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Press Release Details

Advanced Drainage Systems Announces Second Quarter Fiscal 2019 Results

11/08/2018

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 non-residential, residential, infrastructure and agricultural applications, today announced financial results for the second fiscal quarter ended September 30, 2018.

Second Quarter Fiscal 2019 Highlights

  • Net sales increased 1.4% to $406.6 million
  • Net income increased 63.6% to $29.4 million
  • Adjusted EBITDA (Non-GAAP) increased 6.9% to $71.5 million

Fiscal Year to Date Highlights

  • Net sales increased 4.6% to $794.4 million
  • Net income increased 73.0% to $63.0 million
  • Adjusted EBITDA (Non-GAAP) increased 15.3% to $146.7 million
  • Cash provided by operating activities increased 104.9% to $58.2 million
  • Free cash flow (Non-GAAP) improved $37.5 million to $38.9 million

Scott Barbour, President and Chief Executive Officer of ADS commented, “We delivered solid top-line performance this quarter, reflecting growth in our domestic non-residential and residential construction end markets, double-digit growth in International sales and strong performance from Allied products. Net sales growth of 1.4% was negatively impacted by record rainfall in September throughout many of our key markets as well as the unfavorable comparison to September of last year when sales demand was accelerated due to Hurricane Irma and our corresponding pricing action. Absent these two items, our net sales growth for the quarter would have been mid- to high-single digits. Importantly, this quarter also marks our fourth consecutive quarter of year-over-year margin improvement driven by our disciplined execution, favorable pricing, and cost containment initiatives. As we look ahead, we will continue to focus on our key growth and execution strategies to drive above-market growth, while continuing to mitigate inflationary pressures, increase profitability and drive shareholder value. We remain confident in our outlook for the balance of the year, including the health of our core construction end markets, and look forward to building on our strong first half performance.”

Second Quarter Fiscal 2018 Results

Net sales increased 1.4% to $406.6 million, as compared to $401.0 million in the prior year. Domestic net sales decreased slightly to $351.3 million as compared to $351.9 million in the prior year. International net sales increased 12.4% to $55.3 million as compared to $49.2 million in the prior year, driven by sales growth in Canada, Mexico and our Exports business.

Gross profit increased 6.2% to $95.4 million, as compared to $89.8 million the prior year quarter. As a percentage of net sales, gross profit increased 110 basis points to 23.5%, compared to 22.4% in the prior year. The increase is primarily due to favorable pricing and cost containment, partially offset by higher inflationary costs, including resin and transportation expenses, among others.

Adjusted EBITDA (Non-GAAP) increased 6.9% to $71.5 million, as compared to $66.9 million in the prior year quarter. As a percentage of net sales, Adjusted EBITDA increased 90 basis points to 17.6% as compared to 16.7% in the prior year. The increase in Adjusted EBITDA margin was largely attributed to the factors mentioned above.

Reconciliations of GAAP to Non-GAAP financial measures for Adjusted EBITDA and Free Cash Flow 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.”

Fiscal Year-to-Date Results

Net sales increased 4.6% to $794.4 million, as compared to $759.4 million in the prior year. Domestic net sales increased 3.3% to $693.8 million as compared to $671.4 million in the prior year, primarily driven by solid construction market demand, favorable pricing and strong Allied product sales. International net sales increased 14.3% to $100.6 million as compared to $88.0 million in the prior year, driven by growth in Canada, Mexico and our Exports business.

Gross profit increased 10.5% to $195.1 million, as compared to $176.5 million the prior year. As a percentage of net sales, gross profit increased 130 basis points to 24.6% compared to 23.2% in the prior year. The increase is primarily due to favorable pricing and cost containment, partially offset by higher inflationary costs, including resin and transportation expenses, among others.

Adjusted EBITDA (Non-GAAP) increased 15.3% to $146.7 million, as compared to $127. 2 million in the prior year. As a percentage of net sales, Adjusted EBITDA increased 170 basis points to 18.5% as compared to 16.8% in the prior year. The increase in Adjusted EBITDA margin was largely attributed to the factors mentioned above.

