UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2018September 30, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-36557
ADVANCED DRAINAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 51-0105665 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
4640 Trueman Boulevard, Hilliard, Ohio 43026
(Address of Principal Executive Offices, Including Zip Code)
(614) 658-0050
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | WMS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |
Emerging Growth Company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 31,November 5, 2019, the registrant had 57,275,21868,272,550 shares of common stock outstanding. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS.” In addition, as of January 31,November 5, 2019, 249,897303,257 shares of unvested restricted common stock were outstanding and 22,701,61722,382,004 shares of ESOP, preferred stock, convertible into 17,462,08317,216,237 shares of common stock, were outstanding. As of January 31,November 5, 2019, 74,987,19885,792,044 shares of common stock were outstanding, inclusive of outstanding shares of unvested restricted common stock and on an as-converted basis with respect to the outstanding shares of ESOP preferred stock.
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Item 1. |
| Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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i
PART I. FINANCIALFINANCIAL INFORMATION
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except par value)
|
| December 31, 2018 |
|
| March 31, 2018 |
|
| September 30, 2019 |
|
| March 31, 2019 |
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ASSETS |
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Current assets: |
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Cash |
| $ | 19,758 |
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| $ | 17,587 |
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| $ | 54,207 |
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| $ | 8,891 |
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Receivables (less allowance for doubtful accounts of $7,353 and $6,826, respectively) |
|
| 152,538 |
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| 171,961 |
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Receivables (less allowance for doubtful accounts of $5,939 and $7,653, respectively) |
|
| 250,470 |
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| 186,991 |
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Inventories |
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| 246,451 |
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| 263,792 |
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| 248,914 |
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| 264,540 |
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Other current assets |
|
| 7,641 |
|
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| 5,113 |
|
|
| 10,629 |
|
|
| 6,091 |
| |
Total current assets |
|
| 426,388 |
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|
| 458,453 |
|
|
| 564,220 |
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| 466,513 |
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Property, plant and equipment, net |
|
| 402,819 |
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| 399,381 |
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| 492,017 |
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| 398,891 |
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Other assets: |
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Goodwill |
|
| 102,423 |
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| 103,017 |
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| 669,753 |
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| 102,638 |
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Intangible assets, net |
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| 38,554 |
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| 44,437 |
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| 501,572 |
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| 37,177 |
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Other assets |
|
| 36,856 |
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| 37,954 |
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| 67,758 |
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| 36,940 |
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Total assets |
| $ | 1,007,040 |
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| $ | 1,043,242 |
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| $ | 2,295,320 |
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| $ | 1,042,159 |
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LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current maturities of debt obligations |
| $ | 26,165 |
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| $ | 26,848 |
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| $ | 6,195 |
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| $ | 25,932 |
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Current maturities of capital lease obligations |
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| 23,354 |
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| 22,007 |
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Current maturities of finance lease obligations |
|
| 22,555 |
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| 23,117 |
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Accounts payable |
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| 66,361 |
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| 105,521 |
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| 111,450 |
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| 93,577 |
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Other accrued liabilities |
