Market Overview

Advanced Drainage Systems Announces First Quarter Fiscal 2019 Results

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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 first fiscal
quarter ended June 30, 2018.

First Quarter Fiscal 2019 Highlights

  • Net sales increased 8.2% to $387.8 million
  • Net income increased 82.2% to $33.7 million
  • Adjusted EBITDA (Non-GAAP) increased 24.5% to $75.1 million
  • Cash provided by operating activities improved $26.4 million to
    $9.8 million
  • Free cash flow (Non-GAAP) improved $37.4 million to $3.0 million

Scott Barbour, President and Chief Executive Officer of ADS commented,
"We are very pleased with our strong start to the year, including solid
top line growth driven by above-market growth in both non-residential
and residential construction markets as well as strong performance from
our International businesses. We also benefited from disciplined
execution and growing demand for our allied products, which drove our
third consecutive quarter of year over year margin expansion. With the
backdrop of healthy expected growth in our core domestic construction
markets for the remainder of fiscal 2019, we remain focused on executing
our key growth strategies while continuing to take actions to mitigate
inflationary pressure, increase profitability and drive shareholder
value."

First Quarter Fiscal 2018 Results

Net sales increased 8.2% to $387.8 million, as compared to $358.4
million in the prior year. Domestic net sales increased 7.2% to $342.5
million as compared to $319.5 million in the prior year, driven by
strong demand and market conversion in the construction markets.
International net sales increased 16.7% to $45.3 million as compared to
$38.9 million in the prior year, driven by growth in Mexico and Canada.

Gross profit increased 14.9% to $99.7 million, as compared to $86.7
million the prior year quarter. As a percentage of net sales, gross
profit increased 150 basis points to 25.7% compared to 24.2% in the
prior year, primarily due to favorable pricing as well as lower
manufacturing costs.

Adjusted EBITDA (Non-GAAP) increased 24.5% to $75.1 million, as compared
to $60.3 million in the prior year quarter. As a percentage of net
sales, Adjusted EBITDA increased 260 basis points to 19.4% as compared
to 16.8% in the prior year. The increase in Adjusted EBITDA margin was
largely attributed to the factors mentioned above as well as a decrease
in selling, general and administrative expenses.

Net cash provided by operating activities increased $26.4 million to
$9.8 million, as compared to a use of $16.5 million in the prior year.
Free cash flow (Non-GAAP) increased $37.4 million to $3.0 million, as
compared to a use of $34.5 million in the prior year. Net debt (total
debt and capital lease obligations net of cash) was $366.0 million as of
June 30, 2018, an increase of $3.8 million from March 31, 2018.

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 2019 Outlook

Based on current visibility, backlog of existing orders and business
trends, the Company has provided 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, which is consistent with the Company's
previously issued guidance. The Company also is raising the bottom-end
of its Adjusted EBITDA range by $5 million to an updated range of $225
to $240 million. Capital expenditures are expected to be approximately
$60 to $70 million.

Webcast Information

The Company will host an investor conference call and webcast on
Thursday, August 9, 2018 at 10:00 a.m. Eastern Time. The live call can
be accessed by dialing 1-866-393-4306 (US toll-free) or 1-734-385-2616
(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 60 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
June 30,
(Amounts in thousands, except per share data) 2018   2017
Net sales $ 387,847 $ 358,359
Cost of goods sold   288,156   271,620
Gross profit 99,691 86,739
Operating expenses:
Selling 24,165 23,099
General and administrative 21,382 26,676
Loss on disposal of assets and costs from exit and disposal
activities
1,104 3,423
Intangible amortization   1,984   2,044
Income from operations 51,056 31,497
Other expense:
Interest expense 3,802 4,479
Derivative gains and other income, net   (814 )   (954 )
Income before income taxes 48,068 27,972
Income tax expense 14,284 9,746
Equity in net loss (income) of unconsolidated affiliates   133   (248 )
Net income 33,651 18,474
Less: net income attributable to noncontrolling interest   1,371   732
Net income attributable to ADS 32,280 17,742
Dividends to redeemable convertible preferred stockholders (497 ) (489 )
Dividends paid to unvested restricted stockholders   (15 )   (19 )
Net income available to common stockholders and participating
securities
31,768 17,234
Undistributed income allocated to participating securities   (2,712 )   (1,429 )
Net income available to common stockholders $ 29,056 $ 15,805
 