Net cash provided by operating activities increased 104.9% to $58.2 million, as compared to $28.4 million in the prior year. Free cash flow (Non-GAAP) increased $37.5 million to $38.9 million, as compared to $1.4 million in the prior year. Net debt (total debt and capital lease obligations net of cash) was $346.6 million as of September 30, 2018, a decrease of $15.6 million from March 31, 2018.

Fiscal Year 2019 Outlook

Based on current visibility, backlog of existing orders and business trends, the Company reaffirmed its net sales and Adjusted EBITDA targets for fiscal 2019. Net sales are expected to be in the range of $1.375 billion to $1.425 billion and Adjusted EBITDA is expected to be in the range of $225 to $240 million. Capital expenditures are expected to be approximately $50 to $60 million.

Webcast Information

The Company will host an investor conference call and webcast on Thursday, November 8, 2018 at 10:00 a.m. Eastern Time. The live call can be accessed by dialing 1-844-484-0244 (US toll-free) or 1-647-689-5142 (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 one year following the call.

About the Company

Advanced Drainage Systems 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, overall product breadth and scale and manufacturing excellence. Founded in 1966, the Company operates a global network of approximately 55 manufacturing plants and over 30 distribution centers. To learn more about ADS, please visit the Company’s website at www.ads-pipe.com.

Forward Looking Statements

Certain statements in this press release may be deemed to be forward-looking statements. 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,” “confident” 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; fluctuations in our effective tax rate, including from the recently enacted Tax Cuts and Jobs Act; changes to our operating results, cash flows and financial condition attributable to the recently enacted Tax Cuts and Jobs Act; our ability to meet future capital requirements and fund our liquidity needs; the risk that additional information may arise that would require the Company to make additional adjustments or revisions or to restate the financial statements and other financial data for certain prior periods and any future periods, any delay in the filing of any filings with the Securities and Exchange Commission (“SEC”); the review of potential weaknesses or deficiencies in the Company’s disclosure controls and procedures, and discovering weaknesses of which we are not currently aware or which have not been detected and the other risks and uncertainties described in the Company’s filings with the SEC. 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   Six Months Ended
September 30, September 30,
(Amounts in thousands, except per share data) 2018   2017 2018   2017
Net sales $ 406,555 $ 401,049 $ 794,402 $ 759,408
Cost of goods sold   311,182     311,248     599,338     582,868  
Gross profit 95,373 89,801 195,064 176,540
Operating expenses:
Selling 24,731 24,346 48,896 47,445
General and administrative 21,584 23,887 42,966 50,563
Loss on disposal of assets and costs from exit and disposal activities 324 5,121 1,428 8,544
Intangible amortization   1,985     2,015     3,969     4,059  
Income from operations 46,749 34,432 97,805 65,929
Other expense:
Interest expense 4,531 5,055 8,333 9,534
Derivative gains and other income, net   94     (2,539 )   (720 )   (3,493 )
Income before income taxes 42,124 31,916 90,192 59,888
Income tax expense 12,194 13,437 26,478 23,183
Equity in net loss (income) of unconsolidated affiliates   558     520     691     272  
Net income 29,372 17,959 63,023 36,433
Less: net income attributable to noncontrolling interest   702     96     2,073     828  
Net income attributable to ADS 28,670 17,863 60,950 35,605
Dividends to redeemable convertible preferred stockholders (478 ) (470 ) (975 ) (959 )
Dividends paid to unvested restricted stockholders   (15 )   (16 )   (30 )   (35 )
Net income available to common stockholders and participating securities 28,177 17,377 59,945 34,611
Undistributed income allocated to participating securities   (2,310 )   (1,397 )   (5,022 )   (2,830 )
Net income available to common stockholders $ 25,867   $ 15,980   $ 54,923   $ 31,781  
 
Weighted average common shares outstanding:
Basic 56,929 55,269 56,776 55,286
Diluted 57,558 55,893 57,374 55,953
Net income per share:
Basic $ 0.45 $ 0.29 $ 0.97 $ 0.57
Diluted $ 0.45 $ 0.29 $ 0.96 $ 0.57
Cash dividends declared per share $ 0.08 $ 0.07 $ 0.16 $ 0.14
 
 