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| 67,567 |
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| 60,560 |
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| 97,979 |
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| 61,901 |
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Accrued income taxes |
|
| 6,608 |
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| 6,307 |
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| 3,169 |
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| 1,758 |
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Total current liabilities |
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| 190,055 |
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| 221,243 |
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| 241,348 |
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| 206,285 |
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Long-term debt obligations (less unamortized debt issuance costs of $2,467 and $3,028, respectively) |
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| 200,764 |
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| 270,900 |
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Long-term capital lease obligations |
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| 63,541 |
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| 59,963 |
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Long-term debt obligations (less unamortized debt issuance costs of $2,614 and $2,293, respectively) |
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| 1,043,154 |
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| 208,602 |
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Long-term finance lease obligations |
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| 52,746 |
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| 61,555 |
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Deferred tax liabilities |
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| 35,472 |
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| 32,304 |
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| 158,079 |
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| 45,963 |
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Other liabilities |
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| 22,220 |
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| 25,023 |
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| 37,017 |
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| 19,119 |
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Total liabilities |
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| 512,052 |
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| 609,433 |
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| 1,532,344 |
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| 541,524 |
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Commitments and contingencies (see Note 10) |
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Commitments and contingencies (see Note 12) |
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Mezzanine equity: |
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Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized; 44,170 shares issued; 22,810 and 23,300 shares outstanding, respectively |
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| 285,117 |
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| 291,247 |
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Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized; 44,170 shares issued; 22,383 and 22,611 shares outstanding, respectively |
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| 279,785 |
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| 282,638 |
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Deferred compensation – unearned ESOP shares |
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| (182,980 | ) |
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| (190,168 | ) |
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| (28,565 | ) |
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| (180,316 | ) | |
Redeemable noncontrolling interest in subsidiaries |
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| 8,471 |
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Total mezzanine equity |
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| 102,137 |
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| 109,550 |
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| 251,220 |
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| 102,322 |
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Stockholders’ equity: |
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Common stock; $0.01 par value: 1,000,000 shares authorized; 57,634 shares issued; 57,190 and 56,476 shares outstanding, respectively |
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| 11,433 |
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| 11,426 |
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Common stock; $0.01 par value: 1,000,000 shares authorized; 68,746 and 57,964 shares issued, respectively; 68,262 and 57,490 shares outstanding, respectively |
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| 11,545 |
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| 11,436 |
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Paid-in capital |
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| 383,300 |
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| 364,908 |
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| 800,947 |
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| 391,039 |
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Common stock in treasury, at cost |
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| (9,117 | ) |
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| (8,277 | ) |