Weighted average common shares outstanding:
Basic 56,594 55,303
Diluted 57,158 56,010
Net income per share:
Basic $ 0.51 $ 0.29
Diluted $ 0.51 $ 0.28
Cash dividends declared per share $ 0.08 $ 0.07

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 
As of
(Amounts in thousands) June 30, 2018   March 31, 2018
ASSETS
Current assets:
Cash $ 18,394 $ 17,587
Receivables, net 228,905 171,961
Inventories 261,721 263,792
Other current assets   8,740   5,113
Total current assets 517,760 458,453
Property, plant and equipment, net 391,710 399,381
Other assets:
Goodwill 102,792 103,017
Intangible assets, net 42,486 44,437
Other assets   36,158   37,954
Total assets $ 1,090,906 $ 1,043,242
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt obligations $ 26,623 $ 26,848
Current maturities of capital lease obligations 21,787 22,007
Accounts payable 102,884 105,521
Other accrued liabilities 66,037 60,560
Accrued income taxes   16,090   6,307
Total current liabilities 233,421 221,243
Long-term debt obligations, net 278,561 270,900
Long-term capital lease obligations 57,388 59,963
Deferred tax liabilities 34,008 32,304
Other liabilities   22,950   25,023
Total liabilities 626,328 609,433
Mezzanine equity:
Redeemable convertible preferred stock 287,337 291,247
Deferred compensation — unearned ESOP shares (187,772 ) (190,168 )
Redeemable noncontrolling interest in subsidiaries   8,474   8,471
Total mezzanine equity 108,039 109,550
Stockholders' equity:
Common stock 11,431 11,426
Paid-in capital 375,215 364,908
Common stock in treasury, at cost (9,033 ) (8,277 )
Accumulated other comprehensive loss (24,684 ) (21,247 )
Retained deficit   (11,976 )   (39,214 )
Total ADS stockholders' equity 340,953 307,596
Noncontrolling interest in subsidiaries   15,586   16,663
Total stockholders' equity   356,539   324,259
Total liabilities, mezzanine equity and stockholders' equity $ 1,090,906 $ 1,043,242

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Three Months Ended June 30,
(Amounts in thousands) 2018   2017
Cash Flow from Operating Activities
Net income $ 33,651 $ 18,474
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17,827 18,221
Deferred income taxes 1,729 (281 )
Loss on disposal of assets and costs from exit and disposal
activities
1,104 3,423
ESOP and stock-based compensation 5,580 4,304
Amortization of deferred financing charges 191 353
Fair market value adjustments to derivatives (625 ) 191
Equity in net loss (income) of unconsolidated affiliates 133 (248 )
Other operating activities (1,030 ) (1,656 )
Changes in working capital:
Receivables (54,910 ) (47,469 )
Inventories 1,040 (2,445 )
Prepaid expenses and other current assets (3,665 ) (2,547 )
Accounts payable, accrued expenses, and other liabilities   8,806   (6,857 )
Net cash provided by (used in) operating activities 9,831 (16,537 )
Cash Flows from Investing Activities
Capital expenditures (6,874 ) (17,949 )
Other investing activities   (109 )   (254 )
Net cash used in investing activities (6,983 ) (18,203 )
Cash Flows from Financing Activities
Proceeds from Revolving Credit Facility 101,400 212,950
Payments on Revolving Credit Facility (93,700 ) (155,750 )
Payments on Term Loan - (72,500 )
Proceeds from Senior Loan - 75,000
Debt issuance costs - (2,268 )
Payments of notes, mortgages, and other debt (230 ) (1,225 )
Payments on capital lease obligations (5,885 ) (6,066 )
Cash dividends paid (6,141 ) (4,353 )
Proceeds from option exercises 3,215 6
Repurchase of common stock - (7,947 )
Other financing activities   (257 )   (652 )
Net cash (used in) provided by financing activities (1,598 ) 37,195
Effect of exchange rate changes on cash   (443 )   (188 )
Net change in cash 807 2,267
Cash at beginning of period   17,587   6,450
Cash at end of period $ 18,394 $ 8,717

