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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, references to year pertain to our
fiscal year. For example, 2017 refers to fiscal 2017, which is the period from April 1, 2016 to March 31, 2017.
The
following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on
Form 10-Q
and with the audited consolidated financial statements included in our Fiscal 2016 Form
10-K/A,
as filed with the Securities and Exchange Commission (the
SEC) on January 10, 2017. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our
management. Our actual results could differ materially from those discussed in the forward-looking statements. For more information, see the section below entitled Forward Looking Statements.
We consolidate all of our joint ventures for purposes of GAAP, except for our South American Joint Venture and our
Tigre-ADS
USA joint venture.
Overview
We are 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 underground construction and infrastructure marketplace. Our innovative products are used across a broad range of end markets and applications, including
non-residential,
residential, agriculture and infrastructure applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, our
overall product breadth and scale and our manufacturing excellence. In the United States, our national footprint combined with our strong local presence and broad product offering make us the leader in an otherwise highly fragmented sector comprised
of many smaller competitors. We believe the markets we serve in the United States represent approximately $10.8 billion of annual revenue opportunity. In addition, we believe the increasing acceptance of thermoplastic pipe products in
international markets represents an attractive growth opportunity.
Our products are generally lighter, more durable, more cost effective
and easier to install than comparable alternatives made with traditional materials. Following our entrance into the
non-residential
construction market with the introduction of
N-12
corrugated polyethylene pipe in the late 1980s, our pipe has been displacing traditional materials, such as reinforced concrete, corrugated steel and PVC, across an ever expanding range of end markets.
This has allowed us to consistently gain share and achieve above-market growth throughout economic cycles. We expect to continue to drive conversion to our products from traditional materials as contractors, civil design engineers and municipal
agencies increasingly acknowledge the superior physical attributes and compelling value proposition of our thermoplastic products. In addition, we believe that overall demand for our products will benefit as the regulatory environment continues to
evolve.
Our broad product line includes HDPE pipe, PP pipe and related water management products. Building on our core drainage
businesses, we have aggressively pursued attractive ancillary product categories such as storm and septic chambers, PVC drainage structures, fittings and filters, and water quality filters and separators. We refer to these ancillary product
categories as Allied Products. Given the scope of our overall sales and distribution platform, we have been able to drive growth within our Allied Products and believe there are significant growth opportunities going forward.
Results of Operations
Three Months Ended
June 30, 2016 Compared With Three Months Ended June 30, 2015
The following table summarizes our operating results as a
percentage of net sales that have been derived from our condensed consolidated financial statements for the three months ended June 30, 2016 and 2015. We believe this presentation is useful to investors in comparing historical results.
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Three Months
Ended June 30,
2016
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Three Months
Ended June 30,
2015
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Consolidated Statements of Operations data:
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Net sales
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100.0
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%
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100.0
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%
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Cost of goods sold
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|
73.0
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|
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78.7
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- 16 -
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Three Months
Ended June 30,
2016
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Three Months
Ended June 30,
2015
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Gross profit
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27.0
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21.3
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Selling expenses
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6.8
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6.1
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General and administrative expenses
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9.7
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5.4
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Loss on disposal of assets or businesses
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0.1
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0.2
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Intangible amortization
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0.6
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0.7
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|
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Income from operations
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9.9
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8.9
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Interest expense
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1.3
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1.2
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Derivative (gains) losses and other (income) expense, net
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(0.8
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)
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1.9
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Income before income taxes
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9.4
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5.8
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Income tax expense
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4.0
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2.3
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Equity in net loss (income) of unconsolidated affiliates
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0.0
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(0.1
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)
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Net income
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5.4
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3.7
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Less net income attributable to noncontrolling interest
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0.3
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0.3
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Net income attributable to ADS
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5.1
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%
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3.3
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%
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Net sales.
Net sales totaled $357.6 million in the three months ended June 30, 2016, increasing
$8.5 million, or 2.4%, over the comparable period in fiscal year 2016.
