Advanced Drainage Systems Inc. restated its annual finances and revealed March 30 that an inquiry by the U.S. Securities and Exchange Commission for accounting practices transitioned into an investigation almost four months ago.
“We're providing SEC with all the materials they've requested and the dialogue and the communication is very cordial. There's no consternation or elbow bumping here at all,” CEO Joe Chlapaty said during a conference call with investment bankers.
The manufacturer of high density polyethylene and polypropylene water management products discovered accounting problems soon after it went public in July 2014 and has been working on restating its financials going back to 2011.
For the fiscal 2016 year, which ends March 31, ADS's net sales of $1.28 billion “remain largely unaffected” by the restatement, added Chief Financial Officer Scott Cottrill, who recently joined the Hilliard, Ohio-based company and found it lacking in “requisite skill sets” in areas like technical accounting and SEC reporting. The majority of errors were related to inventory adjustments, lease accounting, a subsidiary in Mexico, and miscellaneous items.
“Overall, the total impact of all those adjustments was a $9.8 million reduction in adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] in fiscal '15,” Cottrill said.
He is overseeing a remediation effort that includes hiring an international controller, enhancing controls over journal entries, and using third-party consultants until more new talent is recruited.
ADS's fiscal year 2016 outlook had called for net sales of $1.3 billion but Cottrill said the company experienced lower-than-expected growth for products in the non-residential construction market and in Mexico, where public spending has curtailed. A weaker Canadian dollar also played a part in the lower fiscal results.
The company also lowered guidance and reported losses related to raw material and diesel fuel hedges, which decreased adjusted EBITDA from a range of $190 million to $215 million to $180 million to $190 million.