NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, AS RESTATED)
(Amounts in thousands, except per share data)
1.
|
BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
Advanced Drainage Systems, Inc. (collectively with its subsidiaries referred to as ADS, the Company,
we, us and our), incorporated in Delaware, designs, manufactures and markets high performance thermoplastic corrugated pipe and related water management products, primarily in North and South America and Europe.
Our broad product line includes corrugated high density polyethylene (or HDPE) pipe, polypropylene (or PP) pipe and related water management products.
The Company is managed based primarily on the geographies in which it operates and reports results of operations in two reportable segments.
The reportable segments are Domestic and International.
Historically, sales of the Companys products have been higher in the first
and second quarters of each fiscal year due to favorable weather and longer daylight conditions accelerating construction activity during these periods. Seasonal variations in operating results may also be impacted by inclement weather conditions,
such as cold or wet weather, which can delay projects.
2014 Initial Public Offering (IPO)
On July 11, 2014, in anticipation of the IPO, we executed a
4.707-for-one
split of our common and our preferred stock. The effect of the stock split on outstanding shares and earnings per share has been retroactively applied to
all periods presented.
On July 25, 2014, we completed the IPO of our common stock, which resulted in the sale by the Company of 5,289
shares of common stock. We received total proceeds from the IPO of $79,131 after excluding underwriter discounts and commissions of $5,501, based upon the price to the public of $16.00 per share. After deducting other offering expenses, we used the
net proceeds to reduce the outstanding indebtedness under the revolving portion of our credit facility. The common stock is listed on the New York Stock Exchange (NYSE) under the symbol WMS.
On August 22, 2014, an additional 600 shares of common stock were sold by certain selling stockholders of the Company as a result of the
partial exercise by the underwriters of the over-allotment option granted by the selling stockholders to the underwriters in connection with the IPO. The shares were sold at the public offering price of $16.00 per share. The Company did not receive
any proceeds from the sale of such additional shares.
2014 Secondary Public Offering
On December 9, 2014, we completed a secondary public offering of our common stock, which resulted in the sale of 10,000 shares of common
stock by a certain selling stockholder of the Company at a public offering price of $21.25. We did not receive any proceeds from the sale of shares by the selling stockholder.
On December 15, 2014, an additional 1,500 shares of common stock were sold by a certain selling stockholder of the Company as a result of
the full exercise by the underwriters of the over-allotment option granted by the selling stockholder to the underwriters in connection with the secondary public offering. The shares were sold at the public offering price of $21.25 per share. The
Company did not receive any proceeds from the sale of such additional shares.
Basis of Presentation
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America (GAAP). The Condensed Consolidated Balance Sheet as of March 31, 2015 was derived from audited financial statements. In our opinion, the accompanying unaudited condensed consolidated financial statements contain
all adjustments, of a normal recurring nature, in addition to the restatement adjustments described in Note 16. Restatement of Previously Issued Financial Statements, necessary to present fairly its financial position as of December 31, 2015
and the results of operations for the three and nine months ended December 31, 2015 and 2014 and cash flows for the nine months ended December 31, 2015 and 2014. The interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements, including the notes thereto, filed in our Annual Report on Form
10-K/A
for the year ended March 31, 2016 (Fiscal 2016 Form
10-K/A),
filed concurrently with this form
10-Q/A.
- 7 -
Principles of Consolidation
Our condensed consolidated financial statements include the Company, our wholly-owned subsidiaries, our majority-owned subsidiaries, including
ADS Mexicana, S.A. de C.V. (together with its affiliate ADS Corporativo, S.A. de C.V., ADS Mexicana) and BaySaver Technologies, LLC (BaySaver), and variable interest entities (VIEs) of which we are the primary
beneficiary. We use the equity method of accounting for equity investments where we exercise significant influence but do not hold a controlling financial interest. Such investments are recorded in Other assets in our Condensed Consolidated Balance
Sheets and the related equity earnings from these investments is included in Equity in net loss of unconsolidated affiliates in our Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in
consolidation.
Recent Accounting Pronouncements
Stock-Based Compensation
In March 2016, the Financial Accounting Standards Board issued an accounting standards update which is
intended to simplify certain aspects of the accounting for stock-based compensation. This amendment contains changes to the accounting for excess tax benefits, whereby excess tax benefits will be recognized in the income statement rather than in
additional
paid-in
capital on the balance sheet. The amendment also contains potential changes to the accounting for forfeitures, whereby entities can elect to either continue to apply the current GAAP
requirement to estimate forfeitures when determining compensation expense, or to alternatively reverse the compensation expense of forfeited awards when they occur. In addition, the amendment also modifies the
net-share
settlement liability classification exception for statutory income tax withholdings, whereby the new guidance allows an employer with a statutory income tax withholding obligation to withhold shares
with a fair value up to the maximum statutory tax rate in the employees applicable jurisdiction. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within those years, and early adoption
is permitted. We expect to adopt this standard effective April 1, 2017. We are currently evaluating the impact of this standard on our consolidated financial statements.
With the exception of the pronouncement described above, there have been no new accounting pronouncements issued since the filing of our Annual
Report on Form
10-K
for the year ended March 31, 2015 (Fiscal 2015 Form
10-K)
that have significance, or potential significance, to our consolidated
financial statements.
On July 17, 2015, ADS Ventures, Inc. (ADS/V), a
wholly-owned subsidiary of the Company, acquired an additional 10% of the issued and outstanding membership interests in BaySaver, increasing the Companys total ownership interest in BaySaver to 65%, for a purchase price of $3,200, plus
contingent consideration with an initial estimated fair value of $750. Concurrent with our purchase of the additional membership investment, the BaySaver joint venture agreement was amended to modify the voting rights from an equal vote for each
member to a vote based upon the ownership interest. As a result, we have accounted for this transaction as a business combination with BaySaver being consolidated into our financial statements after July 17, 2015.
As we had accounted for our investment in BaySaver prior to the purchase of the 10% additional membership interest under the equity method of
accounting, we accounted for this business combination as a step acquisition and recognized a loss of $490 on remeasurement to fair value of our previously held investment. The loss is included in Derivative losses and other expense, net in our
Condensed Consolidated Statements of Operations. The fair value of our BaySaver investment immediately before the July 17, 2015 acquisition was measured based on a combination of the discounted cash flow and guideline public company valuation
methods and involves significant unobservable inputs (Level 3). These inputs include projected sales, margin, required rate of return and tax rate for the discounted cash flow method, as well as implied pricing multiples, and guideline public
company group for the guideline public company method.