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Three Months Ended June 30,
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2016
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2015
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% Variance
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(In thousands)
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Domestic
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Pipe
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$
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223,310
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$
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220,533
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1.3
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%
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Allied Products
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89,453
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77,631
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15.2
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%
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Total domestic
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312,763
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298,164
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4.9
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%
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International
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Pipe
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34,372
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42,376
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(18.9
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%)
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Allied Products
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10,441
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8,584
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21.6
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%
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Total international
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44,813
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50,960
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(12.1
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%)
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Total net sales
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$
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357,576
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$
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349,124
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2.4
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%
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Domestic net sales increased $14.6 million, or 4.9%, in the three months ended June 30, 2016, over the
comparable period in the previous fiscal year. Our domestic pipe sales increased by $2.8 million, or 1.3%, which was a result of our volume gains of $3.4 million achieved in our construction end markets, which was offset by declines in our
agriculture end market and essentially flat sales prices. Allied product sales increased $11.9 million, or 15.2%, which included the impact of the acquisition of BaySaver of $3.9 million, as well as increased sales volume of products sold
primarily into the construction end markets.
International net sales decreased $6.2 million, or 12.1%, in the three months ended
June 30, 2016 over the comparable period in the previous fiscal year. The decrease was primarily attributable to pipe volume decreases of $5.5 million in Mexico and Canada, along with a decrease of $1.5 million from a weaker Canadian dollar to
U.S. Dollar exchange rate, offset by an increase in Allied products sales of $1.9 million.
Cost of goods sold and Gross profit.
Cost of goods
sold decreased by $13.7 million, or 5.0%, and gross profit increased by $22.1 million, or 29.7%, in the three months ended June 30, 2016 over the comparable period in the previous fiscal year.
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Three Months Ended June 30,
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2016
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|
2015
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$ Variance
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% Variance
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(In thousands)
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Gross Profit
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Domestic
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$
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87,726
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$
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61,689
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$
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26,037
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42.2
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%
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International
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8,880
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12,788
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(3,908
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)
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(30.6
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%)
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Total
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$
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96,606
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$
|
74,477
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$
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22,129
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29.7
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%
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- 17 -
In addition to the impact of the increase in domestic net sales of 4.9% over the comparable fiscal year 2016
period, the increase in domestic gross profit of $26.0 million, or 42.2%, was also impacted by decreased raw material costs and lower diesel fuel prices. Growth in sales of higher margin Allied Products also contributed to the overall increase
in gross profit.
International gross profit decreased $3.9 million, or 30.6%, in the first quarter of fiscal year 2017 compared to
the same period in fiscal year 2016, largely due to decreases in sales volume.
Selling expenses.
Selling expenses for the three months ended
June 30, 2016 increased 14.1% over the prior year. The increase was primarily the result of increases in variable selling expenses due to higher sales volume and investments in additional sales coverage. As a percentage of net sales, selling
expenses increased to 6.8% in the first quarter of fiscal 2017 as compared to 6.1% in the prior year.
General and administrative expenses
. The
large increase of $15.8 million was primarily due to increased expenses for audit, tax, legal and other professional fees of $9.2 million related to the preparation of our fiscal year 2016 Forms
10-Q
and
10-K
that were delayed due to the restatement of prior period financial statements as reflected in the Fiscal 2015 Form
10-K,
as well as a $7.6 million increase
in stock-based compensation expense.
Loss on disposal of assets or businesses
. There were no large or unusual disposals of assets or businesses.
Intangible amortization
. Intangible amortization remained relatively flat.
Interest expense
. While our average overall outstanding debt was down by approximately $58.4 million, or 13.9%, for the quarter ending
June 30, 2016 compared to the average balance outstanding for the quarter ending June 30, 2015 the impact of that on interest expense was more than offset by higher average capital lease obligations for the quarter ending June 30,
2016 compared to the quarter ending June 30, 2015, which resulted in higher overall interest expense in the current year period.
Derivative
(gains) losses and other (income) expense, net
. During the quarter ended June 30, 2016, we benefited from unrealized gains on swaps for propylene raw material of $3.3 million compared to unrealized losses of $5.1 million in the
comparable period last year. In addition, an incremental $1.0 million of hedging losses were recognized compared to the prior year, primarily in connection with realized losses on propylene material swaps. The remainder is related to foreign
exchange gains of $1.8 million and other
non-operating
income of $0.1 million.