Selected Financial Data

       
 

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

 
Three Months Ended
(Amounts in thousands June 30,

%
Variance

except percentages) 2018     2017
Domestic
Pipe $ 242,026 $ 228,623 5.9 %
Allied Products   100,472   90,874 10.6 %
Domestic net sales $ 342,498 $ 319,497 7.2 %
International
Pipe $ 34,448 $ 29,954 15.0 %
Allied Products   10,901   8,908 22.4 %
International net sales $ 45,349 $ 38,862 16.7 %
Consolidated
Pipe $ 276,474 $ 258,577 6.9 %
Allied Products   111,373   99,782 11.6 %
Net sales $ 387,847 $ 358,359 8.2 %

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
June 30,
(Amounts in thousands) 2018     2017
Net income attributable to ADS $ 32,280 $ 17,742
ESOP deferred compensation 4,021 2,614

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
March 31,
(Shares in thousands) 2018     2017
Weighted average common shares outstanding - Basic   56,594   55,303
Conversion of preferred shares 17,881 18,589
Unvested restricted shares 92 237

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
June 30,
(Amounts in thousands) 2018   2017
Net income $ 33,651 $ 18,474
Depreciation and amortization 17,827 18,221
Interest expense 3,802 4,479
Income tax expense   14,284   9,746
EBITDA 69,564 50,920
Derivative fair value adjustments (12 ) 191
Foreign currency transaction gains (171 ) (869 )
Loss on disposal of assets and costs from exit and disposal
activities
1,104 3,423
Unconsolidated affiliates interest, tax, depreciation and
amortization
379 708
Contingent consideration remeasurement 2 26
Stock-based compensation expense 1,559 1,690
ESOP deferred compensation 4,021 2,614
Executive retirement (benefit) expense (328 ) 15
Restatement-related (benefit) costs (1,231 ) 1,460
Transaction costs   256   167
Adjusted EBITDA $ 75,143 $ 60,345

Reconciliation of Segment Adjusted EBITDA to Net Income

 

 

Three Months Ended June 30,
2018   2017
(Amounts in thousands) Domestic   International Domestic     International
Net income $ 30,589 $ 3,062 $ 15,150 $ 3,324
Depreciation and amortization 15,953 1,874 16,263 1,958
Interest expense 3,757 45 4,385 94
Income tax expense   13,257   1,027   9,515   231
EBITDA 63,556 6,008 45,313 5,607
Derivative fair value adjustments (12 ) - 191 -
Foreign currency transaction gains - (171 ) - (869 )
Loss on disposal of assets and costs from exit and disposal
activities
1,009 95 3,319 104
Unconsolidated affiliates interest, tax, depreciation and
amortization
- 379 294 414
Contingent consideration remeasurement 2 - 26 -
Stock-based compensation expense 1,559 - 1,690 -
ESOP deferred compensation 4,021 - 2,614 -
Executive retirement (benefit) expense (328 ) - 15 -
Restatement-related (benefit) costs (1,231 ) - 1,460 -
Transaction costs   256   -   167   -

Adjusted EBITDA

$ 68,832 $ 6,311 $ 55,089 $ 5,256

Reconciliation of Free Cash Flow to Cash flow from Operating
Activities

 
 

 

Three Months Ended June 30,
(Amounts in thousands) 2018   2017
Net cash provided by (used in) operating activities $ 9,831 $ (16,537 )
Capital expenditures   (6,874 )   (17,949 )
Free cash flow $ 2,957 $ (34,486 )

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