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| (10,162 | ) |
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| (9,863 | ) | |
Accumulated other comprehensive loss |
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| (27,675 | ) |
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| (21,247 | ) |
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| (26,427 | ) |
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| (25,867 | ) | |
Retained earnings (deficit) |
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| 22,017 |
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| (39,214 | ) | |||||||||
Retained (deficit) earnings |
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| (277,725 | ) |
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| 17,582 |
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Total ADS stockholders’ equity |
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| 379,958 |
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| 307,596 |
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| 498,178 |
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| 384,327 |
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Noncontrolling interest in subsidiaries |
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| 12,893 |
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| 16,663 |
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| 13,578 |
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|
| 13,986 |
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Total stockholders’ equity |
|
| 392,851 |
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|
| 324,259 |
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| 511,756 |
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| 398,313 |
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Total liabilities, mezzanine equity and stockholders’ equity |
| $ | 1,007,040 |
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| $ | 1,043,242 |
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| $ | 2,295,320 |
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| $ | 1,042,159 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
- 1 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per share data)
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
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| Three Months Ended September 30, |
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| Six Months Ended September 30, |
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| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net sales |
| $ | 318,113 |
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| $ | 320,832 |
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| $ | 1,112,515 |
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| $ | 1,080,240 |
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| $ | 495,905 |
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| $ | 406,555 |
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| $ | 909,613 |
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| $ | 794,402 |
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Cost of goods sold |
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| 245,714 |
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| 243,006 |
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| 845,052 |
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| 825,874 |
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| 349,381 |
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| 311,182 |
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| 656,637 |
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| 599,338 |
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Cost of goods sold - ESOP special dividend compensation |
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| — |
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| — |
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| 168,610 |
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Gross profit |
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| 72,399 |
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| 77,826 |
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| 267,463 |
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| 254,366 |
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| 146,524 |
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| 95,373 |
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| 84,366 |
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| 195,064 |
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Operating expenses: |
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Selling |
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| 23,260 |
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| 22,903 |
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| 72,156 |
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| 70,348 |
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| 29,971 |
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| 24,731 |
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| 56,336 |
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| 48,896 |
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General and administrative |
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| 22,116 |
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| 23,788 |
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| 65,082 |
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| 74,351 |
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| 48,030 |
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| 21,584 |
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| 79,463 |
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| 42,966 |
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Selling, general and administrative - ESOP special dividend compensation |