Income tax
expense
. For the three months ended June 30, 2016 and 2015, the Company had effective tax rates of 42.1% and 38.8%, respectively. These rates are higher than the federal statutory rate of 35% due principally to state and local income taxes
and
non-deductible
expenses, partially offset by foreign income taxed at lower rates.
Equity in net loss
(income) of unconsolidated affiliates.
Equity in net loss (income) of unconsolidated affiliates represents our proportionate share of income or loss attributed to two unconsolidated joint ventures in which we have significant influence, but not
control, over operations as well as our proportional share of BaySaver earnings up until the July 17, 2015 step acquisition. Our proportional share of BaySaver earnings was $0.3 million for the three months ended June 30, 2015,
whereas there was no comparable amount in the three months ended June 30, 2016.
Net income attributable to noncontrolling interest
. Net
income attributable to noncontrolling interest for the three months ended June 30, 2016 remained relatively flat. As noted above, the 35% noncontrolling interest for BaySaver is now included in the consolidated results beginning after
July 17, 2015. The performance of BaySaver in the fiscal 2017 period offset the impact of the change in results of
ADS-Mexicana.
Non-GAAP
Financial Measures
In addition to financial results reported in accordance with GAAP, we have provided the following
non-GAAP
financial measures: Adjusted EBITDA, System-Wide Net Sales, Adjusted Earnings Per Fully Converted Share and Free Cash Flow. These
non-GAAP
financial measures
are used in addition to and in conjunction with results presented in accordance with GAAP. However, these measures are not intended to be a substitute for those reported in accordance with GAAP. These measures may be different from
non-GAAP
financial measures used by other companies, even when similar terms are used to identify such measures.
- 18 -
Adjusted EBITDA
(Non-GAAP).
Adjusted EBITDA is a
non-GAAP
financial measure that is a key metric used by management and our Board of Directors to assess our financial performance. Accordingly, we believe that Adjusted EBITDA provides useful information to
investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar
terms are used to identify such measure. The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods indicated:
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|
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Three Months Ended June 30,
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2016
|
|
|
2015
|
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|
(In thousands)
|
|
Net income
|
|
$
|
19,421
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|
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$
|
12,782
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Depreciation and amortization
|
|
|
18,026
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|
|
|
17,385
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Interest expense
|
|
|
4,784
|
|
|
|
4,286
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|
Income tax expense
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|
14,194
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|
|
7,879
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|
|
|
|
|
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EBITDA
|
|
|
56,425
|
|
|
|
42,332
|
|
Derivative fair value adjustments
|
|
|
(4,907
|
)
|
|
|
3,761
|
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Foreign currency transaction (gains) losses
|
|
|
(1,762
|
)
|
|
|
317
|
|
Loss on disposal of assets or businesses
|
|
|
202
|
|
|
|
866
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|
Unconsolidated affiliates interest, tax, depreciation and amortization
(a)
|
|
|
778
|
|
|
|
870
|
|
Contingent consideration remeasurement
|
|
|
24
|
|
|
|
55
|
|
Stock-based compensation expense
|
|
|
9,020
|
|
|
|
1,041
|
|
ESOP deferred stock-based compensation
|
|
|
2,737
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|
|
|
3,125
|
|
Expense related to executive termination payments
|
|
|
79
|
|
|
|
82
|
|
Restatement-related costs
(b)
|
|
|
9,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
71,808
|
|
|
$
|
52,449
|
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|
|
|
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(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 step acquisition of BaySaver
on July 17, 2015, which was previously accounted for under the equity method of accounting.
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(b)
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The amounts in the quarter ended June 30, 2016 represent legal, accounting and other professional fees incurred primarily in connection with the preparation of our fiscal year 2016 Forms
10-Q
and
10-K
that were delayed due to the restatement of prior period financial statements as reflected in the Fiscal 2015 Form
10-K.