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

 
  As of
(Amounts in thousands) September 30, 2018   March 31, 2018
ASSETS
Current assets:
Cash $ 17,612 $ 17,587
Receivables, net 236,968 171,961
Inventories 247,161 263,792
Other current assets   7,219     5,113  
Total current assets 508,960 458,453
Property, plant and equipment, net 402,238 399,381
Other assets:
Goodwill 103,002 103,017
Intangible assets, net 40,693 44,437
Other assets   39,342     37,954  
Total assets $ 1,094,235   $ 1,043,242  
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations $ 26,395 $ 26,848
Current maturities of capital lease obligations 22,970 22,007
Accounts payable 95,861 105,521
Other accrued liabilities 65,116 60,560
Accrued income taxes   10,455     6,307  
Total current liabilities 220,797 221,243
Long-term debt obligations, net 252,524 270,900
Long-term capital lease obligations 62,283 59,963
Deferred tax liabilities 35,750 32,304
Other liabilities   24,721     25,023  
Total liabilities 596,075 609,433
Mezzanine equity:
Redeemable convertible preferred stock 285,117 291,247
Deferred compensation — unearned ESOP shares (185,376 ) (190,168 )
Redeemable noncontrolling interest in subsidiaries   8,968     8,471  
Total mezzanine equity 108,709 109,550
Stockholders’ equity:
Common stock 11,433 11,426
Paid-in capital 381,475 364,908
Common stock in treasury, at cost (9,035 ) (8,277 )
Accumulated other comprehensive loss (22,843 ) (21,247 )
Retained deficit   11,631     (39,214 )
Total ADS stockholders’ equity 372,661 307,596
Noncontrolling interest in subsidiaries   16,790     16,663  
Total stockholders’ equity   389,451     324,259  
Total liabilities, mezzanine equity and stockholders’ equity $ 1,094,235   $ 1,043,242  
 
 

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 
  Six Months Ended September 30,
(Amounts in thousands) 2018   2017
Cash Flow from Operating Activities
Net income $ 63,023 $ 36,433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 35,363 37,941
Deferred income taxes 3,221 (801 )
Loss on disposal of assets and costs from exit and disposal activities 1,428 8,544
ESOP and stock-based compensation 11,760 8,709
Amortization of deferred financing charges 387 550
Fair market value adjustments to derivatives (901 ) (590 )
Equity in net loss (income) of unconsolidated affiliates 691 272
Other operating activities (1,342 ) 12,078
Changes in working capital:
Receivables (64,649 ) (111,463 )
Inventories 16,378 46,205
Prepaid expenses and other current assets (2,116 ) 256
Accounts payable, accrued expenses, and other liabilities   (5,082 )   (9,745 )
Net cash provided by (used in) operating activities 58,161 28,389
Cash Flows from Investing Activities
Capital expenditures (19,299 ) (27,035 )
Other investing activities   429     (2,401 )
Net cash used in investing activities (18,870 ) (29,436 )
Cash Flows from Financing Activities
Proceeds from Revolving Credit Facility 250,100 335,950
Payments on Revolving Credit Facility (243,400 ) (273,650 )
Payments on Term Loan - (72,500 )
Proceeds from Senior Loan - 75,000
Payments on Senior Notes (25,000 ) (25,000 )
Debt issuance costs - (2,268 )
Payments of notes, mortgages, and other debt (465 ) (1,450 )
Payments on capital lease obligations (11,619 ) (12,217 )
Cash dividends paid (11,618 ) (8,673 )
Proceeds from option exercises 3,473 100
Repurchase of common stock - (7,947 )
Other financing activities   (561 )   (1,171 )
Net cash (used in) provided by financing activities (39,090 ) 6,174
Effect of exchange rate changes on cash   (176 )   (394 )
Net change in cash 25 4,733
Cash at beginning of period   17,587     6,450  
Cash at end of period $ 17,612   $ 11,183  
 

Selected Financial Data

The following tables set forth net sales by reportable segment for each of the periods indicated.