|
| — |
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| — |
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| 78,142 |
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| — |
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Loss on disposal of assets and costs from exit and disposal activities |
|
| 144 |
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| 1,924 |
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| 1,572 |
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| 10,468 |
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| 2,004 |
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| 324 |
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| 2,711 |
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| 1,428 |
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Intangible amortization |
|
| 1,976 |
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| 2,012 |
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| 5,945 |
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| 6,071 |
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| 9,300 |
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| 1,985 |
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| 10,842 |
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|
| 3,969 |
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Income from operations |
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| 24,903 |
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| 27,199 |
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| 122,708 |
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| 93,128 |
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Income (loss) from operations |
|
| 57,219 |
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| 46,749 |
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| (143,128 | ) |
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| 97,805 |
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Other expense: |
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Interest expense |
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| 5,695 |
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| 3,086 |
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| 14,028 |
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| 12,620 |
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| 52,332 |
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| 4,531 |
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| 57,596 |
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| 8,333 |
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Derivative loss (gains) and other expense (income), net |
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| 634 |
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| (963 | ) |
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| (86 | ) |
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| (4,456 | ) |
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| 175 |
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| 94 |
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| 79 |
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| (720 | ) |
Income before income taxes |
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| 18,574 |
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| 25,076 |
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| 108,766 |
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| 84,964 |
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Income tax expense (benefit) |
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| 2,490 |
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| (7,371 | ) |
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| 28,968 |
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| 15,812 |
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Income (loss) before income taxes |
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| 4,712 |
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| 42,124 |
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| (200,803 | ) |
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| 90,192 |
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Income tax (benefit) expense |
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| (3,547 | ) |
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| 12,194 |
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| 18,823 |
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| 26,478 |
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Equity in net (income) loss of unconsolidated affiliates |
|
| (466 | ) |
|
| (768 | ) |
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| 225 |
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|
| (496 | ) |
|
| (203 | ) |
|
| 558 |
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|
| (637 | ) |
|
| 691 |
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Net income |
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| 16,550 |
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|
| 33,215 |
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|
| 79,573 |
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|
| 69,648 |
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Less: net income attributable to noncontrolling interest |
|
| 738 |
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|
| 1,110 |
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|
| 2,811 |
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|
| 1,938 |
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Net income attributable to ADS |
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| 15,812 |
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|
| 32,105 |
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|
| 76,762 |
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|
