NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
|
BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
-
Advanced Drainage Systems, Inc. and subsidiaries (collectively referred to as “ADS” or the “Company”), 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. ADS’s broad product line includes corrugated high density polyethylene (or “HDPE”) pipe, polypropylene (or “PP”) pipe and related water management products. On August 1, 2017, ADS acquired DURASLOT, Inc., a manufacturer of linear surface drains, for $2.3 million. The acquisition included approximately $2.1 million of tax-deductible goodwill.
The Company is managed based primarily on the geographies in which it operates and reports results of operations in two reportable segments: Domestic and International.
Historically, sales of the Company’s 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.
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, 2017 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 2017 (“Fiscal 2017 Form 10-K”). The accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as of September 30, 2017 and the results of operations and cash flows for the three and six months ended September 30, 2017 and 2016. The interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, including the notes thereto, filed in the Company’s Fiscal 2017 Form 10-K.
Principles of Consolidation
-
The Condensed Consolidated Financial Statements include the Company, its wholly-owned subsidiaries, its majority-owned subsidiaries and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company uses the equity method of accounting for equity investments where it exercises significant influence but does not hold a controlling financial interest. Such investments are recorded in Other assets in the Condensed Consolidated Balance Sheets and the related equity earnings from these investments are included in Equity in net loss of unconsolidated affiliates in the Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Measurement of Inventory
-
In July 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) which requires entities to measure most inventory at the lower of cost and net realizable value, simplifying current guidance under which an entity must measure inventory at the lower of cost or market. The determination of market value, under current guidance, is considered unnecessarily complex as there are several potential outcomes based on its definition as replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. Whereas net realizable value, under the update, is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this standard effective April 1, 2017. The new standard did not have a material impact on the Condensed Consolidated Financial Statements.
- 6 -
Table of Contents
Advanced Drainage Systems, Inc.
Stock-Based Compensation
-
In March 2016, the FASB issued an ASU which is intended to simplify certain aspects of the accounting for stock-based compensation.
The Company adopted t
he standard on April 1, 2017. The adoption of the ASU did not have a material impact on the historical Consolidated Financial Statements.
This update 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.
This update is expected to result in increased volatility to income tax expense in future periods dependent upon the timing of employee exercises of stock options, the
price of the Company's common stock and the vesting of restricted stock awards. In addition, excess tax benefits will now be classified as operating cash flows rather than financing cash flows in the Condensed Consolidated Statements of Cash Flows.
The amendment also contains potential changes to the accounting for forfeitures, whereby entities can elect to either continue to apply the current requirement to estimate forfeitures when determining compensation expense, or to alternatively reverse the compensation expense of forfeited awards when they occur. The Company will account for forfeitures as they occur, which may result in expense volatility based on the timing of forfeitures.
In addition, the update also modified 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 employee’s applicable jurisdiction. The Company included this provision in awards issued in fiscal 2017 and modified previously issued awards on April 1, 2017. See “Note 11. Stock-Based Compensation” for further information on the modification.
Recent Accounting Guidance Not Yet Adopted
Revenue Recognition -
In May 2014, the FASB issued an ASU which amends the guidance for revenue recognition. This standard contains principles that will require an entity to recognize revenue to depict the transfer of goods and services to customers at an amount that an entity expects to be entitled to in exchange for goods or services. The standard sets forth a new revenue recognition model that requires identifying the contract, identifying the performance obligations and recognizing the revenue upon satisfaction of performance obligations. In August 2015, the FASB issued an ASU that deferred the effective date of the new revenue standard for public entities to periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date of periods beginning after December 15, 2016. There have also been various additional accounting standards updates issued by the FASB in 2016 that further amend this new revenue standard. The updated standard permits the use of either the retrospective or cumulative effect transition method. The Company will adopt this standard effective April 1, 2018. To date, the Company has formed an internal stakeholder group to promote information sharing, communicate the new requirements of the standard, and assess the impact of the new revenue recognition model on the Company’s contracts with customers. The Company expects enhanced revenue disclosures as the result of adoption. The Company has not yet selected a transition method and is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.
Leases
-
In February 2016, the FASB issued an ASU which amends the guidance for leases. This standard contains principles that will require an entity to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability, unless the lease is a short-term lease that has an accounting lease term of twelve months or less. The standard also contains other changes to the current lease guidance that may result in changes to how entities determine which contractual arrangements qualify as a lease, the accounting for executory costs such as property taxes and insurance, as well as which lease origination costs will be capitalizable. The new standard also requires expanded quantitative and qualitative disclosures. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. The standard requires the use of the modified retrospective transition method, whereby the new guidance will be applied at the beginning of the earliest period presented in the financial statements of the period of adoption. The modified retrospective transition approach includes certain practical expedients that entities may elect to apply in transition. The Company expects to adopt this standard effective April 1, 2019. The Company has implemented a new software solution to improve the process of tracking and
- 7 -
Table of Contents
Advanced Drainage Systems, Inc.
accounting for leases under the current and new standards. The Company has not yet determined whether to apply any of the a
vailable practical expedients. The Company has begun the process of reviewing contracts under the new standard to determine the impact the new standard will have on the Condensed Consolidated Financial Statements.
Measurement of Credit Losses
-
In June 2016, the FASB issued an ASU which provides amended guidance on the measurement of credit losses on financial instruments, including trade receivables. This standard requires the use of an impairment model referred to as the current expected credit loss model. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, and early adoption is permitted for fiscal years beginning after December 15, 2018. The Company expects to adopt this standard effective April 1, 2020. The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.
Cash Flow Classification
-
In August 2016, the FASB issued an ASU which provides amended guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance and distributions received from equity method investees. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, and early adoption is permitted. This amended guidance must be applied retrospectively to all periods presented, but may be applied prospectively if retrospective application would be impracticable. The Company expects to adopt this update effective April 1, 2018. The Company is currently evaluating the impact of this update on the Condensed Consolidated Financial Statements.
Goodwill Impairment
-
In January 2017, the FASB issued an ASU
which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the standards update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company expects to adopt this standard effective April 1, 2020.
The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.
Definition of a Business
-
In January 2017, the FASB issued an ASU to clarify the definition of a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company will adopt this standard effective April 1, 2018.
The new standard will not have a material impact on the Condensed Consolidated Financial Statements.
Stock-Based Compensation -
In May 2017, the FASB issued an ASU to clarify when modification accounting should be applied for changes to the terms or conditions of share-based payment awards. The amendments clarify that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company expects to adopt this standard effective April 1, 2018. The Company is currently evaluating the impact of this update on its Condensed Consolidated Financial Statements.