The purchase price was determined as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
Acquisition-date fair value of our prior equity interest
|
|
$
|
4,220
|
|
Acquisition-date fair value of noncontrolling interest
|
|
|
6,330
|
|
Cash paid at acquisition date
|
|
|
3,200
|
|
Fair value of contingent consideration
|
|
|
750
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
14,500
|
|
|
|
|
|
|
The preliminary purchase price has been allocated to the estimated fair values of acquired tangible and
intangible assets, assumed liabilities and goodwill. The preliminary fair value of identifiable intangible assets has been determined primarily
- 8 -
using the income approach, which involves significant unobservable inputs (Level 3 inputs). These inputs include projected sales, margin, required rate of return and tax rate, as well as an
estimated royalty rate in the cases of the developed technology and trade name and trademark intangibles. The developed technology and trade name and trademark intangibles are valued using a relief-from-royalty method.
Redeemable noncontrolling interest in subsidiaries is classified as mezzanine equity in our Condensed Consolidated Balance Sheets due to a put
option held by the joint venture partner, which may be exercised on or after April 1, 2017. The redeemable noncontrolling interest balance will be accreted to the redemption value using the effective interest method until April 1, 2017.
The excess of the preliminary purchase price over the fair value of the net assets acquired of $2,495 was allocated to goodwill, assigned
to the Domestic segment, and consists primarily of the acquired workforce and sales and cost synergies the two companies anticipate realizing as a combined company. None of the goodwill is deductible for tax purposes.
Certain estimated values for the acquisition, including intangible assets, goodwill and deferred taxes are not yet finalized. The preliminary
purchase price allocation is as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
Cash
|
|
$
|
12
|
|
Other current assets
|
|
|
2,262
|
|
Property, plant and equipment
|
|
|
164
|
|
Goodwill
|
|
|
2,495
|
|
Intangible assets
|
|
|
10,800
|
|
Other assets
|
|
|
152
|
|
Current liabilities
|
|
|
(1,385
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
14,500
|
|
|
|
|
|
|
The acquired identifiable intangible assets represent customer relationships of $5,400, developed technology of
$4,000 and trade name and trademark of $1,400, each of which have an estimated
10-year
useful life. Transaction costs were immaterial.
The net sales and income before income taxes of BaySaver since the acquisition date included in our Condensed Consolidated Statements of
Operations were $6,780, and $715, respectively.
The following table contains unaudited pro forma Consolidated Statements of Operations
information assuming the acquisition occurred on April 1, 2014 and includes adjustments for amortization of intangibles, interest expense and our prior equity method accounting for BaySaver. This pro forma information is presented for
illustrative purposes only and is not indicative of what actual results would have been if the acquisitions had taken place on April 1, 2014 or of future results. The unaudited pro forma consolidated results are not projections of future
results of operations of the combined company nor do they reflect the expected realization of any cost savings or synergies associated with the acquisition.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
December 31,
|
|
(Amounts in thousands)
|
|
2015
|
|
|
2014
|
|
Net sales
|
|
$
|
1,048,879
|
|
|
$
|
981,736
|
|
Net income attributable to ADS
|
|
$
|
37,209
|
|
|
$
|
16,859
|
|
Unaudited pro forma net income attributable to ADS has been calculated after adjusting the combined results of
the Company to reflect additional intangible asset amortization expense, net of related income taxes and amounts related to the noncontrolling interest, of $94 and $230, additional interest expense, net of related income taxes and amounts related to
the noncontrolling interest, of $10 and $27, and the impact of our prior equity method accounting of $109 and $302, net of related income taxes, for the nine months ended December 31, 2015 and 2014, respectively.
- 9 -
Inventories as of December 31, 2015 and March 31, 2015 consisted
of the following:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
December 31,
2015
|
|
|
March 31,
2015
|
|
Raw materials
|
|
$
|
44,403
|
|
|
$
|
50,198
|
|
Finished goods
|
|
|
155,186
|
|
|
|
210,352
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
199,589
|
|
|
$
|
260,550
|
|
|
|
|
|
|
|
|
|
|
We had no
work-in-process
inventories as of December 31, 2015 and March 31, 2015.
4.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
The change in carrying amount of goodwill by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Balance at March 31, 2015
|
|
$
|
87,507
|
|
|
$
|
11,172
|
|
|
$
|
98,679
|
|
Acquisition
|
|
|
2,495
|
|
|
|
|
|
|
|
2,495
|
|
Currency translation
|
|
|
|
|
|
|
(969
|
)
|
|
|
(969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
90,002
|
|
|
$
|
10,203
|
|
|
$
|
100,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
Intangible assets as of December 31, 2015 and March 31, 2015 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
(Amounts in thousands)
|
|
Gross
Intangible
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible
|
|
|
Gross
Intangible
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible
|
|
Definite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
44,579
|
|
|
$
|
(28,740
|
)
|
|
$
|
15,839
|
|
|
$
|
40,579
|
|
|
$
|
(26,405
|
)
|
|
$
|
14,174
|
|
Customer relationships
|
|
|
40,470
|
|
|
|
(21,614
|
)
|
|
|
18,856
|
|
|
|
43,167
|
|
|
|
(26,113
|
)
|
|
|
17,054
|
|
Patents
|
|
|
6,938
|
|
|
|
(4,012
|
)
|
|
|
2,926
|
|
|
|
6,547
|
|
|
|
(3,550
|
)
|
|
|
2,997
|
|
Non-compete
and other contractual agreements
|
|
|
1,231
|
|
|
|
(777
|
)
|
|
|
454
|
|
|
|
1,365
|
|
|
|
(691
|
)
|
|
|
674
|
|
Trademarks and tradenames
|
|
|
15,390
|
|
|
|
(3,903
|
)
|
|
|
11,487
|
|
|
|
14,248
|
|
|
|
(3,051
|
)
|
|
|
11,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
|
108,608
|
|
|
|
(59,046
|
)
|
|
|
49,562
|
|
|
|
105,906
|
|
|
|
(59,810
|
)
|
|
|
46,096
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
11,930
|
|
|
|
|
|
|
|
11,930
|
|
|
|
11,959
|
|
|
|
|
|
|
|
11,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
120,538
|
|
|
$
|
(59,046
|
)
|
|
$
|
61,492
|
|
|
$
|
117,865
|
|
|
$
|
(59,810
|
)
|
|
$
|
58,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
FAIR VALUE MEASUREMENT
|
The fair value measurements and disclosure principles of ASC 820
- Fair Value Measurements and Disclosures define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements. These principles define a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
Level 1 Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity has the ability to access as of the measurement date.