| 67,710 |
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Net income (loss) |
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| 8,462 |
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|
| 29,372 |
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| (218,989 | ) |
|
| 63,023 |
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Less: net income (loss) attributable to noncontrolling interest |
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| 873 |
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| 702 |
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| (222 | ) |
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| 2,073 |
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Net income (loss) attributable to ADS |
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| 7,589 |
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| 28,670 |
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| (218,767 | ) |
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| 60,950 |
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Weighted average common shares outstanding: |
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Basic |
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| 57,180 |
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|
| 55,917 |
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|
| 56,925 |
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|
| 55,497 |
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|
| 60,222 |
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|
| 56,929 |
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|
| 58,906 |
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|
| 56,776 |
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Diluted |
|
| 57,685 |
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|
| 56,459 |
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|
| 57,482 |
|
|
| 56,124 |
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|
| 60,876 |
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|
| 57,558 |
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|
| 58,906 |
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|
| 57,374 |
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Net income per share: |
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Net income (loss) per share: |
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Basic |
| $ | 0.25 |
|
| $ | 0.52 |
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| $ | 1.22 |
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| $ | 1.09 |
|
| $ | 0.10 |
|
| $ | 0.45 |
|
| $ | (3.86 | ) |
| $ | 0.97 |
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Diluted |
| $ | 0.25 |
|
| $ | 0.51 |
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| $ | 1.20 |
|
| $ | 1.08 |
|
| $ | 0.10 |
|
| $ | 0.45 |
|
| $ | (3.86 | ) |
| $ | 0.96 |
|
Cash dividends declared per share |
| $ | 0.08 |
|
| $ | 0.07 |
|
| $ | 0.24 |
|
| $ | 0.21 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 2 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands)
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Net income |
| $ | 16,550 |
|
| $ | 33,215 |
|
| $ | 79,573 |
|
| $ | 69,648 |
|
Currency translation (loss) gain |
|
| (5,642 | ) |
|
| (2,975 | ) |
|
| (7,617 | ) |
|
| 3,010 |
|
Comprehensive income |
|
| 10,908 |
|
|
| 30,240 |
|
|
| 71,956 |
|
|
| 72,658 |
|
Less: other comprehensive loss attributable to noncontrolling interest |
|
| (810 | ) |
|
| (1,484 | ) |
|
| (1,189 | ) |
|
| (872 | ) |
Less: net income attributable to noncontrolling interest |
|
| 738 |
|
|
| 1,110 |
|
|
| 2,811 |
|
|
| 1,938 |
|
Total comprehensive income attributable to ADS |
| $ | 10,980 |
|
| $ | 30,614 |
|
| $ | 70,334 |
|
| $ | 71,592 |
|
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net income (loss) |
| $ | 8,462 |
|
| $ | 29,372 |
|
| $ | (218,989 | ) |
| $ | 63,023 |
|
Currency translation (loss) gain |
|
| (2,310 | ) |
|
| 2,837 |
|
|
| (746 | ) |
|
| (1,975 | ) |
Comprehensive income (loss) |
|
| 6,152 |
|
|
| 32,209 |
|
|
| (219,735 | ) |
|
| 61,048 |
|
Less: other comprehensive (loss) income attributable to noncontrolling interest |
|
| (353 | ) |
|
| 996 |
|
|
| (186 | ) |
|
| (379 | ) |
Less: net income (loss) attributable to noncontrolling interest |
|
| 873 |
|
|
| 702 |
|
|
| (222 | ) |
|
| 2,073 |
|
Total comprehensive income (loss) attributable to ADS |
| $ | 5,632 |
|
| $ | 30,511 |
|
| $ | (219,327 | ) |
| $ | 59,354 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
|
| Nine Months Ended December 31, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 79,573 |
|
| $ | 69,648 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net (loss) income |
| $ | (218,989 | ) |
| $ | 63,023 |
| ||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 52,912 |
|
|
| 55,793 |
|
|
| 43,260 |
|
|
| 35,363 |
|
Deferred income taxes |
|
| 2,316 |
|
|
| (12,738 | ) |
|
| 1,127 |
|
|
| 3,221 |
|
Loss on disposal of assets and costs from exit and disposal activities |
|
| 1,572 |
|
|
| 10,468 |
|
|
| 2,711 |
|
|
| 1,428 |
|
ESOP and stock-based compensation |
|
| 16,142 |
|
|
| 13,086 |
|
|
| 16,082 |
|
|
| 11,760 |
|
ESOP special dividend compensation |
|
| 246,752 |
|
|
| — |
| ||||||||
Amortization of deferred financing charges |
|
| 561 |
|
|
| 746 |
|
|
| 34,285 |
|
|
| 387 |
|
Inventory step up related to Infiltrator Water Technologies acquisition |
|
| 5,773 |
|
|
| — |
| ||||||||
Fair market value adjustments to derivatives |
|
| 1,976 |
|
|
| (1,988 | ) |
|
| 996 |
|
|
| (901 | ) |
Equity in net loss (income) of unconsolidated affiliates |
|
| 225 |
|
|
| (496 | ) | ||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| (637 | ) |
|
| 691 |
| ||||||||
Other operating activities |
|
| (3,493 | ) |
|
| 12,046 |
|
|
| (3,635 | ) |
|
| (1,342 | ) |
Changes in working capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