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System-Wide Net Sales
(Non-GAAP)
. System-Wide Net Sales is a
non-GAAP
measure we use to measure the overall performance of our business across all of our geographies and markets we serve. Our South American Joint Venture is managed as an integral part of our International
segment, and our
Tigre-ADS
USA joint venture and our BaySaver joint venture are managed as integral parts of our Domestic segment. System-Wide Net Sales is prepared as if our South American Joint Venture, our
Tigre-ADS
USA joint venture, and our BaySaver joint venture (prior to its acquisition on July 17, 2015) were accounted for as consolidated subsidiaries for all periods. The reconciliation of our System-Wide Net
Sales to Net sales is as follows:
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|
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|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Net sales
|
|
$
|
357,576
|
|
|
$
|
349,124
|
|
Net sales associated with our unconsolidated affiliates
|
|
|
|
|
|
|
|
|
South American Joint Venture
|
|
|
11,365
|
|
|
|
14,277
|
|
BaySaver joint venture
(a)
|
|
|
|
|
|
|
3,126
|
|
Tigre-ADS
USA joint venture
|
|
|
5,199
|
|
|
|
4,606
|
|
|
|
|
|
|
|
|
|
|
System-Wide Net Sales
|
|
$
|
374,140
|
|
|
$
|
371,133
|
|
|
|
|
|
|
|
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(a)
|
As of July 17, 2015, we increased our ownership in BaySaver to 65% and have consolidated BaySaver since that date. As such Net Sales from our BaySaver joint venture prior to July 17, 2015 are included in this
line item.
|
Adjusted Earnings Per Fully Converted Share
(Non-GAAP)
. Adjusted
Earnings Per Fully Converted Share
(Non-GAAP)
is a
non-GAAP,
supplemental measure of financial performance that is not required by, or presented in accordance with GAAP.
Adjusted Earnings Per Fully Converted Share
(Non-GAAP)
is a key metric used by management and our board of directors to assess our financial performance as if all shares held by the ESOP were to be converted
to common shares. This information is useful to investors as the preferred shares held by the ESOP are required to be distributed to our employees over time, which is done in the form of common stock after the conversion of the preferred shares. As
such, this measure is included in this report because it provides the investors with information to understand the impact on the financial statements once all preferred shares are converted and distributed.
- 19 -
Adjusted Earnings Per Fully Converted Share
(Non-GAAP)
is not necessarily comparable to other similarly titled captions of other companies due to different
methods of calculation. We calculate Adjusted Earnings Per Fully Converted Share
(Non-GAAP)
by adjusting our historical Net income per shareBasic, Net income available to common stockholders
Basic, and Weighted average common shares outstanding Basic amounts for the conversion of all shares of Redeemable convertible preferred stock into ADS common stock at the conversion ratio of one share of redeemable convertible preferred
stock for every 0.7692 share of common stock as of the beginning of each period presented.
To effect this adjustment with respect to Net
income available to common stockholders - Basic, we have (1) added back the accretion of Redeemable noncontrolling interest in subsidiaries, (2) added back the dividends to Redeemable convertible preferred stockholders and dividends paid to unvested
restricted stockholders, (3) added back the amount allocated to participating securities under the two class earnings per share computation method, and (4) added back ESOP deferred compensation attributable to the shares of Redeemable convertible
preferred stock allocated to employee ESOP accounts during the applicable period, which is a
non-cash
charge to our earnings. We have also made adjustments to the Weighted average common shares outstanding
Basic to (1) assume share conversion of the outstanding shares of redeemable convertible preferred stock to common stock and (2) add shares of outstanding unvested restricted stock.