Level 2 Significant
other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
- 10 -
When applying fair value principles in the valuation of assets and liabilities, we are required
to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the periods presented. Our
fair value estimates take into consideration the credit risk of both the Company and our counterparties.
When active market quotes are not
available for financial assets and liabilities, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including
credit risk, interest rate curves, foreign currency rates and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value.
Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future cash flows based on internal and external inputs.
Recurring Fair Value Measurements
The assets and liabilities carried at fair value as of December 31, 2015 and March 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Amounts in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets - currency forward contracts
|
|
$
|
47
|
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a recurring basis
|
|
$
|
47
|
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - interest rate swaps
|
|
$
|
326
|
|
|
$
|
|
|
|
$
|
326
|
|
|
$
|
|
|
Derivative liability - diesel fuel contracts
|
|
|
3,639
|
|
|
|
|
|
|
|
3,639
|
|
|
|
|
|
Derivative liability - propylene swaps
|
|
|
12,552
|
|
|
|
|
|
|
|
12,552
|
|
|
|
|
|
Contingent consideration for acquisitions
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value on a recurring basis
|
|
$
|
19,243
|
|
|
$
|
|
|
|
$
|
16,517
|
|
|
$
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
(Amounts in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets - currency forward contracts
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
28
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a recurring basis
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
28
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - interest rate swaps
|
|
$
|
765
|
|
|
$
|
|
|
|
$
|
765
|
|
|
$
|
|
|
Derivative liability - diesel fuel contracts
|
|
|
2,841
|
|
|
|
|
|
|
|
2,841
|
|
|
|
|
|
Derivative liability - propylene swaps
|
|
|
5,142
|
|
|
|
|
|
|
|
5,142
|
|
|
|
|
|
Contingent consideration for acquisitions
|
|
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value on a recurring basis
|
|
$
|
11,192
|
|
|
$
|
|
|
|
$
|
8,748
|
|
|
$
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3)
for the three and nine months ended December 31, 2015 and 2014 were as follows:
Three months ended December 31, 2015 and 2014
|
|
|
|
|
(Amounts in thousands)
|
|
Contingent
consideration
|
|
Balance at September 30, 2015
|
|
$
|
2,869
|
|
Change in fair value
|
|
|
14
|
|
Payments of contingent consideration liability
|
|
|
(157
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
2,726
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Contingent
consideration
|
|
Balance at September 30, 2014
|
|
$
|
2,526
|
|
Change in fair value
|
|
|
(7
|
)
|
Payments of contingent consideration liability
|
|
|
(154
|
)
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
2,365
|
|
|
|
|
|
|
- 11 -
Nine months ended December 31, 2015 and 2014
|
|
|
|
|
(amounts in thousands)
|
|
Contingent
consideration
|
|
Balance at March 31, 2015
|
|
$
|
2,444
|
|
Acquisition
|
|
|
750
|
|
Change in fair value
|
|
|
114
|
|
Payments of contingent consideration liability
|
|
|
(582
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2014
|
|
(amounts in thousands)
|
|
Contingent
Consideration
|
|
|
Executive
stock
repurchase
agreements
|
|
|
Redeemable
common
stock
|
|
|
Redeemable
convertible
preferred
stock
|
|
|
Deferred
compensation
- unearned
ESOP shares
|
|
|
Total
|
|
Balance at March 31, 2014
|
|
$
|
2,898
|
|
|
$
|
16,934
|
|
|
$
|
549,359
|
|
|
$
|
291,720
|
|
|
$
|
(197,888
|
)
|
|
$
|
663,023
|
|
Allocation of ESOP shares to participants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,391
|
|
|
|
4,391
|
|
Change in fair value
|
|
|
(5
|
)
|
|
|
1,302
|
|
|
|
65,921
|
|
|
|
34,903
|
|
|
|
(23,849
|
)
|
|
|
78,272
|
|
Payments of contingent consideration liability
|
|
|
(528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(528
|
)
|
Transfer from Level 3
|
|
|
|
|
|
|
(18,236
|
)
|
|
|
(615,280
|
)
|
|
|
(326,623
|
)
|
|
|
217,346
|
|
|
|
(742,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
2,365
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended December 31, 2014, our Redeemable common stock transferred out of Level 3,
as these securities started actively trading on the NYSE during the second quarter of fiscal 2015. The liability associated with the executive stock repurchase agreements also transferred out of Level 3, as the underlying securities started
actively trading on the NYSE during the second quarter of fiscal 2015. In addition, our Redeemable convertible preferred stock and Deferred compensation unearned ESOP shares were reclassified from a recurring Level 3 fair value
measurement to a
non-recurring
Level 3 fair value measurement as a result of the IPO. See Note 1. Background and Summary of Significant Accounting Policies for further information on the IPO. There were
no further transfers in or out of Levels 1, 2 and 3 for the nine months ended December 31, 2015 and 2014, respectively.
Valuation
of our Contingent Consideration for Acquisitions
The fair values of the contingent consideration payables for prior period
acquisitions were calculated with reference to the estimated future value of the Inserta Tee and FleXstorm businesses, which are based on a discounted cash flow model. The undiscounted value is discounted to the present value using a market discount
rate. The fair value of the contingent consideration liability related to the BaySaver acquisition was calculated based on a disclounted cash flow model, whereby the probability-weighted estimated future payment value is discounted to the present
value using a market discount rate. The categorization of the framework used to price these liabilities is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
Valuation of our Redeemable Common Stock and Executive Stock Repurchase Agreements Obligations
Prior to July 2014, the Company had certain shares of common stock outstanding allowing the holder to put its shares to us for cash. This
Redeemable common stock was historically recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value were recorded in Retained earnings. Historically, the fair value of a share of
common stock was determined by management by applying industry-appropriate multiples to EBITDA and performing a discounted cash flow analysis. Under the industry-appropriate multiples approach, to arrive at concluded multiples, we considered
differences between the risk and return characteristics of ADS and the guideline companies. Under the discounted cash flow analysis, the cash flows expected to be generated by the Company were discounted to their present value equivalent using a
rate of return that reflects the relative risk of an investment in ADS, as well as the time value of money. This return was an overall rate based upon the individual rates of return for invested capital (equity and interest-bearing debt). The
return, known as the weighted average cost of capital (WACC), was calculated by weighting the required returns on interest-bearing debt
- 12 -
and common stock in proportion to their estimated percentages in an expected capital structure. The WACC used was 11% as of March 31, 2014. An increase in the WACC would decrease the fair
value of the Redeemable common stock. The categorization of the framework used to price this temporary equity was considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
The redemption feature of our Redeemable common stock allowing the holder to put its shares to us for cash, as discussed in the previous
paragraph, was not in effect upon effectiveness of the IPO on July 25, 2014. As a result, the Redeemable common stock was recorded as mezzanine equity at fair value through the effective date of the IPO and was subsequently reclassified at that
fair value to stockholders equity. See Note 1. Background and Summary of Significant Accounting Policies, for more information on the IPO.