                 
Three Months Ended Six Months Ended
(Amounts in thousands September 30, % September 30, %
except percentages) 2018     2017 Variance 2018     2017 Variance
Domestic
Pipe $ 249,324 $ 256,175 (2.7 %) $ 491,350 $ 484,798 1.4 %
Allied Products   101,945   95,709 6.5 %   202,417   186,583 8.5 %
Domestic net sales $ 351,269 $ 351,884 (0.2 %) $ 693,767 $ 671,381 3.3 %
International
Pipe $ 44,008 $ 38,375 14.7 % $ 78,456 $ 68,329 14.8 %
Allied Products   11,278   10,790 4.5 %   22,179   19,698 12.6 %
International net sales $ 55,286 $ 49,165 12.4 % $ 100,635 $ 88,027 14.3 %
Consolidated
Pipe $ 293,332 $ 294,550 (0.4 %) $ 569,806 $ 553,127 3.0 %
Allied Products   113,223   106,499 6.3 %   224,596   206,281 8.9 %
Net sales $ 406,555 $ 401,049 1.4 % $ 794,402 $ 759,408 4.6 %
 

Employee Stock Ownership Plan (“ESOP”)

The Company established an ESOP to enable employees to acquire stock ownership in ADS in the form of redeemable convertible preferred shares (“preferred shares”). All preferred shares will be converted to common shares by plan maturity, which will be no later than March 2023. The ESOP’s conversion of preferred shares into common shares will have a meaningful impact on net income, net income per share and common shares outstanding. The common shares outstanding will be greater after conversion.

Net Income

The impact of the ESOP on net income includes the ESOP deferred compensation attributable to the preferred shares allocated to employee accounts during the period, which is a non-cash charge to our earnings and not deductible for income tax purposes.

         
Three Months Ended Six Months Ended
September 30, September 30,
(Amounts in thousands) 2018     2017 2018     2017
Net income attributable to ADS $ 28,670 $ 17,863 $ 60,950 $ 35,605
ESOP deferred compensation 4,368 2,595 8,389 5,209
 

Common shares outstanding

The conversion of the preferred shares will increase the number of common shares outstanding. Preferred shares will convert to common shares at plan maturity, or upon retirement, disability, death or vested terminations over the life of the plan.

         
Three Months Ended Six Months Ended
September 30, September 30,
(Shares in thousands) 2018     2017 2018     2017
Weighted average common shares outstanding - Basic   56,929   55,269   56,776   55,286
Conversion of preferred shares 17,711 18,353 17,799 18,470
Unvested restricted shares 83 223 87 240
 

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 (“GAAP”). ADS management uses non-GAAP measures in its analysis of the Company’s performance. Investors are encouraged to review the reconciliation of non-GAAP financial measures to the comparable GAAP results available in the accompanying tables.

Reconciliation of Non-GAAP Financial Measures

This press release includes references to Adjusted EBITDA and Free Cash Flow, non-GAAP financial measures. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These measures are not intended to be substitutes for those reported in accordance with GAAP. Adjusted EBITDA and Free Cash Flow may be different from non-GAAP financial measures used by other companies, even when similar terms are used to identify such measures.

EBITDA and Adjusted EBITDA are non-GAAP financial measures that comprise net income before interest, income taxes, depreciation and amortization, stock-based compensation, non-cash charges and certain other expenses. The Company’s definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Adjusted EBITDA is a key metric used by management and the Company’s board of directors to assess financial performance and evaluate the effectiveness of the Company’s business strategies. Accordingly, management believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as the Company’s management and board of directors. In order to provide investors with a meaningful reconciliation, the Company has provided below reconciliations of Adjusted EBITDA to net income.

Free Cash Flow is a non-GAAP financial measure that comprises cash flow from operating activities less capital expenditures. Free Cash Flow is a measure used by management and the Company’s board of directors to assess the Company’s ability to generate cash. Accordingly, management believes that Free Cash Flow provides useful information to investors and others in understanding and evaluating our ability to generate cash flow from operations after capital expenditures. In order to provide investors with a meaningful reconciliation, the Company has provided below a reconciliation of cash flow from operating activities to Free Cash Flow.

The following tables present a reconciliation of EBITDA and Adjusted EBITDA to Net Income and Free Cash Flow to Cash Flow from Operating Activities, the most comparable GAAP measures, for each of the periods indicated.