The following table presents a reconciliation of Adjusted Net Income
(Non-GAAP),
Weighted Average
Common Shares Outstanding Fully Converted
(Non-GAAP)
and Adjusted Earnings Per Fully Converted Share
(Non-GAAP)
to Net income available to common stockholders
-Basic, Weighted average common shares outstanding Basic, and Net income per share - Basic, the most comparable GAAP measures, respectively, for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
Net income available to common stockholders - Basic
|
|
$
|
15,932
|
|
|
$
|
10,348
|
|
Adjustments to Net income available to common stockholders - Basic:
|
|
|
|
|
|
|
|
|
Accretion of Redeemable noncontrolling interest in subsidiaries
|
|
|
362
|
|
|
|
|
|
Dividends to Redeemable convertible preferred stockholders
|
|
|
425
|
|
|
|
371
|
|
Dividends paid to unvested restricted stockholders
|
|
|
30
|
|
|
|
6
|
|
Undistributed income allocated to participating securities
|
|
|
1,524
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ADS
|
|
|
18,273
|
|
|
|
11,694
|
|
Fair value of ESOP compensation related to Redeemable convertible preferred stock
|
|
|
2,737
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
(Non-GAAP)
|
|
$
|
21,010
|
|
|
$
|
14,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Basic
|
|
|
54,071
|
|
|
|
53,623
|
|
Adjustments to Weighted average common shares outstanding - Basic:
|
|
|
|
|
|
|
|
|
Unvested restricted shares
|
|
|
79
|
|
|
|
148
|
|
Redeemable convertible preferred shares
|
|
|
19,065
|
|
|
|
19,693
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Fully Converted
(Non-GAAP)
|
|
|
73,215
|
|
|
|
73,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - Basic
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
Adjusted Earnings per Fully Converted Share
(Non-GAAP)
|
|
$
|
0.29
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
(Non-GAAP)
. Free Cash Flow is a
non-GAAP
financial measure used by management and the Companys board of directors to assess the Companys ability to generate cash. 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. Free Cash Flow should not be considered as an alternative to cash flow from operating activities as a
measure of liquidity or any other liquidity measure derived in accordance with GAAP. Our measure of Free Cash Flow is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. The
following table presents a reconciliation of Free Cash Flow to Cash flow from operating activities, the most comparable GAAP measure, for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Cash flow from operating activities
|
|
$
|
(132
|
)
|
|
$
|
(18,142
|
)
|
Capital expenditures
|
|
|
(12,595
|
)
|
|
|
(11,535
|
)
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
$
|
(12,727
|
)
|
|
$
|
(29,677
|
)
|
|
|
|
|
|
|
|
|
|
- 20 -
Liquidity and Capital Resources
Our primary liquidity requirements are working capital, capital expenditures, debt service and dividend payments for our convertible preferred
stock and common stock. We have historically funded, and expect to continue to fund, our operations primarily through internally generated cash flow, debt financings, equity issuance and capital and operating leases. From time to time, we may
explore additional financing methods and other means to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.
As of June 30, 2016, we had $2.5 million in cash that was held by our foreign subsidiaries. Our intent is to indefinitely reinvest
our earnings in foreign subsidiaries with the exception of cash dividends paid by our ADS Mexicana joint venture. In the event that foreign earnings are repatriated, these amounts will be subject to income tax liabilities in the appropriate tax
jurisdiction.
Working Capital and Cash Flows
During the three months ended June 30, 2016, our source of funds was primarily driven by operating earnings and seasonal borrowings on our
Revolving Credit Facility. During the three months ended June 30, 2015, our source of funds was primarily driven by operating earnings, seasonal borrowings on our Revolving Credit facility, and proceeds from notes, mortgages and other debt. For
both the quarters ended June 30, 2016 and 2015, our use of cash was primarily driven by seasonal increases in accounts receivable and capital expenditures.
As of June 30, 2016, we had $132.3 million in liquidity, including $9.2 million of cash and $123.1 million in borrowings
available under our Revolving Credit Facility, described below. We believe that our cash on hand, together with the availability of borrowings under our Revolving Credit Facility and other financing arrangements and cash generated from operations,
will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled interest payments on our indebtedness and the dividend payment requirement for our convertible preferred stock for at least the next twelve
months.
As of June 30, 2016, we had total consolidated net indebtedness of approximately $445.9 million. This amount includes
capital lease obligations and is net of cash.
Working Capital
. Working capital increased to $220.3 million as of June 30, 2016, from
$187.4 million as of March 31, 2016, primarily due to the increases in account receivable of $25.3 million resulting from sales increases and an increase of $8.2 million in inventory for planned sales increases. As disclosed in Note 1, the
change in working capital is also impacted by the reduction of net current deferred tax assets from $11.7 million as of March 31, 2016 to $0 as of June 30, 2016 as all deferred tax assets and liabilities as of June 30, 2016 are
now classified as
non-current.
Operating Cash Flows.
Cash flows from operating activities for the three
months ended June 30, 2016 was a use of $0.1 million as compared with cash used by operating activities of $18.1 million for the three months ended June 30, 2015. Cash flows from operating activities during the three months ended
June 30, 2016 was impacted by higher net income as a result of lower resin costs partially offset by restatement-related costs, as well as lower income tax cash payments and slower growth in accounts receivable compared to the prior year.