The liability associated with the executive stock repurchase agreements was valued on the same basis as the Redeemable common stock, and as
such is also considered a Level 3 measurement. The executive stock repurchase agreements were terminated upon the IPO. As a result, this liability was recorded at fair value through the effective date of the IPO and was subsequently
reclassified at that fair value to stockholders equity.
Valuation of our Redeemable Convertible Preferred Stock
The Trustee of the Companys ESOP has the ability to put the shares of our Redeemable convertible preferred stock to the Company. Prior to
July 2014, our Redeemable convertible preferred stock was recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value were recorded in Retained earnings. Accordingly, we estimated
the fair value of the Redeemable Convertible Preferred Stock through estimating the fair value of the Companys common stock and applying certain adjustments including for the fair value of the total dividends to be received and assuming
conversion of the Redeemable convertible preferred stock to common stock at the stated conversion ratio per our Certificate of Incorporation. The categorization of the framework used to price this temporary equity was considered a Level 3, due
to the subjective nature of the unobservable inputs used to determine the fair value.
Upon the effective date of the IPO, the redemption
feature of our Redeemable convertible preferred stock allowing the Trustee of the Companys ESOP to put shares to us for cash was no longer applicable. However, if our common stock, which our Redeemable convertible preferred stock may convert
to, is no longer a registration-type class of security (e.g., in the event of a delisting), the option held by the Trustee, which granted it the ability to put the shares of our Redeemable convertible preferred stock to us, would then
become applicable. Preferred securities that become redeemable upon a contingent event that is not solely within the control of the Company should be classified outside of permanent equity. As of December 31, 2015, the Company has determined
that it is not probable that the redemption feature will become applicable. Since the Redeemable convertible preferred stock is not currently redeemable and it is not probable that the instrument will become redeemable, subsequent adjustment to fair
value is not required. As such, the Redeemable convertible preferred stock was recorded to fair value at the effective date of the IPO on July 25, 2014 and will remain in mezzanine equity without further adjustment to carrying value unless it
becomes probable that the redemption feature will become applicable. See Note 1. Background and Summary of Significant Accounting Policies, for more information on the IPO.
Nonrecurring Fair Value Measurements
Valuation of our Goodwill and Indefinite Lived Intangible Assets
Goodwill and indefinite lived intangible assets are tested for impairment annually as of March 31 or whenever events or changes in
circumstances indicate the carrying value may be greater than fair value.
6.
|
RELATED PARTY TRANSACTIONS
|
ADS Mexicana
ADS conducts business in Mexico and Central America through its joint venture ADS Mexicana. ADS owns 51% of the outstanding stock of ADS
Mexicana and consolidates ADS Mexicana for financial reporting purposes. During the three and nine months ended December 31, 2015 and 2014, ADS Mexicana compensated certain owners and former owners of Grupo Altima, the joint venture partner of
ADS Mexicana, for consulting services related to the operations of the business . These cash payments totaled $104 and $203 for the three and nine months ended December 31, 2015, respectively, and $102 and $271 for the three and nine months
ended December 31, 2014, respectively.
Occasionally, ADS and ADS Mexicana jointly enter into agreements for pipe sales with their
related parties. There were no such transactions during the three and nine months ended December 31, 2015 and $1,125 and $3,464 for the three and nine months ended December 31, 2014, respectively. Outstanding receivables related to these
sales were $361 and $1,005 as of December 31, 2015 and March 31, 2015, respectively.
- 13 -
In April 2015, ADS Mexicana borrowed $3,000 under a revolving credit facility arrangement with
Scotia Bank and loaned that amount to ADS, and such loan was repaid in May 2015. In June 2015, ADS Mexicana borrowed $3,854 under the Scotia Bank credit facility and loaned it to an entity owned by a Grupo Altima owner, and such loan was repaid
in July 2015. ADS does not guarantee the borrowings from this facility and therefore, does not anticipate any required contributions related to the balance of this credit facility.
We are the guarantor of 100% of ADS Mexicanas credit facility and our maximum potential payment under this guarantee totals $12,000.
South American Joint Venture
The Tuberias Tigre ADS Limitada joint venture (South American Joint Venture) manufactures and sells HDPE corrugated pipe in
the South American market. We are the guarantor for 50% of the South American Joint Ventures credit facility, and the debt guarantee is shared equally with the joint venture partner. Our maximum potential obligation under this guarantee totals
$6,844 as of December 31, 2015. The maximum borrowings permitted under the South American Joint Ventures credit facility are $19,000. This credit facility allows borrowings in either Chilean pesos or US dollars at a fixed interest rate
determined at inception of each draw on the facility. The guarantee of South American Joint Ventures debt is for the life of the credit facility which matures on February 5, 2017. ADS does not anticipate any required contributions related
to the balance of this credit facility. As of December 31, 2015 and March 31, 2015, the outstanding principal balance of the credit facility including letters of credit was $13,700 and $13,600, respectively. The weighted average interest
rate as of December 31, 2015 was 3.39% on U.S. dollar denominated loans and 7.30% on Chilean peso denominated loans.
ADS and the
South American Joint Venture have entered into shared services arrangements in order to execute the joint venture services. Included within these arrangements are the lease of an office and plant location used to conduct business and operating
expenses related to these leased facilities. Occasionally, ADS and South American Joint Venture jointly enter into agreements for pipe sales with their related parties which were $236 and $1,117 for the three and nine months ended December 31,
2015, respectively and $185 and $648 for the three and nine months ended December 31, 2014. As of December 31, 2015, ADS had a receivable from the South American Joint Venture of $254.
BaySaver
BaySaver
is a joint venture that was established to produce and distribute water quality filters and separators used in the removal of sediment and pollution from storm water. ADS owns 65% of the outstanding membership interests of BaySaver and consolidates
its interest in BaySaver.