| 16,768 |
|
|
| (14,817 | ) |
|
| (44,883 | ) |
|
| (64,649 | ) |
Inventories |
|
| 15,705 |
|
|
| 44,560 |
|
|
| 57,316 |
|
|
| 16,378 |
|
Prepaid expenses and other current assets |
|
| (2,562 | ) |
|
| 2,105 |
|
|
| (2,917 | ) |
|
| (2,116 | ) |
Accounts payable, accrued expenses, and other liabilities |
|
| (33,673 | ) |
|
| (39,504 | ) |
|
| 34,470 |
|
|
| (5,082 | ) |
Net cash provided by operating activities |
|
| 148,022 |
|
|
| 138,909 |
|
|
| 171,711 |
|
|
| 58,161 |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (31,130 | ) |
|
| (35,124 | ) |
|
| (25,622 | ) |
|
| (19,299 | ) |
Cash paid for acquisitions, net of cash acquired |
|
| — |
|
|
| (1,990 | ) | ||||||||
Proceeds from sale of corporate-owned life insurance |
|
| — |
|
|
| 5,959 |
| ||||||||
Acquisition of Infiltrator Water Technologies, net of cash acquired |
|
| (1,088,617 | ) |
|
| — |
| ||||||||
Other investing activities |
|
| 1,109 |
|
|
| (570 | ) |
|
| (116 | ) |
|
| 429 |
|
Net cash used in investing activities |
|
| (30,021 | ) |
|
| (31,725 | ) |
|
| (1,114,355 | ) |
|
| (18,870 | ) |
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Revolving Credit Facility |
|
| 331,600 |
|
|
| 397,450 |
| ||||||||
Payments on Revolving Credit Facility |
|
| (376,600 | ) |
|
| (431,950 | ) | ||||||||
Payments on Term Loan |
|
| — |
|
|
| (72,500 | ) | ||||||||
Proceeds from Term Loan Facility |
|
| 1,300,000 |
|
|
| — |
| ||||||||
Payments on Term Loan Facility |
|
| (1,300,000 | ) |
|
| — |
| ||||||||
Proceeds from syndication of Term Loan Facility |
|
| 700,000 |
|
|
| — |
| ||||||||
Proceeds from Senior Notes |
|
| — |
|
|
| 75,000 |
|
|
| 350,000 |
|
|
| — |
|
Payments on Senior Notes |
|
| (25,000 | ) |
|
| (25,000 | ) | ||||||||
Proceeds from Revolving Credit Agreement |
|
| 177,900 |
|
|
| — |
| ||||||||
Payments on Revolving Credit Agreement |
|
| (177,900 | ) |
|
| — |
| ||||||||
Debt issuance costs |
|
| — |
|
|
| (2,268 | ) |
|
| (34,606 | ) |
|
| — |
|
Payments of notes, mortgages and other debt |
|
| (700 | ) |
|
| (1,675 | ) | ||||||||
Payments on capital lease obligations |
|
| (17,791 | ) |
|
| (18,176 | ) | ||||||||
Acquisition of noncontrolling interest in BaySaver |
|
| (8,821 | ) |
|
| — |
| ||||||||
Proceeds from PNC Credit Agreement |
|
| 253,900 |
|
|
| 250,100 |
| ||||||||
Payments on PNC Credit Agreement |
|
| (388,300 | ) |
|
| (243,400 | ) | ||||||||
Payments on Prudential Senior Notes |
|
| (100,000 | ) |
|
| (25,000 | ) | ||||||||
Payments on finance lease obligations |
|
| (12,375 | ) |
|
| (11,619 | ) | ||||||||
Proceeds from common stock offering, net of offering costs |
|
| 293,648 |
|
|
| — |
| ||||||||
Cash dividends paid |
|
| (21,084 | ) |
|
| (13,511 | ) |
|
| (76,324 | ) |
|
| (11,618 | ) |
Proceeds from exercise of stock options |
|
| 3,937 |
|
|
| 7,606 |
|
|
| 2,430 |
|
|
| 3,473 |
|
Repurchase of common stock |
|
| — |
|
|
| (7,947 | ) | ||||||||
Other financing activities |
|
| (920 | ) |
|
| (1,558 | ) |
|
| (236 | ) |
|
| (1,026 | ) |
Net cash used in financing activities |
|
| (115,379 | ) |
|
| (94,529 | ) | ||||||||
Net cash provided by (used in) financing activities |
|
| 988,137 |
|
|
| (39,090 | ) | ||||||||
Effect of exchange rate changes on cash |
|
| (451 | ) |
|
| (698 | ) |
|
| (177 | ) |
|
| (176 | ) |
Net change in cash |
|
| 2,171 |
|
|
| 11,957 |
|
|
| 45,316 |
|
|
| 25 |
|
Cash at beginning of period |
|
| 17,587 |
|
|
| 6,450 |
|
|
| 8,891 |
|
|
| 17,587 |
|
Cash at end of period |
| $ | 19,758 |
|
| $ | 18,407 |
|
| $ | 54,207 |
|
| $ | 17,612 |
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 27,459 |
|
| $ | 25,408 |
|
| $ | 7,199 |
|
| $ | 18,331 |
|
Cash paid for interest |
|
| 11,506 |
|
|
| 13,904 |
|
|
| 17,771 |
|
|
| 8,032 |
|
Non-cash operating, investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment under capital lease and incurred lease obligations |
|
| 19,915 |
|
|
| 25,993 |
| ||||||||
Balance in accounts payable for the acquisition of property, plant and equipment |
|
| 2,381 |
|
|
| 998 |
|
|
| 3,669 |
|
|
| 3,152 |
|
Payable recorded for business acquisition |
|
| — |
|
|
| 300 |
| ||||||||
Contribution of net accounts receivable to the South American Joint Venture |
|
| — |
|
|
| 2,785 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY
(Unaudited) (In thousands)
| Common Stock |
| Paid -In |
| Common Stock in Treasury |
| Accumulated Other Compre-hensive |
| Retained (Deficit) |
| Total ADS Stockholders’ |
| Non- controlling Interest in |
| Total Stock- holders’ |
|
| Redeemable Convertible Preferred Stock |
| Deferred Compensation Unearned ESOP Shares |
| Redeemable Non-controlling Interest in |
| Total Mezzanine |
| Common Stock |
| Paid -In |
| Common Stock in Treasury |
| Accumulated Other Compre-hensive |
| Retained (Deficit) |
| Total ADS Stockholders’ |
| Non- controlling Interest in |
| Total Stock- holders’ |
|
| Redeemable Convertible Preferred Stock |
| Deferred Compensation Unearned ESOP Shares |
| Redeemable Non-controlling Interest in |
| Total Mezzanine |
| ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Equity |
| Subsidiaries |
| Equity |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Subsidiaries |
| Equity |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Equity |
| Subsidiaries |
| Equity |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Subsidiaries |
| Equity |
| ||||||||||||||||||||||||||||||||
Balance at April 1, 2017 |
| 153,560 |
| $ | 12,393 |
| $ | 755,787 |
|
| 98,222 |
| $ | (436,984 | ) | $ | (24,815 | ) | $ | (83,678 | ) | $ | 222,703 |
| $ | 14,907 |
| $ | 237,610 |
|
|
| 24,225 |
| $ | 302,814 |
|
| 15,863 |
| $ | (198,216 | ) | $ | 8,227 |
| $ | 112,825 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2018 |
| 57,366 |
| $ | 11,431 |
| $ | 375,215 |
|
| 441 |
| $ | (9,033 | ) | $ | (24,684 | ) | $ | (11,976 | ) | $ | 340,953 |
| $ | 15,586 |
| $ | 356,539 |
|
|