Hedge Accounting
– In August 2017, the FASB issued an ASU which expands an entity’s ability to apply hedge accounting for non-financial and financial risk components and provides a simplified approach for fair
- 8 -
Table of Contents
Advanced Drainage Systems, Inc.
value hedging of interest rate risk. The standard also refines how entities assess hedge effectiveness. This standard is effective for fiscal y
ears beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.
With the exception of the pronouncements described above, there have been no new accounting pronouncements issued or adopted since the filing of the Fiscal 2017 Form 10-K that have significance, or potential significance, to the Condensed Consolidated Financial Statements.
2.
|
LOSS ON DISPOSAL OF ASSETS AND COSTS FROM EXIT AND DISPOSAL ACTIVITIES
|
The Company recorded loss on disposal of assets and costs from exit and disposal activities of $5.1 million and $8.5 million for the three and six months ended September 30, 2017, respectively. For the three and six months ended September 30, 2016, the Company recorded loss on disposal of assets and costs from exit and disposal activities of $0.7 million and $0.9 million, respectively.
In fiscal 2018, the Company initiated restructuring activities, including closing three underutilized manufacturing facilities, reducing headcount and eliminating nonessential costs, designed to improve the Company’s cost structure. The following table summarizes the activity included in Loss on disposal of assets and costs from exit and disposal activities recorded during the three and six months ended September 30, 2017 and 2016:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Accelerated depreciation
|
|
$
|
1,520
|
|
|
$
|
—
|
|
|
$
|
3,561
|
|
|
$
|
—
|
|
Plant severance
|
|
|
186
|
|
|
|
—
|
|
|
|
827
|
|
|
|
—
|
|
Headcount reduction
|
|
|
2,577
|
|
|
|
—
|
|
|
|
2,577
|
|
|
|
—
|
|
Total restructuring activities
|
|
$
|
4,283
|
|
|
$
|
—
|
|
|
$
|
6,965
|
|
|
$
|
—
|
|
Loss on other disposals and partial disposals of property, plant and equipment
|
|
|
838
|
|
|
|
737
|
|
|
|
1,579
|
|
|
|
939
|
|
Total loss on disposal of assets and costs from exit and disposal activities
|
|
$
|
5,121
|
|
|
$
|
737
|
|
|
$
|
8,544
|
|
|
$
|
939
|
|
As of September 30, 2017, the Company has a $2.8 million severance liability related to restructuring activities recorded in Other accrued liabilities and Other liabilities in the Condensed Consolidated Balance Sheets.
3.
|
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
Receivables include trade receivables, refundable income taxes and other miscellaneous receivables, net of an allowance for doubtful accounts. Receivables at September 30, 2017 and March 31, 2017 consisted of the following:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
|
|
(In thousands)
|
|
Trade receivables
|
|
$
|
245,642
|
|
|
$
|
160,655
|
|
Refundable income taxes
|
|
|
3,408
|
|
|
|
1,468
|
|
Other miscellaneous receivables
|
|
|
30,661
|
|
|
|
6,820
|
|
Receivables
|
|
$
|
279,711
|
|
|
$
|
168,943
|
|
As of September 30, 2017, Other miscellaneous receivables includes an insurance recoverable of approximately $12.0 million, which has a corresponding liability recorded in Other accrued liabilities, and
- 9 -
Table of Contents
Advanced Drainage Systems, Inc.
approximately $13.0 million related to the discontinuance of cash surrender value of officer life insurance on key senior management executives which is being monetize
d.
Inventories as of the periods presented consisted of the following:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
45,938
|
|
|
$
|
52,746
|
|
Finished goods
|
|
|
168,345
|
|
|
|
205,684
|
|
Total inventories
|
|
$
|
214,283
|
|
|
$
|
258,430
|
|
There were no work-in-process inventories as of the periods presented.
5
.
|
FAIR VALUE MEASUREMENT
|
When applying fair value principles in the valuation of assets and liabilities, the Company is 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 fiscal years presented. The fair value estimates take into consideration the credit risk of both the Company and its counterparties.
When active market quotes are not available for financial assets and liabilities, ADS uses 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 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 the periods presented were as follows:
|
|
September 30, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets – diesel fuel contracts
|
|
$
|
442
|
|
|
$
|
—
|
|
|
$
|
442
|
|
|
$
|
—
|
|
Derivative assets – interest rate swap
|
|
|
615
|
|
|
|
—
|
|
|
|
615
|
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
|
$
|
1,057
|
|
|
$
|
—
|
|
|
$
|
1,057
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - diesel fuel contracts
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Derivative liability - interest rate swap
|
|
|
428
|
|
|
|
—
|
|
|
|
428
|
|
|
|
—
|
|
Contingent consideration for acquisitions
|
|
|
735
|
|
|
|
—
|
|
|
|
—
|
|
|
|
735
|
|
Total liabilities at fair value on a recurring basis
|
|
$
|
1,165
|
|
|
$
|
—
|
|
|
$
|
430
|
|
|
$
|
735
|
|
- 10 -
Table of Contents
Advanced Drainage Systems, Inc.
|
|
March 31, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets – diesel fuel contracts
|
|
$
|
179
|
|
|
$
|
—
|
|
|
$
|
179
|
|
|
$
|
—
|
|
Total assets at fair value on a recurring basis
|
|
$
|
179
|
|
|
$
|
—
|
|
|
$
|
179
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - diesel fuel contracts
|
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
142
|
|
|
$
|
—
|
|
Contingent consideration for acquisitions
|
|
|
1,348
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,348
|
|
Total liabilities at fair value on a recurring basis
|
|
$
|
1,490
|
|
|
$
|
—
|
|
|
$
|
142
|
|
|
$
|
1,348
|
|
For the six months ended September 30, 2017 and 2016, respectively, there were no transfers in or out of Levels 1, 2 or 3.