ADS and BaySaver have entered into shared services arrangements in order to execute the joint venture services.
Included within these arrangements are the lease of a plant and adjacent yard used to conduct business and operating expenses related to the leased facility. Occasionally, ADS and BaySaver jointly enter into agreements for sales of pipe and Allied
Products with their related parties in immaterial amounts.
Long-term debt as of December 31, 2015 and March 31, 2015 consisted of
the following:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
Bank Term Loans
|
|
|
|
|
|
|
|
|
Revolving Credit Facility ADS
|
|
$
|
149,500
|
|
|
$
|
205,100
|
|
Term Note
|
|
|
85,000
|
|
|
|
91,250
|
|
Senior Notes payable
|
|
|
100,000
|
|
|
|
100,000
|
|
Industrial revenue bonds
|
|
|
2,925
|
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
337,425
|
|
|
|
399,895
|
|
Current maturities
|
|
|
(35,860
|
)
|
|
|
(9,580
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt obligation
|
|
$
|
301,565
|
|
|
$
|
390,315
|
|
|
|
|
|
|
|
|
|
|
- 14 -
ADS Mexicana Scotia Bank Revolving Credit Facility
On December 11, 2014, our joint venture, ADS Mexicana, entered into a credit agreement with Scotia Bank. The credit agreement provides for
revolving loans up to a maximum aggregate principal amount of $5,000. The proceeds of the revolving credit facility have primarily been used for short-term investment and are available for working capital needs. The interest rates of the revolving
credit facilities are determined by LIBOR rates, Tasa de Interes Interbancaria de Equilibrio (TIIE) or the Costos de Captacion rates, plus an applicable margin. The Scotia Bank revolving credit facility matures on December 11, 2017. The
obligations under the revolving credit facility are not guaranteed by ADS. As of December 31, 2015, there was no outstanding principal drawn on the Scotia Bank revolving credit facility with $5,000 available to be drawn.
8.
|
DERIVATIVE TRANSACTIONS
|
The Company uses interest rate swaps, commodity options in the
form of collars and swaps, and foreign currency forward contracts to manage its various exposures to interest rate, commodity price, and exchange rate fluctuations. For interest rate swaps, the difference between the spot rate and applicable
base rate is recorded in Interest expense. Contract settlement gains and losses on collars, commodity swaps and foreign exchange forward contracts as well as gains and losses related to the
mark-to-market
adjustments for changes in fair value of the derivative contracts are recorded in the Condensed Consolidated Statements of Operations as Derivative losses and other expense, net. The Company
recognized (losses) and gains on
mark-to-market
adjustments for changes in fair value on derivative contracts of $1,784 and $(6,054) for the three months ended
December 31, 2015 and 2014, respectively, and $(7,750) and $(6,217) for the nine months ended December 31, 2015 and 2014, respectively.
The fair value of the derivatives is included in the Condensed Consolidated Balance sheet at December 31, 2015 and March 31, 2015 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Assets
|
|
|
Liabilities
|
|
(Amounts in thousands)
|
|
Receivables
|
|
|
Other assets
|
|
|
Other accrued
liabilities
|
|
|
Other
liabilities
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(326
|
)
|
|
$
|
|
|
Foreign exchange forward contracts
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel fuel option collars and swaps
|
|
|
|
|
|
|
|
|
|
|
(3,364
|
)
|
|
|
(275
|
)
|
Propylene swaps
|
|
|
|
|
|
|
|
|
|
|
(11,704
|
)
|
|
|
(848
|
)
|
|
|
|
|
March 31, 2015
|
|
|
|
Assets
|
|
|
Liabilities
|
|
(Amounts in thousands)
|
|
Receivables
|
|
|
Other assets
|
|
|
Other accrued
liabilities
|
|
|
Other
liabilities
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(150
|
)
|
|
$
|
(615
|
)
|
Foreign exchange forward contracts
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel fuel option collars and swaps
|
|
|
|
|
|
|
|
|
|
|
(1,883
|
)
|
|
|
(958
|
)
|
Propylene swaps
|
|
|
|
|
|
|
|
|
|
|
(4,412
|
)
|
|
|
(730
|
)
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Purchase Commitments
We will, from time to time, secure supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed
price. These purchase contracts are short term in nature and occur in the ordinary course of business. Under such purchase contracts, we have agreed to purchase resin over the period January 2016 through December 2016 at a committed purchase cost of
$24,240.
Litigation
On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all others similarly situated v.
Advanced Drainage Systems, Inc., et al. (Case
No. 1:15-cv-05955-KPF),
was commenced in the U.S. District Court for the
Southern District of New York, naming the Company, along with Joseph A. Chlapaty, the Companys Chief Executive Officer, and Mark B. Sturgeon, the Companys former Chief Financial Officer, as defendants and alleging violations of the
federal securities laws. An amended complaint was filed on April 28, 2016. The amended complaint alleges that the Company made material misrepresentations and/or omissions of material fact in its public disclosures during the period from
July 25, 2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5
- 15 -
promulgated thereunder. Plaintiffs seek an unspecified amount of monetary damages on behalf of the putative class and an award of costs and expenses, including counsel fees and expert fees. The
Company believes that it has valid and meritorious defenses and will vigorously defend against these allegations, but litigation is subject to many uncertainties and the outcome of this matter is not predictable with assurance. While it is
reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but they could be material.
On August 12, 2015, the SEC Division of Enforcement (Enforcement Division) informed the Company that it was conducting an
informal inquiry with respect to the Company. As part of this inquiry, the Enforcement Division requested the voluntary production of certain documents generally related to the Companys accounting practices. Subsequent to the initial voluntary
production request, the Company received document subpoenas from the Enforcement Division pursuant to a formal order of investigation. The Company has from the outset cooperated with the Enforcement Divisions investigation and intends to
continue to do so. While it is reasonably possible that this investigation ultimately could be resolved unfavorably to the Company, the Company is currently unable to estimate the range of possible losses, but they could be material.
We are involved from time to time in various legal proceedings that arise in the ordinary course of our business, including but not limited to
commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. We believe that such litigation, claims, and administrative
proceedings will not have a material adverse impact on our financial position or our results of operations. We record a liability when a loss is considered probable, and the amount can be reasonably estimated. In managements opinion, none of
these proceedings are material in relation to our consolidated operations, cash flows, or financial position, and we have adequate accrued liabilities to cover our estimated probable loss exposure.