Investing Cash Flows.
During the three months ended June 30, 2016 and 2015, cash used for investing activities was $12.8 million and $15.6
million, respectively, primarily due to capital expenditures in support of operations.
Financing Cash Flows.
During the three months ended
June 30, 2016, cash provided from financing activities was $16.2 million, due to increased borrowings on our Revolving Credit facility to support our typical seasonal demand increase following the winter months. During the three months ended
June 30, 2015, cash provided by financing activities was $34.7 million, utilizing borrowings on our Revolving Credit Facility to support our typical seasonal demand increase and proceeds from notes, mortgages, and other debt.
Capital Expenditures
Capital
expenditures totaled $12.6 million and $11.5 million for the three months ended June 30, 2016 and June 30, 2015, respectively. Our capital expenditures for the three months ended June 30, 2016 were used primarily to support
facility expansions, equipment replacements, our recycled resin initiatives and capitalized software.
- 21 -
We currently anticipate that we will make capital expenditures of approximately $50 million
to $55 million in fiscal year 2017. Such capital expenditures are expected to be financed using funds generated by operations. As of June 30, 2016, there were no material contractual obligations or commitments related to these planned capital
expenditures.
Financing Transactions
Bank
Term Loans
On September 24, 2010, we entered into a credit agreement with PNC Bank, National Association, or PNC, as
administrative agent, and lender parties thereto. The credit agreement, as amended and restated on June 12, 2013 and subsequently further amended, provides for our Bank Term Loans consisting of (i) the Revolving Credit Facility providing
for revolving loans and letters of credit of up to a maximum aggregate principal amount of $325 million, (ii) the Term Loan Facility providing for the Term Loans in an aggregate original principal amount of $100 million, and
(iii) the ADS Mexicana Revolving Credit Facility, described below, which is more fully described in our Fiscal 2016 Form
10-K/A.
As of June 30, 2016, the outstanding principal drawn on the Revolving Credit Facility was $191.3 million, with $123.1 million
available to be drawn on the U.S. facility. As of June 30, 2016, the outstanding principal balance of the Term Loan was $80.0 million.
ADS
Mexicana Revolving Credit Facility
On September 24, 2010, our joint venture ADS Mexicana entered into a credit agreement with
PNC, as administrative agent, and lender parties thereto. The credit agreement, as amended and restated on June 12, 2013 and subsequently further amended, provides for revolving loans and letters of credit of up to a maximum aggregate principal
amount of $12 million. According to the terms of the ADS Mexicana Revolving Credit Facility, ADS Mexicana is not permitted to make loans to ADS, Inc.
As of June 30, 2016, there was no outstanding principal drawn on the Revolving Credit Facility and the entire $12.0 million was
available to be drawn.
Senior Notes
On December 11, 2009, we entered into a private shelf agreement with Prudential Investment Management Inc., or Prudential, which
agreement, as amended and restated on September 24, 2010 and subsequently further amended, provides for the issuance by us of senior secured promissory notes to Prudential or its affiliates from time to time in the aggregate principal amount up
to $100 million, which is more fully described in our Fiscal 2016 Form
10-K/A.
We have no
further amount available for issuance of senior notes under the private shelf agreement. At June 30, 2016, the outstanding principal balance on these notes was $100.0 million.
July, October and December 2016 Consents Related to the Bank Term Loans and Senior Notes
In July 2016, the Company obtained consents from the lenders of the Bank Term Loans and Senior Notes. These consents had the effect
of extending the time for delivery of our fiscal 2016 audited financial statements to August 31, 2016 and first quarter fiscal 2017 quarterly financial information to October 15, 2016, whereby an event of default was waived as long as
those items are delivered within a 15 day grace period after those dates. The fiscal 2016 audited financial statements were delivered within the grace period. In addition, the consents also permitted the Companys payment of quarterly
dividends of $0.06 per share on common shares in each of June and September 2016, as well as the annual dividend of $0.0195 per share to be paid on shares of preferred stock in March 2017.