Valuation of Contingent Consideration for Acquisitions
- The fair values of the contingent consideration payables for acquisitions were calculated based on a discounted cash flow model, whereby the probability-weighted future payment value is discounted to the present value using a market discount rate. The method used to price these liabilities is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the periods presented were as follows:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
858
|
|
|
$
|
2,199
|
|
|
$
|
1,348
|
|
|
$
|
2,858
|
|
Change in fair value
|
|
|
6
|
|
|
|
31
|
|
|
|
32
|
|
|
|
57
|
|
Payments of contingent consideration liability
|
|
|
(129
|
)
|
|
|
(233
|
)
|
|
|
(645
|
)
|
|
|
(918
|
)
|
Balance at the end of the period
|
|
$
|
735
|
|
|
$
|
1,997
|
|
|
$
|
735
|
|
|
$
|
1,997
|
|
Valuation of Debt -
The carrying amounts of current financial assets and liabilities approximate fair value because of the immediate or short-term maturity of these items, or in the case of derivative instruments, because they are recorded at fair value. The carrying and fair value of the Company’s Senior Notes (discussed in “Note 7. Debt”) were $125.0 million and $124.9 million, respectively, as of September 30, 2017 and $75.0 million and $75.9 million, respectively, at March 31, 2017. The fair value of the Senior Notes was determined based on a comparison of the interest rate and terms of such borrowings to the rates and terms of similar debt available for the period. The Company believes the carrying amount on the remaining long-term debt, including the Secured Bank Term Loans, is not materially different from its fair value as the interest rates and terms of the borrowings are similar to currently available borrowings. The categorization of the framework used to evaluate this debt is considered Level 2.
6
.
|
RELATED PARTY TRANSACTIONS
|
ADS Mexicana
-
ADS conducts business in Mexico and Central America through its joint venture ADS Mexicana, S.A. de C.V. (together with its affiliate ADS Corporativo, S.A. de C.V., “ADS Mexicana”). ADS owns 51% of the outstanding stock of ADS Mexicana and consolidates ADS Mexicana for financial reporting purposes. During the three and six months ended September 30, 2017 and 2016, ADS Mexicana compensated certain current and former shareholders of Grupo Altima, the joint venture partner of ADS Mexicana, for consulting services related to the operations of the business. These cash payments were $0.1 million or less for the three and six months ended September 30, 2017 and 2016.
Occasionally, ADS and ADS Mexicana jointly enter into agreements for pipe sales with related parties. There were no such sales in either the three and six months ended September 30, 2017 and 2016. However,
- 11 -
Table of Contents
Advanced Drainage Systems, Inc.
outstanding receivables related to such sales from prior periods were $0.1 million and $0.2 million as of September 30, 2017 and March 31, 2017, re
spectively.
The Company is the guarantor of 100% of a second credit facility for ADS Mexicana, and the Company’s maximum potential payment under this guarantee is $12.0 million. See “Note 7. Debt.”
South American Joint Venture
-
The Tuberias Tigre – ADS Limitada joint venture (the “South American Joint Venture”) manufactures and sells HDPE corrugated pipe in certain South American markets. ADS is the guarantor of 50% of the South American Joint Venture’s credit facility, and the debt guarantee is shared equally with the joint venture partner. The Company’s maximum potential obligation under this guarantee is $11.0 million as of September 30, 2017. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $22.0 million. 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 the South American Joint Venture’s debt expires on December 31, 2020. ADS does not anticipate any required contributions related to the balance of this credit facility. As of September 30, 2017 and March 31, 2017, the outstanding principal balances of the credit facility including letters of credit were $15.4 million and $16.0 million, respectively. As of September 30, 2017, there were no U.S. dollar denominated loans. The weighted average interest rate as of September 30, 2017 was 5.8% on Chilean peso denominated loans.
ADS and the South American Joint Venture have shared services arrangements in order to execute the joint venture services. In addition, the South American Joint Venture has entered into agreements for pipe sales with ADS and its other related parties, which totaled $0.2 million and $0.8 million for the three and six months ended September 30, 2017, respectively, and $0.3 million and $0.5 million for the three and six months ended September 30, 2016, respectively. ADS pipe sales to the South American Joint Venture were $0.1 million and $0.2 million for the three and six months ended September 30, 2017, respectively, and $0.2 million and $0.5 million for the three and six months ended September 30, 2016, respectively.
BaySaver
-
BaySaver Technologies LLC (“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 stock 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, which were immaterial for the periods presented.
Tigre-ADS USA
- Tigre-ADS USA is a joint venture established to manufacture and sell PVC fittings for waterworks, plumbing, and HVAC applications primarily in the United States and Canadian markets. ADS owns 49% of the outstanding shares of capital stock of Tigre-ADS USA. The joint venture represents a continuation of the existing activities of Tigre-ADS USA through its Janesville, Wisconsin manufacturing facility.
ADS is the guarantor of 49% of a specific Tigre-ADS USA credit facility. The Company’s maximum potential obligation under this guarantee totals $4.4 million as of September 30, 2017. The guarantee of Tigre-ADS USA’s debt expires on August 2, 2018. ADS does not anticipate any required contributions related to the balance of this credit facility. The outstanding principal balance of the credit facility, including letters of credit the Company guarantees, was $9.0 million as of both September 30, 2017 and March 31, 2017. The weighted average interest rate as of September 30, 2017 was 3.25%.
ADS purchased $0.5 million and $1.1 million of Tigre-ADS USA manufactured products for use in the production of ADS products during the three and six months ended September 30, 2017, respectively, and $0.5 million and $0.9 million during the three and six months ended September 30, 2016.
- 12 -
Table of Contents
Advanced Drainage Systems, Inc.
Long-term debt as of the periods presented consisted of the following:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
|
|
(In thousands)
|
|
Secured Bank Term Loans:
|
|
|
|
|
|
|
|
|
Revolving Credit Facility — ADS
|
|
$
|
258,100
|
|
|
$
|
194,300
|
|
Revolving Credit Facility — ADS Mexicana
|
|
|
—
|
|
|
|
1,500
|
|
Term Note
|
|
|
—
|
|
|
|
72,500
|
|
Senior Notes payable
|
|
|
125,000
|
|
|
|
75,000
|
|
Industrial revenue bonds
|
|
|
1,395
|
|
|
|
1,845
|
|
Equipment financing
|
|
|
3,782
|
|
|
|
4,216
|
|
ADS Mexicana Scotia bank revolving credit facility
|
|
|
—
|
|
|
|
1,000
|
|
Total
|
|
|
388,277
|
|
|
|
350,361
|
|
Unamortized debt issuance costs
|
|
|
(3,412
|
)
|
|
|
(1,723
|
)
|
Current maturities
|
|
|
(26,818
|
)
|
|
|
(37,789
|
)
|
Long-term debt obligation
|
|
$
|
358,047
|
|
|
$
|
310,849
|
|
Master Loan and Security Agreement -
In June 2016, ADS signed a Master Loan and Security Agreement for Equipment Financing in the U.S. and Canada for an aggregate amount of up to $4.5 million. During fiscal 2017, the Company issued $4.6 million of Equipment Notes with a weighted average fixed interest rate at 2.72%, with the aggregate loan amount during fiscal 2017 reaching a total of $4.2 million, net of principal payments. Each Equipment Note amortizes the principal over five years and is payable monthly.