| 22,987 |
| $ | 287,337 |
|
| 15,027 |
| $ | (187,772 | ) | $ | 8,474 |
| $ | 108,039 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 67,710 |
|
| 67,710 |
|
| 1,165 |
|
| 68,875 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 773 |
|
| 773 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 28,670 |
|
| 28,670 |
|
| 208 |
|
| 28,878 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 494 |
|
| 494 |
|
Other comprehensive income |
| — |
| — |
| — |
| — |
| — |
| 3,882 |
| — |
| 3,882 |
| (872 | ) |
| 3,010 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| 1,841 |
| — |
| 1,841 |
| 996 |
| 2,837 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||
Redeemable convertible preferred stock dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,310 | ) |
| (1,310 | ) |
| — |
| (1,310 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| (478 | ) |
| (478 | ) |
| — |
| (478 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||
Common stock dividends ($0.21 per share) |
| — |
| — |
| — |
| — |
| — |
| — |
| (11,729 | ) |
| (11,729 | ) |
| — |
| (11,729 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($0.08 per share) |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,585 | ) |
| (4,585 | ) |
| — |
| (4,585 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allocation of ESOP shares to participants for compensation |
| — |
| — |
| 1,972 |
| — |
| — |
| — |
| — |
| 1,972 |
| — |
| 1,972 |
|
|
| — |
| — |
| (191 | ) |
| 2,396 |
| — |
| 2,396 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock options |
| 25 |
| — |
| 258 |
| — |
| — |
| — |
| — |
| 258 |
| — |
| 258 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock awards |
| — |
| — |
| — |
| — |
| (2 | ) |
| — |
| — |
| (2 | ) |
| — |
| (2 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
| — |
| — |
| 1,812 |
| — |
| — |
| — |
| — |
| 1,812 |
| — |
| 1,812 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ESOP distribution in common stock |
| 134 |
|
| 2 |
|
| 2,218 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,220 |
|
| — |
|
| 2,220 |
|
|
| (177 | ) |
| (2,220 | ) |
| — |
|
| — |
|
| — |
|
| (2,220 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 |
| 57,525 |
| $ | 11,433 |
| $ | 381,475 |
|
| 441 |
| $ | (9,035 | ) | $ | (22,843 | ) | $ | 11,631 |
| $ | 372,661 |
| $ | 16,790 |
| $ | 389,451 |
|
|
| 22,810 |
| $ | 285,117 |
|
| 14,836 |
| $ | (185,376 | ) | $ | 8,968 |
| $ | 108,709 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 1, 2018 |
| 56,889 |
| $ | 11,426 |
| $ | 364,908 |
|
| 413 |
| $ | (8,277 | ) | $ | (21,247 | ) | $ | (39,214 | ) | $ | 307,596 |
| $ | 16,663 |
| $ | 324,259 |
|
|
| 23,300 |
| $ | 291,247 |
|
| 15,219 |
| $ | (190,168 | ) | $ | 8,471 |
| $ | 109,550 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 60,950 |
|
| 60,950 |
|
| 1,241 |
|
| 62,191 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 832 |
|
| 832 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| — |
| (1,596 | ) |
| — |
| (1,596 | ) |
| (379 | ) |
| (1,975 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Redeemable convertible preferred stock dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| (975 | ) |
| (975 | ) |
| — |
| (975 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($0.16 per share) |
| — |
| — |
| — |
| — |
| — |
| — |
| (9,130 | ) |
| (9,130 | ) |
| — |
| (9,130 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend paid to non-controlling interest holder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (490 | ) |
| (490 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (735 | ) |
| (735 | ) |
|
| — |
| — |
| — |
| — |
| (335 | ) |
| (335 | ) | |||||||||||||||||||||||||
Allocation of ESOP shares to participants for compensation |
| — |
| — |
| 1,910 |
| — |
| — |
| — |
| — |
| 1,910 |
| — |
| 1,910 |
|
|
| — |
| — |
| (483 | ) |
| 6,036 |
| — |
| 6,036 |
|
| — |
| — |
| 3,597 |
| — |
| — |
| — |
| — |
| 3,597 |
| — |
| 3,597 |
|
|
| — |
| — |
| (383 | ) |
| 4,792 |
| — |
| 4,792 |
| ||||||||||||||||||||||||||
Exercise of common stock options |
| 559 |
| 6 |
| 7,558 |
| (2 | ) |
| 42 |
| — |
| — |
| 7,606 |
| — |
| 7,606 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
|
| 242 |
| 2 |
| 3,473 |
| 26 |
| (704 | ) |
| — |
| — |
| 2,771 |
| — |
| 2,771 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||||
Restricted stock awards |
| 41 |
| — |
| 1,801 |
| (78 | ) |
| 349 |
| — |
| — |
| 2,150 |
| — |
| 2,150 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
|
| 19 |
| 1 |
| — |
| 2 |
| (54 | ) |
| — |
| — |
| (53 | ) |
| — |
| (53 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||
Reclassification of liability- classified awards |
| — |
| — |
| 13,714 |
| — |
| — |
| — |
| — |
| 13,714 |
| — |
| 13,714 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity classified stock-based compensation expense |
| — |
| — |
| 2,991 |
| — |
| — |
| — |
| — |
| 2,991 |
| — |
| 2,991 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
| — |
| — |
| 3,371 |
| — |
| — |
| — |
| — |
| 3,371 |
| — |
| 3,371 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ESOP distribution in common stock |
| 192 |
| 2 |
| 7,775 |
| (394 | ) |
| 1,753 |
| — |
| — |
| 9,530 |
| — |
| 9,530 |
|
|
| (762 | ) |
| (9,530 | ) |
| — |
| — |
| — |
| (9,530 | ) |
| 375 |
|
| 4 |
|
| 6,126 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,130 |
|
| — |
|
| 6,130 |
|
|
| (490 | ) |
| (6,130 | ) |
| — |
|
| — |
|
| — |
|
| (6,130 | ) | |||||||||||
Retirement of common stock held in treasury |
| (97,745 | ) |
| (977 | ) |
| (433,852 | ) |
| (97,745 | ) |
| 434,829 |
|
|
|
|
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock repurchases |
| — |
|
| — |
|
| — |
|
| 400 |
|
| (7,947 | ) |
| — |
|
| — |
|
| (7,947 | ) |
| — |
|
| (7,947 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
| 56,607 |
| $ | 11,424 |
| $ | 357,684 |
|
| 403 |