10.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The following table presents the changes in the
balance of Accumulated other comprehensive loss (AOCL) for the nine months ending December 31, which consists entirely of foreign currency translation gains (losses):
|
|
|
|
|
(Amounts in thousands)
|
|
Accumulated
Other
Comprehensive Loss
|
|
Balance at April 1, 2014
|
|
$
|
(6,830
|
)
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(4,730
|
)
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(11,560
|
)
|
|
|
|
|
|
Balance at April 1, 2015
|
|
|
(15,521
|
)
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(10,601
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(26,122
|
)
|
|
|
|
|
|
The Companys effective tax rate will vary based on a variety of
factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other onetime charges, as well as discrete events, such as provision to return adjustments. For the
nine months ended December 31, 2015 and 2014, the Company utilized an effective tax rate of 35.2% and 43.8%, respectively, to calculate its provision for income taxes. The effective tax rate for the first nine months of the fiscal 2016 is lower
than the prior year period primarily due to the shift in the projections of the proportion of income earned and higher income before income taxes reducing the impact of
non-deductible
items in our tax
calculations.
12.
|
NET INCOME (LOSS) PER SHARE
|
Basic net income (loss) per share is calculated by dividing
the Net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the Net
income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period.
Holders
of unvested restricted stock have nonforfeitable rights to dividends when declared on common stock, and holders of Redeemable convertible preferred stock participate in dividends on an
as-converted
basis when
declared on common stock. As a result, unvested restricted stock and Redeemable convertible preferred stock meet the definition of participating securities, which requires us to apply the
two-class
method to
compute both basic and diluted net income (loss) per share. The
two-class
method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have
been available to common stockholders.
- 16 -
The dilutive effect of stock options and unvested restricted stock is based on the more dilutive
of the treasury stock method or the diluted
two-class
method. In computing diluted net income (loss) per share, income available to common shareholders used in the basic net income (loss) per share calculation
(numerator) is adjusted, subject to sequencing rules, for certain adjustments that would result from the assumed issuance of potential common shares. Diluted net income (loss) per share assumes the Redeemable convertible preferred stock would be
cash settled through the effective date of the IPO on July 25, 2014, as we have the choice of settling in cash or shares and we have demonstrated past practice and intent of cash settlement. Therefore these shares are excluded from the
calculation through the effective date of the IPO. After the effective date of the IPO, Managements intent is to share settle; therefore, these shares are included in the calculation from July 26, 2014 through December 31, 2015, if
dilutive. For purposes of the calculation of diluted net income (loss) per share, stock options and unvested restricted stock are considered to be potential common stock and are only included in the calculations when their effect is dilutive.
Prior to the effective date of the IPO, the Companys Redeemable common stock was included in the weighted-average number of common shares
outstanding for calculating basic and diluted net income (loss) per share.
The following table presents information necessary to calculate
net income (loss) per share for the three and nine months ended December 31, 2015 and 2014, as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would
have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Nine Months Ended
December 31,
|
|
(Amounts in thousands, except per share data)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Net income (loss) per share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ADS
|
|
$
|
13,131
|
|
|
$
|
(4,641
|
)
|
|
$
|
37,171
|
|
|
$
|
16,813
|
|
Adjustment for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable noncontrolling interest
|
|
|
(329
|
)
|
|
|
|
|
|
|
(586
|
)
|
|
|
|
|
Change in fair value of redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,054
|
)
|
Dividends to redeemable convertible preferred stock
|
|
|
(349
|
)
|
|
|
(298
|
)
|
|
|
(1,082
|
)
|
|
|
(377
|
)
|
Dividends paid to unvested restricted stockholders
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
(18
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders and participating securities
|
|
|
12,447
|
|
|
|
(4,948
|
)
|
|
|
35,485
|
|
|
|
5,373
|
|
Undistributed income allocated to participating securities
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
(2,965
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders - Basic
|
|
|
11,431
|
|
|
|
(4,948
|
)
|
|
|
32,520
|
|
|
|
4,995
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
54,133
|
|
|
|
52,986
|
|
|
|
53,880
|
|
|
|
50,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - Basic
|
|
$
|
0.21
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.60
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders - Basic
|
|
$
|
11,431
|
|
|
$
|
(4,948
|
)
|
|
$
|
32,520
|
|
|
$
|
4,995
|
|
Amount allocated to participating preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on an as if converted common dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional compensation for leverage ESOP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders - Diluted
|
|
|
11,431
|
|
|
|
(4,948
|
)
|
|
|
32,520
|
|
|
|
4,995
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
54,133
|
|
|
|
52,986
|
|
|
|
53,880
|
|
|
|
50,691
|
|
Assumed conversion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options
|
|
|
1,269
|
|
|
|
|
|
|
|
1,311
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
55,402
|
|
|
|
52,986
|
|
|
|
55,191
|
|
|
|
51,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - Diluted
|
|
$
|
0.21
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.59
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded as anti-dilutive
|
|
|
6,229
|
|
|
|
7,431
|
|
|
|
6,467
|
|
|
|
3,815
|
|
13.
|
BUSINESS SEGMENTS INFORMATION
|
We operate our business in two distinct operating and
reportable segments based on the markets we serve: Domestic and International. The Chief Operating Decision Maker (CODM) evaluates segment reporting based on net sales and Segment Adjusted EBITDA (a
non-GAAP
measure). We calculate Segment Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization, stock-based compensation expense,
non-cash
charges and certain other expenses.
- 17 -
Domestic
Our Domestic segment manufactures and markets products throughout the United States. We maintain and serve these markets through strong product
distribution relationships with many of the largest national and independent waterworks distributors, major national retailers as well as an extensive network of hundreds of small to
medium-sized
distributors
across the U.S. We also sell through a broad variety of buying groups and
co-ops
in the United States. Products include Singlewall pipe,
N-12
HDPE pipe sold into the
Storm sewer and Infrastructure markets, high performance PP pipe sold into the Storm sewer and sanitary sewer markets, and our broad line of Allied Products including StormTech, Nyloplast, Arc Septic Chambers, Inserta Tee, BaySaver filters and water
quality structures, Fittings, and FleXstorm. Our Domestic segment sales are diversified across all regions of the country.