Events Related to the Secured Bank Term Loans -
On May 19, 2017, the Company obtained a waiver from the lenders of the Revolving Credit Facility regarding an event of default. A material domestic subsidiary failed to join as a guarantor resulting in default. The lenders agreed to waive the default if the material domestic subsidiary joins as a guarantor by July 31, 2017. The material domestic subsidiary joined as a guarantor on June 22, 2017 upon the closing of the amended Secured Bank Term Loans discussed below.
On June 28, 2017, ADS executed a Forward Interest Rate Swap on the 30-Day LIBOR interest rate to mitigate the impact of interest rate volatility. The swap has a notional value of $100.0 million and a fixed rate of 1.8195% for a five year period.
Events Related to the Senior Notes -
On June 28, 2017, the Company issued and sold Shelf Notes in the aggregate principal amount of $75.0 million pursuant to the Private Shelf Agreement. The $75.0 million of Shelf Notes bears interest at a fixed interest rate of 3.53% per annum and have a maturity date of seven years from the date of issuance. The rate is subject to an additional 100 basis point excess leverage fee if the calculated leverage ratio exceeds 3 to 1 at the end of a fiscal quarter.
Long-term Debt Modification
Secured Bank Term Loans -
On June 22, 2017, the Company and certain of its subsidiaries, as guarantors (collectively, the “Guarantors”), entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”), as administrative agent (in such capacity, the “Agent”), and various financial institutions party thereto (together with PNC, collectively, the “Lenders”), pursuant to which the Lenders have committed to provide the Company a $550.0 million revolving credit facility (with an option to increase such revolving credit facility or incur new term loans in an agreement amount of up to $150.0 million) subject to the terms and conditions in the Credit Agreement. The Credit Agreement amends and restates the Amended and Restated Credit Agreement dated as of June 12, 2013, as amended, among the Company and certain of its subsidiaries, as guarantors, various financial institutions party thereto, and the Agent.
- 13 -
Table of Contents
Advanced Drainage Systems, Inc.
Borrowings under the credit facility will be used for general corporate p
urposes, including repurchases of stock, repayments of existing indebtedness, repayments of short-term borrowings, working capital requirements, capital expenditures and acquisitions. The interest rates under the Credit Agreement are determined by certain
base rates or LIBOR rates, plus an applicable margin based on the Leverage Ratio then in effect. The average interest rate was 3.21% as of September 30, 2017. The Credit Agreement has an expiration date of June 22, 2022.
The Credit Agreement sets forth certain customary business and financial covenants to which the Company and Guarantors are subject when any amounts under the Credit Agreement are outstanding, including covenants that limit or restrict the ability of the Company and the Guarantors to incur indebtedness, to make capital distributions, and to incur certain liens and encumbrances on any of its respective property. The two primary financial covenants of the Credit Agreement require the Company to maintain a certain Leverage Ratio and an Interest Coverage Ratio.
The Credit Agreement Leverage Ratio generally requires that at the end of any fiscal quarter, for the four fiscal quarters then ended, the Company will not permit the ratio of its total consolidated indebtedness to the Company’s Consolidated EBITDA (as defined in the Credit Agreement) to be greater than 4.00 to 1.00 (or 4.25 to 1.00 as of the date of any acquisitions permitted under the Credit Agreement for which the aggregate consideration is $100.0 million or greater). The Credit Agreement Interest Coverage Ratio generally requires that at the end of any fiscal quarter, for the four fiscal quarters then ended, the Company will not permit the ratio of Consolidated EBITDA to the Company’s consolidated interest expense payable during such period to be less than 3.00 to 1.00.
The Credit Agreement provides for customary events of default, including, among other things, in the event of nonpayment of principal, interest, or other amounts, a representation or warranty proving to have been incorrect in any material respect when made, failure to perform or observe certain covenants within a specified period of time, a cross-default to other Company indebtedness of a specified amount, the bankruptcy or insolvency of the Company or a Guarantor, monetary judgment defaults of a specified amount, a change of control of the Company, and ERISA defaults resulting in liability under certain circumstances. In the event of a default by the Company, the Agent or the requisite number of Lenders may declare all amounts owed under the Credit Agreement and outstanding letters of credit immediately due and payable and terminate the Lenders’ commitments to make loans under the Credit Agreement. For defaults related to bankruptcy, insolvency or reorganization proceedings, the commitments of the Lenders will be automatically terminated and all outstanding loans and other amounts will become immediately due and payable.
Senior Notes -
On June 22, 2017, the Company and the Guarantors entered into the Second Amended and Restated Private Shelf Agreement (the “Private Shelf Agreement”) with PGIM, Inc. (“Prudential”) and certain other parties thereto. The Private Shelf Agreement amends and restates the Amended and Restated Private Shelf Agreement dated as of September 24, 2010, as amended, pursuant to which the Company has previously issued and sold secured senior notes of the Company. Under the terms of the Private Shelf Agreement, the Company may request that Prudential purchase, over the next three years, secured senior notes of the Company so long as the aggregate principal amount of notes outstanding at any time does not exceed $175.0 million (the “Shelf Notes”). The Shelf Notes shall bear interest at a fixed interest rate and have a maturity date not to exceed ten years from the date of issuance. Prudential and its affiliates are under no obligation to purchase any of the Shelf Notes. The interest rate and terms of payment of any series of Shelf Notes will be determined at the time of purchase. The proceeds of any series of Shelf Notes will be used as specified in the request for purchase with respect to such series, subject to compliance with the requirements in the Private Shelf Agreement, but are anticipated to be used for general corporate purposes, including refinancing of short-term borrowings and/or repayment of outstanding indebtedness under the Credit Agreement, which is described above, as well as financing of capital expenditures and acquisitions.
Obligations under the Private Shelf Agreement are secured by capital stock of certain direct and indirect subsidiaries of the Company and the Guarantors and substantially all other tangible and intangible personal property owned by the Company and the Guarantors. Obligations under the Private Shelf Agreement are secured by the collateral on a pari passu basis with obligations under the Credit Agreement.
- 14 -
Table of Contents
Advanced Drainage Systems, Inc.
The Private Shelf Agreement sets forth certain customary business and financial covenants to which the Company and Guarantors are subject when any Shelf Note is outstanding,
including covenants that limit or restrict the ability of the Company and the Guarantors to incur indebtedness, to make capital distributions, and to incur certain liens and encumbrances on any of its respective property.