In October 2016, the Company obtained additional consents from the lenders of the Bank Term Loans and Senior Notes. These consents had the
effect of extending the time for delivery of our first quarter fiscal 2017 quarterly financial information to November 30, 2016 and our second quarter fiscal 2017 quarterly financial information to December 31, 2016, whereby an event
of default was waived as long as those items are delivered within a 30 day grace period after those dates. In addition, the consents also permitted the Companys payment of a quarterly dividend of $0.06 per share on common shares in
December 2016, as well as the annual dividend of $0.0195 per share to be paid on shares of preferred stock in March 2017.
In December
2016, the Company obtained additional consents from the lenders of the Bank Term Loans and Senior Notes. These consents had the effect of extending the time for delivery of our first quarter fiscal 2017 quarterly financial information to
January 31, 2017.
Covenant Compliance
Our outstanding debt agreements and instruments contain various restrictive financial covenants including, but not limited to, limitations on
additional indebtedness and capital distributions, including dividend payments. The two primary debt covenants include a Leverage Ratio and a Fixed Charge Coverage Ratio maintenance covenant. For any relevant period of determination, the Leverage
Ratio is calculated by dividing Total Consolidated Indebtedness (funded debt plus guarantees) by Consolidated EBITDA, as defined by the credit facility. The current upper limit is 4.0 times. The Fixed Charge Coverage Ratio is calculated by dividing
the sum of
- 22 -
Consolidated EBITDA minus Capital Expenditures minus cash income taxes paid, by the sum of Fixed Charges. Fixed Charges include cash interest expense, scheduled principal payments on
indebtedness, and ESOP capital distributions in excess of $10 million in a given fiscal year. The current minimum ratio is 1.25 times. For further information, see Note 12. Debt to the Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary Data of our Fiscal 2016 Form
10-K/A.
We were in compliance with our debt covenants as of June 30, 2016, with the exception of the determination
in December 2016 that certain intercompany loans between ADS Mexicana and ADS, Inc. had occurred between November 2014 and November 2015 that triggered an event of default according to the terms of the ADS Mexicana Revolving Credit Facility. On
December 13, 2016, ADS Mexicana obtained a covenant waiver from the lenders.
Off-Balance
Sheet
Arrangements
Excluding the guarantee of 50% of certain debt of our unconsolidated South American Joint Venture, as further discussed
in Note 4. Related Party Transactions to the Condensed Consolidated Financial Statements, we do not have any other
off-balance
sheet arrangement. As of June 30, 2016, our South American Joint
Venture had approximately $19.1 million of outstanding debt. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity, or capital resources.
Critical Accounting Policies and Estimates
There have been no changes in critical accounting policies from those disclosed in Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Fiscal 2016 Form
10-K/A.
Forward-Looking Statements
This Quarterly Report on Form
10-Q
(Form
10-Q)
includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of terms such as believes, expects,
may, will, would, should, could, seeks, predict, potential, continue, intends, plans, projects,
estimates, anticipates or other comparable terms. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number
of places throughout this
Form 10-Q
and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial
condition, liquidity, prospects, growth strategies, and the industries in which we operate and include, without limitation, statements relating to our future performance.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. We caution you that
forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations, financial condition, liquidity and industry development may differ materially from those made in or suggested by the
forward-looking statements contained in this Quarterly Report on Form
10-Q.
In addition, even if our actual consolidated results of operations, financial condition, liquidity and industry development are
consistent with the forward-looking statements contained in this Form
10-Q,
those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors
could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those reflected in forward-looking statements relating to our operations and business, the risks and uncertainties
discussed in this Form
10-Q
(including under the headings Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations), and those
described from time to time in our other filings with the SEC. 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 polyvinyl chloride (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;
|
- 23 -
|
|
|
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;
|
|
|
|
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 further the financial statements and other financial data for certain prior periods
and any future periods;
|
|
|
|
any further delay in the filing of any filings with the SEC;
|
|
|
|
the review of potential weaknesses or deficiencies in the Companys disclosure controls and procedures, and discovering further weaknesses of which we are not currently aware or which have not been detected; and
|
|
|
|
additional uncertainties related to accounting issues generally.
|
All forward-looking
statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect future events or developments. Comparisons of results
for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.