International
Our
International segment manufactures and markets products in regions outside of the United States, with a growth strategy focused on our owned facilities in Canada and through our joint-ventures, with local partners in Mexico, Central America and
South America. Our joint venture strategy provides us with local and regional access to new markets such as Brazil, Chile, Argentina, Peru and Colombia. Our Mexican joint venture through ADS Mexicana primarily serves the Mexican markets, while our
South American Joint Venture is our primary channel to serve the South American markets. Our product line includes Singlewall pipe,
N-12
HDPE pipe, and high performance PP pipe. The Canadian market also sells
our broad line of Allied Products, while sales in Latin America are currently concentrated in fittings and Nyloplast.
The following table
sets forth reportable segment information with respect to the amount of net sales contributed by each class of similar products of our consolidated gross profit for the three and nine months ended December 31, 2015 and 2014, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
(Amounts in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe
|
|
$
|
196,162
|
|
|
$
|
179,979
|
|
|
$
|
654,987
|
|
|
$
|
637,728
|
|
Allied Products
|
|
|
70,588
|
|
|
|
59,236
|
|
|
|
237,228
|
|
|
|
210,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic
|
|
|
266,750
|
|
|
|
239,215
|
|
|
|
892,215
|
|
|
|
848,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe
|
|
|
34,451
|
|
|
|
34,171
|
|
|
|
121,368
|
|
|
|
102,320
|
|
Allied Products
|
|
|
11,626
|
|
|
|
6,485
|
|
|
|
31,697
|
|
|
|
22,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
46,077
|
|
|
|
40,656
|
|
|
|
153,065
|
|
|
|
124,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
312,827
|
|
|
$
|
279,871
|
|
|
$
|
1,045,280
|
|
|
$
|
973,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following sets forth certain additional financial information attributable to our reportable segments for
the three and nine months ended December 31, 2015 and 2014, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
(Amounts in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
266,750
|
|
|
$
|
239,215
|
|
|
$
|
892,215
|
|
|
$
|
848,616
|
|
International
|
|
|
46,077
|
|
|
|
40,656
|
|
|
|
153,065
|
|
|
|
124,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
312,827
|
|
|
$
|
279,871
|
|
|
$
|
1,045,280
|
|
|
$
|
973,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
66,503
|
|
|
|
41,901
|
|
|
|
204,323
|
|
|
|
162,156
|
|
International
|
|
|
8,339
|
|
|
|
7,386
|
|
|
|
31,525
|
|
|
|
18,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,842
|
|
|
$
|
49,287
|
|
|
$
|
235,848
|
|
|
$
|
180,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
44,458
|
|
|
|
30,535
|
|
|
|
140,865
|
|
|
|
126,746
|
|
International
|
|
|
5,058
|
|
|
|
3,472
|
|
|
|
24,836
|
|
|
|
9,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,516
|
|
|
$
|
34,007
|
|
|
$
|
165,701
|
|
|
$
|
135,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
4,606
|
|
|
|
4,613
|
|
|
|
13,544
|
|
|
|
14,675
|
|
International
|
|
|
117
|
|
|
|
18
|
|
|
|
412
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,723
|
|
|
$
|
4,631
|
|
|
$
|
13,956
|
|
|
$
|
14,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 18 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
(Amounts in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
15,221
|
|
|
|
14,742
|
|
|
|
45,626
|
|
|
|
44,338
|
|
International
|
|
|
2,081
|
|
|
|
1,376
|
|
|
|
6,427
|
|
|
|
4,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,302
|
|
|
$
|
16,118
|
|
|
$
|
52,053
|
|
|
$
|
48,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(99
|
)
|
|
|
(92
|
)
|
|
|
224
|
|
|
|
312
|
|
International
|
|
|
(818
|
)
|
|
|
(896
|
)
|
|
|
(1,159
|
)
|
|
|
(2,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(917
|
)
|
|
$
|
(988
|
)
|
|
$
|
(935
|
)
|
|
$
|
(1,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
7,446
|
|
|
|
4,673
|
|
|
|
23,921
|
|
|
|
19,461
|
|
International
|
|
|
2,327
|
|
|
|
1,012
|
|
|
|
6,049
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,773
|
|
|
$
|
5,685
|
|
|
$
|
29,970
|
|
|
$
|
21,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following sets forth certain additional financial information attributable to our reporting segments as of
December 31, 2015 and March 31, 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
March 31,
2015
|
|
Investment in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
2,976
|
|
|
$
|
7,957
|
|
International
|
|
|
13,739
|
|
|
|
17,081
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,715
|
|
|
$
|
25,038
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
909,178
|
|
|
$
|
938,996
|
|
International
|
|
|
144,230
|
|
|
|
168,320
|
|
Eliminations
|
|
|
(50,132
|
)
|
|
|
(69,192
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,003,276
|
|
|
$
|
1,038,124
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Segment Adjusted EBITDA to Net (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
(Amounts in thousands)
|
|
Domestic
|
|
|
International
|
|
|
Domestic
|
|
|
International
|
|
Net income (loss)
|
|
$
|
13,846
|
|
|
$
|
(904
|
)
|
|
$
|
(5,199
|
)
|
|
$
|
1,930
|
|
Depreciation and amortization
|
|
|
15,221
|
|
|
|
2,081
|
|
|
|
14,742
|
|
|
|
1,376
|
|
Interest expense
|
|
|
4,606
|
|
|
|
117
|
|
|
|
4,613
|
|
|
|
18
|
|
Income tax expense
|
|
|
7,196
|
|
|
|
2,894
|
|
|
|
2,251
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
40,869
|
|
|
|
4,188
|
|
|
|
16,407
|
|
|
|
3,571
|
|
Derivative fair value adjustment
|
|
|
(1,733
|
)
|
|
|
(51
|
)
|
|
|
6,310
|
|
|
|
(256
|
)
|
Foreign currency transaction losses (gains)
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
(561
|
)
|
(Gain) loss on disposal of assets or businesses
|
|
|
(546
|
)
|
|
|
(57
|
)
|
|
|
175
|
|
|
|
18
|
|
Unconsolidated affiliates interest, tax depreciation and amortization
(a)
|
|
|
223
|
|
|
|
409
|
|
|
|
648
|
|
|
|
700
|
|
Contingent consideration remeasurement
|
|
|
14
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
Stock-based compensation (benefit) expense
|
|
|
(5,206
|
)
|
|
|
|
|
|
|
3,894
|
|
|
|
|
|
ESOP deferred stock-based compensation
|
|
|
3,125
|
|
|
|
|
|
|
|
2,690
|
|
|
|
|
|
Expense related to executive termination payments
|
|
|
94
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
Restatement costs
(b)
|
|
|
7,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs
(c)
|
|
|
|
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
44,458
|
|
|
$
|
5,058
|
|
|
$
|
30,535
|
|
|
$
|
3,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 19 -
(a)
|
Includes our proportional share of interest, income taxes, depreciation and amortization related to our South American Joint Venture and our
Tigre-ADS
USA Joint Venture, which are
accounted for under the equity method of accounting. In addition, these amounts include our proportional share of interest, income taxes, depreciation and amortization related to our BaySaver Joint Venture prior to our acquisition of BaySaver on
July 17, 2015, which was previously accounted for under the equity method of accounting.