The two primary financial covenant
s of the Private Shelf Agreement require the Company to maintain a certain Leverage Ratio and an Interest Coverage Ratio.
The Private Self Agreement Leverage Ratio generally requires that at the end of any fiscal quarter, for the four fiscal quarters then ended, the Company will not permit the ratio of its total consolidated indebtedness to the Company’s Consolidated EBITDA (as defined in the Private Shelf Agreement) to be greater than 4.00 to 1.00 (or 4.25 to 1.00 as of the date of any acquisitions permitted under the Private Self Agreement for which the aggregate consideration is $100.0 million or greater). The Private Self Agreement Interest Coverage Ratio generally requires that at the end of any fiscal quarter, for the four fiscal quarters then ended, the Company will not permit the ratio of Consolidated EBITDA to the Company’s consolidated interest expense payable during such period to be less than 3.00 to 1.00.
The Private Shelf Agreement provides for customary events of default, including, among other things, in the event of nonpayment of principal, interest, or other amounts, a representation or warranty proving to have been incorrect in any material respect when made, failure to perform or observe certain covenants within a specified period of time, a cross-default to other Company indebtedness of a specified amount, the bankruptcy or insolvency of the Company or a Guarantor, monetary judgment defaults of a specified amount, a change of control of the Company, and ERISA defaults resulting in liability under certain circumstances. In the event of a default by the Company, any or all holders of Shelf Notes may declare amounts owed under the Private Shelf Agreement immediately due and payable. For defaults related to bankruptcy, insolvency or reorganization proceedings, all amounts owed under the Agreement will become immediately due and payable, and Prudential may at its option terminate the Private Shelf Note Facility.
Principal Maturities
– Maturities of long-term debt (excluding interest and deferred financing costs) as of September 30, 2017 are summarized below:
|
|
Twelve Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
Principal maturities
|
|
$
|
26,818
|
|
|
$
|
26,397
|
|
|
$
|
947
|
|
|
$
|
931
|
|
|
$
|
258,184
|
|
|
$
|
75,000
|
|
|
$
|
388,277
|
|
8
.
|
DERIVATIVE TRANSACTIONS
|
Derivatives -
The Company uses interest rate swaps and commodity options in the form of collars and swaps to manage its various exposures to interest rate and commodity price fluctuations. For interest rate swaps, gains and losses resulting from the difference between the spot rate and applicable base rate is recorded in interest expense. For collars and commodity swaps, contract settlement gains and losses are recorded in the Condensed Consolidated Statements of Operations in Derivative gains and other income, net. Gains and losses related to mark-to-market adjustments for changes in fair value of the derivative contracts are also recorded in the Condensed Consolidated Statements of Operations in Derivative gains and other income, net.
- 15 -
Table of Contents
Advanced Drainage Systems, Inc.
The Co
mpany recorded net losses and net (gains) on mark-to-market adjustments for changes in the fair value of derivatives contracts as well as net losses and net (gains) on the settlement of derivative contracts as follows:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Propylene swaps
|
|
$
|
—
|
|
|
$
|
(3,334
|
)
|
|
$
|
—
|
|
|
$
|
(6,647
|
)
|
Diesel fuel contracts
|
|
|
(678
|
)
|
|
|
(689
|
)
|
|
|
(402
|
)
|
|
|
(2,161
|
)
|
Interest rate swaps
|
|
|
(103
|
)
|
|
|
(130
|
)
|
|
|
(188
|
)
|
|
|
(252
|
)
|
Total net unrealized mark-to-market (gains)
|
|
$
|
(781
|
)
|
|
$
|
(4,153
|
)
|
|
$
|
(590
|
)
|
|
$
|
(9,060
|
)
|
Propylene swaps
|
|
|
—
|
|
|
|
1,611
|
|
|
|
—
|
|
|
|
4,683
|
|
Diesel fuel contracts
|
|
|
(53
|
)
|
|
|
679
|
|
|
|
(1
|
)
|
|
|
1,385
|
|
Total net realized (gains) losses
|
|
$
|
(53
|
)
|
|
$
|
2,290
|
|
|
$
|
(1
|
)
|
|
$
|
6,068
|
|
A summary of the fair value of derivatives is included in “Note 5. Fair Value Measurements.”
Other Non-Operating Income -
In addition to the above amounts, Derivative gains and other income, net in the Condensed Consolidated Statements of Operations, also includes other non-operating income of $1.7 million and $2.9 million for the three and six month period ended September 30, 2017, respectively, and other non-operating expense of $0.1 million and income of $1.8 million for the three and six month period ending September 30, 2016, respectively.
9.
|
COMMITMENTS AND CONTINGENCIES
|
Purchase Commitments –
The Company secures supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts typically range from 1 to 12 months and occur in the ordinary course of business. Under such noncancelable purchase contracts in place at September 30, 2017, the Company has agreed to purchase resin over the period October 2017 through December 2017 at a committed purchase cost of $6.0 million.
Litigation and Other Proceedings –
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 (the “District Court”), naming the Company, along with Joseph A. Chlapaty, the Company’s former Chief Executive Officer, and Mark B. Sturgeon, the Company’s 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 promulgated thereunder. On March 10, 2017, the District Court dismissed Plaintiff’s claims against all defendants in their entirety and with prejudice. Plaintiff appealed to the United States Court of Appeals for the Second Circuit, and on October 13, 2017 the District Court’s judgment was affirmed by the Second Circuit. On October 27, 2017, Plaintiff filed a petition for rehearing with the Second Circuit, and the petition is pending.
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 Company’s 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 Division’s 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.
- 16 -
Table of Contents
Advanced Drainage Systems, Inc.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limit
ed to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and
administrative proceedings will have a material adverse impact on the Company’s financial position or results of operations. The Company records a liability when a loss is considered probable, and the amount can be reasonably estimated.
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. The Company’s effective tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in the Company’s assessment of certain tax contingencies, changes in tax law, outcomes of administrative audits, the impact of discrete items, and the mix of earnings.
For the three months ended September 30, 2017 and 2016, the Company utilized an effective tax rate of 42.1% and 37.9%, respectively, to calculate its provision for income taxes. These rates differ from the federal statutory rate primarily due to the timing of certain discrete items.
For the six months ended September 30, 2017 and 2016, the Company utilized an effective tax rate of 38.7% and 39.8%, respectively, to calculate its provision for income taxes. The effective tax rate for the six months ended September 30, 2017 reflects a favorable impact of a $1.0 million discrete income tax benefit related to the release of tax reserves recorded during the three months ended June 30, 2017.