 

Reconciliation of Adjusted EBITDA to Net Income

 
  Three Months Ended   Six Months Ended
September 30, September 30,
(Amounts in thousands) 2018   2017 2018   2017
Net income $ 29,372 $ 17,959 $ 63,023 $ 36,433
Depreciation and amortization 17,536 19,720 35,363 37,941
Interest expense 4,531 5,055 8,333 9,534
Income tax expense   12,194   13,437   26,478   23,183
EBITDA 63,633 56,171 133,197 107,091
Derivative fair value adjustments 154 (781 ) 142 (590 )
Foreign currency transaction gains 818 (1,579 ) 647 (2,448 )
Loss on disposal of assets and costs from exit and disposal activities 324 5,121 1,428 8,544
Unconsolidated affiliates interest, tax, depreciation and amortization 271 715 650 1,423
Contingent consideration remeasurement (9 ) 6 (7 ) 32
Stock-based compensation expense 1,812 1,810 3,371 3,500
ESOP deferred compensation 4,368 2,595 8,389 5,209
Executive retirement (benefit) expense 50 894 (278 ) 909
Restatement-related (benefit) costs 35 1,042 (1,196 ) 2,502
Transaction costs   65   890   321   1,507
Adjusted EBITDA $ 71,521 $ 66,884 $ 146,664 $ 127,679
 
 

Reconciliation of Segment Adjusted EBITDA to Net Income

 
  Three Months Ended September 30,
2018     2017
(Amounts in thousands) Domestic   International Domestic   International
Net income $ 26,617 $ 2,755 $ 16,932 $ 1,027
Depreciation and amortization 15,638 1,898 17,658 2,062
Interest expense 4,434 97 4,971 84
Income tax expense   11,518   676   12,185   1,252
EBITDA 58,207 5,426 51,746 4,425
Derivative fair value adjustments 154 - (781 ) -
Foreign currency transaction gains - 818 - (1,579 )
Loss on disposal of assets and costs from exit and disposal activities (137 ) 461 4,994 127
Unconsolidated affiliates interest, tax, depreciation and amortization - 271 277 438
Contingent consideration remeasurement (9 ) - 6 -
Stock-based compensation expense 1,812 - 1,810 -
ESOP deferred compensation 4,368 - 2,595 -
Executive retirement (benefit) expense 50 - 894 -
Restatement-related (benefit) costs 35 - 1,042 -
Transaction costs   59   6   890   -
Adjusted EBITDA (a) $ 64,539 $ 6,982 $ 63,473 $ 3,411
 
 
Six Months Ended September 30,
2018 2017
(Amounts in thousands) Domestic International Domestic International
Net income $ 57,206 $ 5,817 $ 32,082 $ 4,351
Depreciation and amortization 31,591 3,772 33,921 4,020
Interest expense 8,191 142 9,356 178
Income tax expense   24,775   1,703   21,700   1,483
EBITDA 121,763 11,434 97,059 10,032
Derivative fair value adjustments 142 - (590 ) -
Foreign currency transaction gains - 647 - (2,448 )
Loss on disposal of assets and costs from exit and disposal activities 872 556 8,313 231
Unconsolidated affiliates interest, tax, depreciation and amortization - 650 571 852
Contingent consideration remeasurement (7 ) - 32 -
Stock-based compensation expense (benefit) 3,371 - 3,500 -
ESOP deferred compensation 8,389 - 5,209 -
Executive retirement expense (benefit) (278 ) - 909 -
Restatement-related costs (1,196 ) - 2,502 -
Transaction costs   315   6   1,057   -
Adjusted EBITDA (a) $ 133,371 $ 13,293 $ 118,562 $ 9,117
 
 

Reconciliation of Free Cash Flow to Cash flow from Operating Activities

 
      Six Months Ended September 30,
(Amounts in thousands) 2018   2017
Net cash provided by (used in) operating activities $ 58,161 $ 28,389
Capital expenditures   (19,299 )   (27,035 )
Free cash flow $ 38,862   $ 1,354  
 

Advanced Drainage Systems, Inc.
Michael Higgins, 614-658-0050
VP, Corporate Strategy & Investor Relations
Mike.Higgins@ads-pipe.com

Source: Advanced Drainage Systems, Inc.