29,990 ) $ (21,258 )
Cash Flows from Investing Activities
Capital expenditures (13,142 ) (7,450 )
Proceeds from sale of assets/business 5,877 -
Investment in unconsolidated affiliate (550 ) (7,566 )
Additions of capitalized software (918 ) (1,320 )
Other investing activities (286 ) (310 )
Net cash used in investing activities (9,019 ) (16,646 )
Cash Flows from Financing Activities
Cash dividends paid (1,538 ) -
Debt issuance costs (2,311 ) -
Proceeds from term loan 22,500 -
Payments on term loan - (1,250 )
Payments of notes, mortgages, and other debt (307 ) (317 )
Proceeds from Revolving Credit Facility 136,700 91,000
Payments on Revolving Credit Facility (113,000 ) (50,600 )
Other financing activities (1,360 ) (40 )
Net cash provided by financing activities 40,684   38,793  
Effect of exchange rate changes on cash and cash equivalents -   (100 )
Net change in cash and equivalents 1,675 789
Cash and equivalents at beginning of period 1,361   3,931  
Cash and equivalents at end of period$ 3,036   $ 4,720  
 
 
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
SEGMENT REPORTING
(unaudited)
 

The following table sets forth reportable segment information with respect to the
amount of net sales contributed by each class of similar products of our consolidated
gross profit in the three months ended June 30, 2013 and 2014:

 
Three Months Ended June 30,
(Amounts in thousands)2013   2014
Domestic
Pipe 189,142 217,307
Allied Products 66,447 74,175
Total Domestic $ 255,589 $ 291,482
International
Pipe 29,588 29,937
Allied Products 7,925 6,878
Total International $ 37,513 $ 36,815
Total net sales$ 293,102$ 328,297
 
 

The following sets forth certain additional financial information attributable to our reportable
segments for the three months ended June 30, 2013, and 2014, respectively:

 
Three months ended June 30,
(Amounts in thousands)2013       2014
Net sales
Domestic 255,589 291,482
International   37,513     36,815  
Total$293,102   $328,297  
Gross profit
Domestic 57,552 64,790
International   8,451     7,243  
Total$66,003   $72,033  
Segment Adjusted EBITDA
Domestic 45,078 45,769
International   4,464     3,436  
Total$49,542   $49,205  
Interest expense, net
Domestic 4,089 4,613
International   12     2  
Total$4,101   $4,615  
Capital expenditures
Domestic 10,938 6,937
International   2,204     513  
Total$13,142   $7,450  
Depreciation and amortization
Domestic 12,868 12,466
International   1,233     1,237  
Total$14,101   $13,703  
Equity in net income (loss) of unconsolidated affiliates
Domestic - 153
International   (248 )   (774 )
Total$(248)$(621)
 

Reconciliation of Non-GAAP Measures

We present EBITDA and Adjusted EBITDA because they are key metrics used by management and our board of directors to assess our financial performance, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

EBITDA is calculated as net income attributable to ADS before interest, income taxes, depreciation and amortization. Adjusted EBITDA is calculated as EBITDA before stock-based compensation expense, non-cash charges and certain other expenses.

EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity. They should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP. In addition, they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted EBITDA, 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.

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to Net Income attributable to ADS, the most comparable GAAP measure, for each of the periods indicated:

  Three Months Ended June 30,
(Amounts in thousands)2013       2014
Net income attributable to ADS $ 16,296 $ 14,241
Depreciation and amortization (a) 14,444 14,329
Interest expense, net 4,101 4,615
Income tax expense   11,066     9,695
EBITDA 45,907 42,880
Derivative fair value adjustments (81 ) 96
Foreign currency transaction losses 94 130
Unconsolidated affiliates interest and tax 130 177
Management fee to minority interest holder JV 194 235
Share-based compensation 660 2,285
ESOP deferred compensation 2,520 2,687
Transaction costs (b)   118     715
Adjusted EBITDA$49,542   $49,205
(a)   Includes our proportionate share of depreciation and amortization expense of $343 and $626 related to our Tigre ADS joint venture, BaySaver joint venture and Tigre ADS-USA joint venture, which is included in Net income of unconsolidated affiliates in our Condensed Consolidated Statements of Income for the three months ended June 30, 2013 and 2014, respectively.
(b) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with our debt refinancing and completion of the IPO.
 

The following table presents a reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net Income attributable to ADS, the most comparable GAAP measure, for each of the periods indicated:

  Three Months Ended June 30,
(Amounts in thousands)2013   2014
Domestic   InternationalDomestic   International
Reconciliation of Segment EBITDA and Segment Adjusted EBITDA:
Net income attributable to ADS $ 14,457 $ 1,839 $ 13,442 $ 799
Depreciation and amortization (a) 12,869 1,575 12,674 1,655
Interest expense, net 4,089 12 4,613 2
Income tax expense   10,446     620   9,216   479
Segment EBITDA 41,861 4,046 39,945 2,935
Derivative fair value adjustments (81 ) - 96 -
Foreign currency transaction losses - 94 - 130
Unconsolidated affiliates interest and tax - 130 41 136
Management fee to minority interest holder JV - 194 - 235
Share-based compensation 660 - 2,285 -
ESOP deferred compensation 2,520 - 2,687 -
Transaction costs (b)   118     -   715   -
Segment Adjusted EBITDA$45,078   $4,464$45,769$3,436
(a)   Includes our proportionate share of depreciation and amortization expense of $343 and $626 related to our Tigre ADS joint venture, BaySaver joint venture and Tigre ADS-USA joint venture, which is included in Net income of unconsolidated affiliates in our Condensed Consolidated Statements of Income for the three months ended June 30, 2013 and 2014, respectively.
(b) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with our debt refinancing and completion of the IPO.

Advanced Drainage Systems, Inc.
Michael Higgins, 614-658-0050
Mike.Higgins@ads-pipe.com

Source: Advanced Drainage Systems, Inc.