11.
|
STOCK-BASED COMPENSATION
|
ADS has several programs for stock-based payments to employees and non-employee members of its Board of Directors, including stock options and restricted stock. Equity-classified restricted stock awards are measured based on the grant-date estimated fair value of each award. Liability-classified stock options are re-measured at fair value at each reporting date until the date of settlement, and the pro-rata vested portion of the award is recognized as a liability. The Company determines the fair value of options based on the Black-Scholes option pricing model. The Company accounts for all restricted stock granted to directors as equity-classified awards. The Company recognized stock-based compensation expense in the following line items of the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2017 and 2016:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Component of income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
45
|
|
|
$
|
(100
|
)
|
|
$
|
90
|
|
|
$
|
—
|
|
Selling expenses
|
|
|
27
|
|
|
|
(100
|
)
|
|
|
52
|
|
|
|
200
|
|
General and administrative expenses
|
|
|
1,738
|
|
|
|
(2,708
|
)
|
|
|
3,358
|
|
|
|
5,912
|
|
Total stock-based compensation expense (benefit)
|
|
$
|
1,810
|
|
|
$
|
(2,908
|
)
|
|
$
|
3,500
|
|
|
$
|
6,112
|
|
- 17 -
Table of Contents
Advanced Drainage Systems, Inc.
The following table summarizes stock-based compensation expense by award type for the three and
six months ended September 30, 2017 and 2016:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability-classified Stock Options
|
|
$
|
—
|
|
|
$
|
(3,075
|
)
|
|
$
|
—
|
|
|
$
|
5,761
|
|
Equity-classified Stock Options
|
|
|
1,009
|
|
|
|
—
|
|
|
|
2,093
|
|
|
|
—
|
|
Restricted Stock
|
|
|
360
|
|
|
|
167
|
|
|
|
728
|
|
|
|
351
|
|
Non-Employee Director
|
|
|
441
|
|
|
|
—
|
|
|
|
679
|
|
|
|
—
|
|
Total stock-based compensation expense (benefit)
|
|
$
|
1,810
|
|
|
$
|
(2,908
|
)
|
|
$
|
3,500
|
|
|
$
|
6,112
|
|
On April 1, 2017, the Company modified all outstanding awards to remove the provision that permitted employees to satisfy their personal tax liability with the net settlement of shares in excess of minimum tax withholding. Consistent with the ASU in Note 1, employees can now withhold shares with a fair value up to the maximum statutory rate. Accordingly, the Company modified the awards previously accounted for as liability-classified to equity-classified and reclassified the carrying amount of the awards of $13.7 million to Paid-in capital in the Condensed Consolidated Balance Sheet. All stock options have been accounted for as equity-classified awards for the periods subsequent to the modification. Prior to the modification, liability-classified awards were reclassified to additional paid in capital at fair value when stock options were exercised.
2017 Omnibus Plan
On May 24, 2017, the Board of Directors approved the 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) which was approved by the Company’s stockholders on July 17, 2017. The 2017 Incentive Plan provides for the issuance of a maximum of 3.5 million shares of the Company’s common stock for awards made thereunder, which awards may consist of stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, cash-based awards, performance awards (which may take the form of performance cash, performance units or performance shares) or other stock-based awards. The 2017 Incentive Plan replaces the 2000 Incentive Stock Option Plan, 2008 Restricted Stock Plan, 2013 Stock Option Plan, and 2014 Non-Employee Director Compensation Plan (the “Prior Plans”) and no further grants will be made under the Prior Plans.
During the three and six months ended September 30, 2017, the Company granted 0.1 million shares of restricted stock and 0.2 million nonqualified stock options under the 2017 Incentive Plan.
The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The following table summarizes the assumptions used in estimate the fair value of stock-options during the six months ended September 30, 2017:
|
|
Six Months Ended
September 30, 2017
|
Common stock price
|
|
$19.75 - $19.95
|
Expected stock price volatility
|
|
33.4% - 35.6%
|
Risk-free interest rate
|
|
1.9% - 2.2%
|
Weighted-average expected option life (years)
|
|
5.6 - 6.0
|
Dividend yield
|
|
1.2% - 1.4%
|
- 18 -
Table of Contents
Advanced Drainage Systems, Inc.
12.
|
NET INCOME PER SHARE AND STOCKHOLDERS’ EQUITY
|
The Company is required to apply the two-class method to compute both basic and diluted net income 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.
The following table presents information necessary to calculate net income per share for the periods presented, 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
September 30,
|
|
|
Six Months Ended
September 30,
|
|
(In thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
NET INCOME PER SHARE—BASIC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ADS
|
|
$
|
17,863
|
|
|
$
|
23,734
|
|
|
$
|
35,605
|
|
|
$
|
42,007
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable noncontrolling interest
|
|
|
—
|
|
|
|
(380
|
)
|
|
|
—
|
|
|
|
(742
|
)
|
Dividends to redeemable convertible preferred
stockholders
|
|
|
(470
|
)
|
|
|
(415
|
)
|
|
|
(959
|
)
|
|
|
(840
|
)
|
Dividends paid to unvested restricted stockholders
|
|
|
(16
|
)
|
|
|
(24
|
)
|
|
|
(35
|
)
|
|
|
(54
|
)
|
Net income available to common stockholders and
participating securities
|
|
|
17,377
|
|
|
|
22,915
|
|
|
|
34,611
|
|
|
|
40,371
|
|
Undistributed income allocated to participating
securities
|
|
|
(1,397
|
)
|
|
|
(2,040
|
)
|
|
|
(2,830
|
)
|
|
|
(3,563
|
)
|
Net income available to common stockholders –
Basic
|
|
$
|
15,980
|
|
|
$
|
20,875
|
|
|
$
|
31,781
|
|
|
$
|
36,808
|
|
Weighted average number of common shares
outstanding – Basic
|
|
|
55,269
|
|
|
|
54,429
|
|
|
|
55,286
|
|
|
|
54,250
|
|
Net income per common share – Basic
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
$
|
0.57
|
|
|
$
|
0.68
|
|
NET INCOME PER SHARE—DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders –
Diluted
|
|
$
|
15,980
|
|
|
$
|
20,875
|
|
|
$
|
31,781
|
|
|
$
|
36,808
|
|
Weighted average number of common shares
outstanding – Basic
|
|
|
55,269
|
|
|
|
54,429
|
|
|
|
55,286
|
|
|
|
54,250
|
|
Assumed exercise of stock options
|
|
|
624
|
|
|
|
847
|
|
|
|
667
|
|
|
|
865
|
|
Weighted average number of common shares
outstanding – Diluted
|
|
|
55,893
|
|
|
|
55,276
|
|
|
|
55,953
|
|
|
|
55,115
|
|
Net income per common share – Diluted
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
$
|
0.57
|
|
|
$
|
0.67
|
|
Potentially dilutive securities excluded as
anti-dilutive
|
|
|
6,211
|
|
|
|
6,264
|
|
|
|
6,349
|
|
|
|
6,355
|
|
Stockholders’ Equity –
During the six months ended September 30, 2017, the Company repurchased 400,000 shares of common stock at a cost of $7.9 million. The Company did not repurchase any shares of common stock during the three months ended September 30, 2017. The repurchases were made under the Board of Directors’ authorization in February 2017 to repurchase up to $50 million of ADS common stock in accordance with applicable securities laws. As of September 30, 2017, approximately $42.1 million of common stock may be repurchased under the authorization. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and may be suspended or terminated at any time at the Company’s discretion.
