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May 11, 2015 02:00 AM

Pension fund buys molder Infiltrator Systems

Catherine Kavanaugh
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    Infiltrator Systems Inc.
    Infiltrator Systems Inc. recently installed its largest machine, a press with 6,000 tons of clamping force, to produce 15-foot-long septic tank halves.

    Private equity firm Graham Partners Inc. has sold Infiltrator Systems Integrated LLC, a septic tank maker based in Saybrook, Conn., to a pension fund for $530 million.

    The new owner of the company, which had sales of $190 million in 2014, is the Ontario Teacher's Pension Plan (OTPP). The pension fund also is a partial owner of building materials maker CPG International Inc., the parent company of composite deck makers Azek and TimberTech.

    Infiltrator primarily serves the single-family and commercial construction markets with tanks and leach field products — the latter of which also is experiencing replacement demand because of failing septic systems.

    The company has a stable business outlook, according to Moody's Investors Services, which cites the business's strong market position in the wastewater industry. Advanced Drainage Systems Inc. is its largest customer, representing about 28 percent of 2014 sales.

    Moody's also noted Infiltrator's free cash flow is modest; the distribution network is diverse; and, margins are strong for earnings before interest, taxes, depreciation and amortization (EBITDA).

    For the period ending Jan. 2, the EBITDA margin was 20.1 percent.

    “We expect it to grow in 2015,” noted a Moody's rating notice issued May 7, which is the first time it assigned a rating to the company.

    Offsetting its strengths, Infiltrator is small, has high debt leverage — about $385 million of debt securities — concentrated customers and suppliers and is subject to the volatility of the construction market.

    However, Moody's says the key metrics should improve as the construction market continues to recover and plastic wastewater and storm water products take more share from traditional materials like concrete and stone.

    Infiltrator is a leading provider of plastic chambers for subsurface storm water retention and detention systems with a product line that offers advantages over traditional materials, such as cost-effective installation, reduced drain field footprint and design flexibility.

    The rating agency also notes Infiltrator has a team dedicated to new products designs based on engineering and regulatory requirements as well as “74 active patents which mitigate competition.”

    The company has 1,300 distribution centers and another 400 through its relationship with ADS. Infiltrator also has one key supplier representing about 25 percent of its recycled material purchases.

    Graham Partners bought Infiltrator in November 2005 as a portfolio company and made several add-on acquisitions over the years before putting it up for sale last summer. A call to a firm spokesman was not immediately returned.

    Moody's says Infiltrator derives about 88 percent of its sales from wastewater products and benefits from the stable demand to replace aging septic systems. Management estimated the replacement market for leachfield products represented about 45 percent of Infiltrator's installations in 2014, the agency said.

    Moody's says it expects adjusted debt-to-EBITDA to be below 6x at the end of fiscal year that closes on Jan. 1, 2016.

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