By Bill Bregar
SENIOR STAFF REPORTER
Published: April 2, 2014 3:26 pm ET
Updated: April 2, 2014 7:10 pm ET
Plastics pipe giant Advanced Drainage Systems Inc. plans to make an initial public offering of stock, according to a Securities and Exchange Commission filing made by the Hilliard, Ohio-based company.
ADS filed a preliminary prospectus April 2, to sell its shares on the New York Stock Exchange.
Advanced Drainage sells more than $1 billion worth of pipe a year, most of it corrugated HDPE pipe. ADS also makes polypropylene pipe and produces storm and septic chambers.
According to the prospectus, ADS runs 48 factories and 19 distribution centers that cover all 50 states — giving it a dominating presence in nearly every market area, and making ADS by far the largest maker of corrugated HDPE pipe, which is used for drainage pipe and storm sewers. Because ADS pipe can be as large as five feet in diameter, most of the factories are small, with just two of three extruders. The company runs 120 pipe extrusion lines, the company reports in the SEC document.
The network of small, decentralized factories is done for economics, to cut transportation costs. The shipping radius is about 200 miles from each plant.
ADS also has company owned plants in Canada. It runs joint ventures in Mexico and Central and South America, targeted as growing areas for plastic pipe.
The filing said the company plans to use the proceeds to repay debt and for general corporate purposes, including working capital.
Run by longtime Chairman, CEO and President Joseph Chlapaty, Advanced Drainage already was a behemoth in corrugated HDPE when it bought its largest competitor, Hancor Inc., in 2005. Now, the prospectus said, it’s huge “in an otherwise highly fragmented sector,” of smaller players.
In fiscal year 2013, ended March 31 of last year, ADS generated sales of 1.02 billion, and net income of $30.18 million.
The company reported $887.8 million through the nine months of fiscal 2014, ended Dec.31. Net income was $24.7 million during that period. Fiscal 2014 just ended March 31, and full year results were not included in the prospectus.
Of the total, 88 percent of sales comes from domestic production, with the rest from international through the joint venture operations.
Domestic net sales are evenly split between residential construction and agricultural, each generating 21 percent. Infrastructure projects, like highway drainage, parking lots and sanitary sewers, account for 9 percent.
Private equity backer American Securities currently is the major owner of ADS. In 2010, American Securities bought the stake from Berkshire Partners LLC—an investment position that Berkshire had held for 22 years.
The prospectus lists four ownership groups, although it does not break out percentages: Management and other stockholders, the investment group, an employee stock ownership plan established in 1993, and public stockholders.
Chlapaty, 68, is not a member of the ESOP, the document said.
Even though Advanced Drainage has been the giant in corrugated pipe, for years the company was secretive and did not release much information. That has changed in recent years, as ADS made a series of purchases. Still, the IPO prospectus is full of juicy tidbits, especially about the pipe maker’s enormous appetite for resin:
• ADS buys more than 700 million pounds of virgin and recycled resin a year, from more than 450 suppliers in North America. And resins “currently account for over 60 percent of our cost of goods sold for pipe products,” the company said. That shows how resin prices play a major factor in profitability.
• ADS deals directly with major petrochemical and chemical suppliers. “We have long-standing relationships as well as supply contracts with some of these suppliers. But we have no fixed-price contracts with any of our major suppliers. Prices are typically negotiated on a continuous basis.”
• The company has a limited resin price hedging program that covers about 50 percent of its virgin resin.
• ADS is one of the largest polyethylene recyclers in the Unites States In 2013, recycled resin accounted for about 52 percent of the total resin used. That’s up from about 25 percent recycled content in 2005. ADS officials said using recycled resin reduces costs and the company’s exposure to fluctuating resin prices.
• ADS has a fleet of 625 tractor trailers, and about 1,000 tractor trailers specifically designed to haul its pipe.
• Over the past nine years, ADS has invested $173 million in custom designed mold and die tooling.
• ADS officials think the U.S. market has potential annual sales of $10.1 billion—ten times the current sales of ADS. Some of the growth could come from displacing other materials such as steel and concrete. Since construction and agriculture are the two key markets for Advanced Drainage, the report is full of detailed projections and market studies of farming, home building and spending on highways. | 