1
3
.
|
BUSINESS SEGMENTS INFORMATION
|
The Company operates its business in two distinct operating and reportable segments based on the markets it serves: “Domestic” and “International.” The Chief Operating Decision Maker (“CODM”) evaluates segment
- 19 -
Table of Contents
Advanced Drainage Systems, Inc.
reporting based on Net sales and Segment Adjusted EBITDA. The Company calculates Segment Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization, stock-based compensa
tion expense, non-cash charges and certain other expenses
. The following table sets forth reportable segment information with respect to the amount of Net sales contributed by each class of similar products for the periods presented:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe
|
|
$
|
253,486
|
|
|
$
|
222,026
|
|
|
$
|
479,677
|
|
|
$
|
445,336
|
|
Allied Products
|
|
|
98,398
|
|
|
|
89,747
|
|
|
|
191,704
|
|
|
|
179,200
|
|
Total domestic
|
|
|
351,884
|
|
|
|
311,773
|
|
|
|
671,381
|
|
|
|
624,536
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe
|
|
|
38,204
|
|
|
|
38,910
|
|
|
|
67,973
|
|
|
|
73,282
|
|
Allied Products
|
|
|
10,961
|
|
|
|
10,102
|
|
|
|
20,054
|
|
|
|
20,543
|
|
Total international
|
|
|
49,165
|
|
|
|
49,012
|
|
|
|
88,027
|
|
|
|
93,825
|
|
Total Net sales
|
|
$
|
401,049
|
|
|
$
|
360,785
|
|
|
$
|
759,408
|
|
|
$
|
718,361
|
|
The following sets forth certain additional financial information attributable to the reportable segments for the periods presented:
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
|
(In thousands)
|
|
For the three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
351,884
|
|
|
$
|
49,165
|
|
|
$
|
401,049
|
|
Segment Adjusted EBITDA
|
|
|
63,473
|
|
|
|
3,411
|
|
|
|
66,884
|
|
Interest expense
|
|
|
4,971
|
|
|
|
84
|
|
|
|
5,055
|
|
Income tax expense
|
|
|
12,185
|
|
|
|
1,252
|
|
|
|
13,437
|
|
Depreciation and amortization
|
|
|
17,658
|
|
|
|
2,062
|
|
|
|
19,720
|
|
Equity in net loss of unconsolidated affiliates
|
|
|
437
|
|
|
|
83
|
|
|
|
520
|
|
Capital expenditures
|
|
|
8,673
|
|
|
|
413
|
|
|
|
9,086
|
|
For the three months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
311,773
|
|
|
$
|
49,012
|
|
|
$
|
360,785
|
|
Segment Adjusted EBITDA
|
|
|
57,114
|
|
|
|
8,487
|
|
|
|
65,601
|
|
Interest expense
|
|
|
4,436
|
|
|
|
110
|
|
|
|
4,546
|
|
Income tax expense
|
|
|
13,824
|
|
|
|
1,524
|
|
|
|
15,348
|
|
Depreciation and amortization
|
|
|
15,829
|
|
|
|
2,181
|
|
|
|
18,010
|
|
Equity in net loss of unconsolidated affiliates
|
|
|
44
|
|
|
|
771
|
|
|
|
815
|
|
Capital expenditures
|
|
|
10,496
|
|
|
|
705
|
|
|
|
11,201
|
|
- 20 -
Table of Contents
Advanced Drainage Systems, Inc.
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
|
(In thousands)
|
|
For the six months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
671,381
|
|
|
$
|
88,027
|
|
|
$
|
759,408
|
|
Segment Adjusted EBITDA
|
|
|
118,562
|
|
|
|
8,667
|
|
|
|
127,229
|
|
Interest expense
|
|
|
9,356
|
|
|
|
178
|
|
|
|
9,534
|
|
Income tax expense
|
|
|
21,700
|
|
|
|
1,483
|
|
|
|
23,183
|
|
Depreciation and amortization
|
|
|
33,921
|
|
|
|
4,020
|
|
|
|
37,941
|
|
Equity in net loss (gain) of unconsolidated affiliates
|
|
|
655
|
|
|
|
(383
|
)
|
|
|
272
|
|
Capital expenditures
|
|
|
25,781
|
|
|
|
1,254
|
|
|
|
27,035
|
|
For the six months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
624,536
|
|
|
$
|
93,825
|
|
|
$
|
718,361
|
|
Segment Adjusted EBITDA
|
|
|
121,754
|
|
|
|
15,655
|
|
|
|
137,409
|
|
Interest expense
|
|
|
9,109
|
|
|
|
221
|
|
|
|
9,330
|
|
Income tax expense
|
|
|
25,977
|
|
|
|
3,565
|
|
|
|
29,542
|
|
Depreciation and amortization
|
|
|
31,507
|
|
|
|
4,529
|
|
|
|
36,036
|
|
Equity in net loss of unconsolidated affiliates
|
|
|
27
|
|
|
|
884
|
|
|
|
911
|
|
Capital expenditures
|
|
|
21,991
|
|
|
|
1,805
|
|
|
|
23,796
|
|
The following sets forth certain additional financial information attributable to the reportable segments as of the periods presented:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
|
|
(In thousands)
|
|
Investments in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,772
|
|
|
$
|
2,427
|
|
International
|
|
|
7,399
|
|
|
|
6,559
|
|
Total
|
|
$
|
9,171
|
|
|
$
|
8,986
|
|
Total identifiable assets
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
978,999
|
|
|
$
|
917,006
|
|
International
|
|
|
148,076
|
|
|
|
134,987
|
|
Eliminations
|
|
|
(16,966
|
)
|
|
|
(5,708
|
)
|
Total
|
|
$
|
1,110,109
|
|
|
$
|
1,046,285
|
|
- 21 -
Table of Contents
Advanced Drainage Systems, Inc.