|
(b)
|
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with the restatement of our prior period financial statements as reflected in the Fiscal 2015 Form
10-K.
|
(c)
|
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with our secondary public offering in fiscal year 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
(Amounts in thousands)
|
|
Domestic
|
|
|
International
|
|
|
Domestic
|
|
|
International
|
|
Net income
|
|
$
|
28,067
|
|
|
$
|
13,585
|
|
|
$
|
16,084
|
|
|
$
|
5,129
|
|
Depreciation and amortization
|
|
|
45,626
|
|
|
|
6,427
|
|
|
|
44,338
|
|
|
|
4,181
|
|
Interest expense
|
|
|
13,544
|
|
|
|
412
|
|
|
|
14,675
|
|
|
|
51
|
|
Income tax expense (benefit)
|
|
|
20,725
|
|
|
|
2,431
|
|
|
|
19,112
|
|
|
|
(1,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
107,962
|
|
|
|
22,855
|
|
|
|
94,209
|
|
|
|
8,116
|
|
Derivative fair value adjustment
|
|
|
7,768
|
|
|
|
(18
|
)
|
|
|
6,473
|
|
|
|
(256
|
)
|
Foreign currency transaction losses (gains)
|
|
|
|
|
|
|
735
|
|
|
|
|
|
|
|
(636
|
)
|
Loss (gain) on disposal of assets or businesses
|
|
|
795
|
|
|
|
(237
|
)
|
|
|
486
|
|
|
|
52
|
|
Unconsolidated affiliates interest, tax depreciation and amortization
(a)
|
|
|
769
|
|
|
|
1,501
|
|
|
|
1,188
|
|
|
|
1,835
|
|
Contingent consideration remeasurement
|
|
|
114
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
Stock-based compensation (benefit) expense
|
|
|
(2,994
|
)
|
|
|
|
|
|
|
14,023
|
|
|
|
|
|
ESOP deferred stock-based compensation
|
|
|
9,375
|
|
|
|
|
|
|
|
8,064
|
|
|
|
|
|
Expense related to executive termination payments
|
|
|
258
|
|
|
|
|
|
|
|
246
|
|
|
|
|
|
Expense related to executive stock repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
|
|
|
|
Loss related to BaySaver step acquisition
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement costs
(b)
|
|
|
16,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs
(c)
|
|
|
|
|
|
|
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
140,865
|
|
|
$
|
24,836
|
|
|
$
|
126,746
|
|
|
$
|
9,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes our proportional share of interest, income taxes, depreciation and amortization related to our South American Joint Venture and our
Tigre-ADS
USA Joint Venture, which are
accounted for under the equity method of accounting. In addition, these amounts include our proportional share of interest, income taxes, depreciation and amortization related to our BaySaver Joint Venture prior to our acquisition of BaySaver on
July 17, 2015, which was previously accounted for under the equity method of accounting.
|
(b)
|
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with the restatement of our prior period financial statements as reflected in the Fiscal 2015 Form
10-K.
|
(c)
|
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with our IPO and secondary public offering in fiscal year 2015.
|
14.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
During the nine months ended December 31, 2015
and 2014, the Company acquired Property, plant and equipment under capital lease and incurred lease obligations of $28,109 and $22,531, respectively. During the nine months ended December 31, 2014, the Company reclassified $19,729 related to
the executive stock repurchase agreements from liability and mezzanine equity to
Paid-in
capital after the termination of the agreements upon the IPO in July 2014.
- 20 -
Subsequent Events Related to the Bank Term Loans and Senior
Notes
Our long-term debt primarily consists of amounts outstanding under a Revolving Credit Facility with borrowing capacity of
$325,000 for ADS, Inc., a Revolving Credit Facility for
ADS-Mexicana
with borrowing capacity of $12,000, and a $100,000 term note (collectively, the Bank Term Loans), and the $100,000 of
outstanding senior promissory notes (Senior Notes). The amendments and consents described below that occurred between July 2015 and February 2016 related to the delay in the filing of the Fiscal 2015 Form
10-K,
and the restatement of the Companys previously issued financial statements (the Restatement) as reflected in the fiscal year 2015 Form
10-K,
which was filed in March 2016.
From July 2015 through December 2015, the Company obtained various consents from the lenders and amended
the Bank Term Loans and Senior Notes. These consents and the additional amendments had the effect of: (i) extending the time for delivery of our fiscal 2015 audited financial statements and the first and second quarter fiscal 2016 quarterly
financial statements to January 31, 2016, whereby an event of default was waived as long as those financial statements were delivered within the thirty day grace period after that date, (ii) modified certain definitions applicable to the
Companys affirmative and negative financial covenants, including the negative covenant on indebtedness, to accommodate the Companys treatment of its transportation and equipment leases as capital leases rather than operating leases and
to accommodate the treatment of the costs related to the Companys restatement, and (iii) permitted the Companys payment of quarterly dividends on common shares in June, August and December 2015.
In February 2016, the Company entered into additional amended agreements related to the Bank Term Loans and Senior Notes that further extend
the time for delivery of its fiscal 2015 audited financial statements and the first and second quarter fiscal 2016 quarterly financial statements, as well as to extend the time for delivery of its third quarter fiscal 2016 quarterly financial
statements. The February 2016 amended agreements extended the time for delivery of the fiscal 2015 audited financial statements and the first, second and third quarter fiscal 2016 quarterly financial statements to April 1, 2016, whereby an
event of default was waived as long as those financial statements were delivered by that date without regard to any grace period. As part of the February 2016 amended agreements, the lenders also consented to the Companys payment of the
previously declared annual dividend of $0.0195 per share to be paid on shares of preferred stock in March 2016.
Subsequent Event
Related to the ADS Mexicana Scotia Bank Revolving Credit Facility
On May 27, 2016, ADS Mexicana obtained a waiver on a
covenant from Scotia Bank relating to ADS Mexicana failing to notify Scotia Bank of changes in legal organizational structure and payment of dividends.