The following reconciles segment adjusted EBITDA to net income for the periods presented:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Domestic
|
|
|
International
|
|
|
Domestic
|
|
|
International
|
|
|
|
(In thousands)
|
|
Reconciliation of Segment Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,932
|
|
|
$
|
1,027
|
|
|
$
|
21,049
|
|
|
$
|
3,232
|
|
Depreciation and amortization
|
|
|
17,658
|
|
|
|
2,062
|
|
|
|
15,829
|
|
|
|
2,181
|
|
Interest expense
|
|
|
4,971
|
|
|
|
84
|
|
|
|
4,436
|
|
|
|
110
|
|
Income tax expense
|
|
|
12,185
|
|
|
|
1,252
|
|
|
|
13,824
|
|
|
|
1,524
|
|
Segment EBITDA
|
|
|
51,746
|
|
|
|
4,425
|
|
|
|
55,138
|
|
|
|
7,047
|
|
Derivative fair value adjustments
|
|
|
(781
|
)
|
|
|
—
|
|
|
|
(4,153
|
)
|
|
|
—
|
|
Foreign currency transaction (gains) losses
|
|
|
—
|
|
|
|
(1,579
|
)
|
|
|
—
|
|
|
|
685
|
|
Loss on disposal of assets and costs from exit
and disposal activities
|
|
|
4,994
|
|
|
|
127
|
|
|
|
512
|
|
|
|
225
|
|
Unconsolidated affiliates interest, tax, depreciation
and amortization
(1)
|
|
|
277
|
|
|
|
438
|
|
|
|
272
|
|
|
|
530
|
|
Contingent consideration remeasurement
|
|
|
6
|
|
|
|
—
|
|
|
|
33
|
|
|
|
—
|
|
Stock-based compensation expense (benefit)
|
|
|
1,810
|
|
|
|
—
|
|
|
|
(2,908
|
)
|
|
|
—
|
|
ESOP deferred compensation
|
|
|
2,595
|
|
|
|
—
|
|
|
|
2,368
|
|
|
|
—
|
|
Executive retirement benefits
|
|
|
894
|
|
|
|
—
|
|
|
|
79
|
|
|
|
—
|
|
Transaction costs
(2)
|
|
|
890
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restatement-related costs
(3)
|
|
|
1,042
|
|
|
|
—
|
|
|
|
5,773
|
|
|
|
—
|
|
Segment Adjusted EBITDA
(4)
|
|
$
|
63,473
|
|
|
$
|
3,411
|
|
|
$
|
57,114
|
|
|
$
|
8,487
|
|
|
|
Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Domestic
|
|
|
International
|
|
|
Domestic
|
|
|
International
|
|
|
|
(In thousands)
|
|
Reconciliation of Segment Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,082
|
|
|
$
|
4,351
|
|
|
$
|
36,471
|
|
|
$
|
7,231
|
|
Depreciation and amortization
|
|
|
33,921
|
|
|
|
4,020
|
|
|
|
31,507
|
|
|
|
4,529
|
|
Interest expense
|
|
|
9,356
|
|
|
|
178
|
|
|
|
9,109
|
|
|
|
221
|
|
Income tax expense
|
|
|
21,700
|
|
|
|
1,483
|
|
|
|
25,977
|
|
|
|
3,565
|
|
Segment EBITDA
|
|
|
97,059
|
|
|
|
10,032
|
|
|
|
103,064
|
|
|
|
15,546
|
|
Derivative fair value adjustments
|
|
|
(590
|
)
|
|
|
—
|
|
|
|
(9,060
|
)
|
|
|
—
|
|
Foreign currency transaction (gains)
|
|
|
—
|
|
|
|
(2,448
|
)
|
|
|
—
|
|
|
|
(1,077
|
)
|
Loss on disposal of assets and costs from exit
and disposal activities
|
|
|
8,313
|
|
|
|
231
|
|
|
|
782
|
|
|
|
157
|
|
Unconsolidated affiliates interest, tax, depreciation
and amortization
(1)
|
|
|
571
|
|
|
|
852
|
|
|
|
551
|
|
|
|
1,029
|
|
Contingent consideration remeasurement
|
|
|
32
|
|
|
|
—
|
|
|
|
57
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
3,500
|
|
|
|
—
|
|
|
|
6,112
|
|
|
|
—
|
|
ESOP deferred compensation
|
|
|
5,209
|
|
|
|
—
|
|
|
|
5,105
|
|
|
|
—
|
|
Executive retirement benefits
|
|
|
909
|
|
|
|
—
|
|
|
|
158
|
|
|
|
—
|
|
Transaction costs
(2)
|
|
|
1,057
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restatement-related costs
(3)
|
|
|
2,502
|
|
|
|
—
|
|
|
|
14,985
|
|
|
|
—
|
|
Segment Adjusted EBITDA
(4)
|
|
$
|
118,562
|
|
|
$
|
8,667
|
|
|
$
|
121,754
|
|
|
$
|
15,655
|
|
- 22 -
Table of Contents
Advanced Drainage Systems, Inc.
(1)
|
Includes the proportional share of interest, income taxes, depreciation and amortization related to the South American Joint Venture and the Tigre-ADS USA joint venture, which are accounted for under the equity method of accounting.
|
(2)
|
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with our debt refinancing and potential asset acquisitions and dispositions.
|
(3
)
|
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with the restatement of prior period financial statements as reflected in the fiscal year 2015 Form 10-K and fiscal year 2016 Form 10-K/A. Fiscal 2018 expenses relate to the ongoing SEC Enforcement Division’s investigation and related shareholder litigation discussed in “Note 9. Commitments and Contingencies.”
|
(4)
|
A portion of the reduction in International EBITDA is related to transfer pricing. The reduction is fully offset by an increase in Domestic EBITDA.
|
Dividends on Common Stock
- During the third quarter of fiscal 2018, the Company declared a quarterly cash dividend of $0.07 per share of common stock. The dividend is payable on December 15, 2017 to stockholders of record at the close of business on December 1, 2017.
Treasury Stock Retirement –
On November 1, 2017, the Board of Directors resolved to retire 97.7 million shares of Treasury Stock. The retirement of the Treasury Stock shares will result in a reclassification of Treasury Stock to Paid-In-Capital and will not have an impact on Total Stockholders’ Equity.
- 23 -
Table of Contents
Advanced Drainage Systems, Inc.