| $ | (7,958 | ) | $ | (20,933 | ) | $ | (29,007 | ) | $ | 311,210 |
| $ | 14,710 |
| $ | 325,920 |
|
|
| 23,463 |
| $ | 293,284 |
|
| 15,380 |
| $ | (192,180 | ) | $ | 9,000 |
| $ | 110,104 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at April 1, 2018 |
| 56,889 |
| $ | 11,426 |
| $ | 364,908 |
|
| 413 |
| $ | (8,277 | ) | $ | (21,247 | ) | $ | (39,214 | ) | $ | 307,596 |
| $ | 16,663 |
| $ | 324,259 |
|
|
| 23,300 |
| $ | 291,247 |
|
| 15,219 |
| $ | (190,168 | ) | $ | 8,471 |
| $ | 109,550 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 76,762 |
|
| 76,762 |
|
| 1,979 |
|
| 78,741 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 832 |
|
| 832 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| — |
| (6,428 | ) |
| — |
| (6,428 | ) |
| (1,189 | ) |
| (7,617 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Redeemable convertible preferred stock dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,442 | ) |
| (1,442 | ) |
| — |
| (1,442 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($0.24 per share) |
| — |
| — |
| — |
| — |
| — |
| — |
| (13,751 | ) |
| (13,751 | ) |
| — |
| (13,751 | ) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend paid to non-controlling interest holder |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (4,560 | ) |
| (4,560 | ) |
|
| — |
| — |
| — |
| — |
| (1,075 | ) |
| (1,075 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allocation of ESOP shares to participants for compensation |
| — |
| — |
| 3,925 |
| — |
| — |
| — |
| — |
| 3,925 |
| — |
| 3,925 |
|
|
|
|
|
|
| (575 | ) |
| 7,188 |
|
|
| 7,188 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock options |
| 277 |
| 2 |
| 3,937 |
| 28 |
| (767 | ) |
| — |
| — |
| 3,173 |
| — |
| 3,173 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock awards |
| 93 |
| 1 |
| 2,945 |
| 3 |
| (73 | ) |
| — |
| — |
| 2,872 |
| — |
| 2,872 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity classified stock-based compensation expense |
| — |
| — |
| 2,084 |
| — |
| — |
| — |
| — |
| 2,084 |
| — |
| 2,084 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ESOP distribution in common stock |
| 375 |
| 4 |
| 6,126 |
| — |
| — |
| — |
| — |
| 6,130 |
| — |
| 6,130 |
|
|
| (490 | ) |
| (6,130 | ) |
| — |
| — |
| — |
| (6,130 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of noncontrolling interest in BaySaver |
| — |
|
| — |
|
| (625 | ) |
| — |
|
| — |
|
| — |
|
| (338 | ) |
| (963 | ) |
| — |
|
| (963 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,228 | ) |
| (8,228 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 |
| 57,634 |
| $ | 11,433 |
| $ | 383,300 |
|
| 444 |
| $ | (9,117 | ) | $ | (27,675 | ) | $ | 22,017 |
| $ | 379,958 |
| $ | 12,893 |
| $ | 392,851 |
|
|
| 22,810 |
| $ | 285,117 |
|
| 14,644 |
| $ | (182,980 | ) | $ | — |
| $ | 102,137 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 |
| 57,525 |
| $ | 11,433 |
| $ | 381,475 |
|
| 441 |
| $ | (9,035 | ) | $ | (22,843 | ) | $ | 11,631 |
| $ | 372,661 |
| $ | 16,790 |
| $ | 389,451 |
|
|
| 22,810 |
| $ | 285,117 |
|
| 14,836 |
| $ | (185,376 | ) | $ | 8,968 |
| $ | 108,709 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY (CONTINUED)
(Unaudited) (In thousands)
| Common Stock |
| Paid -In |
| Common Stock in Treasury |
| Accumulated Other Compre-hensive |
| Retained (Deficit) |
| Total ADS Stockholders’ |
| Non- controlling Interest in |
| Total Stock- holders’ |
|
| Redeemable Convertible Preferred Stock |
| Deferred Compensation Unearned ESOP Shares |
| Total Mezzanine |
| |||||||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Equity |
| Subsidiaries |
| Equity |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Equity |
| |||||||||||||||
Balance at July 1, 2019 |
| 58,283 |
| $ | 11,439 |
| $ | 501,046 |
|
| 484 |
| $ | (10,162 | ) | $ | (24,470 | ) | $ | (278,727 | ) | $ | 199,126 |
| $ | 13,058 |
| $ | 212,184 |
|
|
| 22,385 |
| $ | 279,816 |
|
| 2,559 |
| $ | (31,659 | ) | $ | 248,157 |
|
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7,589 |
|
| 7,589 |
|
| 873 |
|
| 8,462 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,957 | ) |
| — |
|
| (1,957 | ) |
| (353 | ) |
| (2,310 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Redeemable convertible preferred stock dividends |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,349 | ) |
| (1,349 | ) |
| — |
|
| (1,349 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Common stock dividends ($0.09 per share) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (5,238 | ) |
| (5,238 | ) |
| — |
|
| (5,238 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Allocation of ESOP shares to participants for compensation |
| — |
|
| — |
|
| 2,392 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,392 |
|
| — |
|
| 2,392 |
|
|
| — |
|
| — |
|
| (247 | ) |
| 3,094 |
|
| 3,094 |
|
Exercise of common stock options |
| 54 |
|
| 1 |
|
| 763 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 764 |
|
| — |
|
| 764 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Restricted stock awards |
| 57 |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| 1 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock-based compensation expense |
| — |
|
| — |
|
| 3,171 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,171 |
|
| — |
|
| 3,171 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
ESOP distribution in common stock |
| 2 |
|
| — |
|
| 31 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 31 |
|
| — |
|
| 31 |
|
|
| (2 | ) |
| (31 | ) |
| — |
|
| — |
|
| (31 | ) |
Common Stock Offering |
| 10,350 |
|
| 104 |
|
| 293,544 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 293,648 |
|
| — |
|
| 293,648 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Balance at September 30, 2019 |
| 68,746 |
|
| 11,545 |
|
| 800,947 |
|
| 484 |
|
| (10,162 | ) |
| (26,427 | ) |
| (277,725 | ) |
| 498,178 |
|
| 13,578 |
|
| 511,756 |
|
|
| 22,383 |
| $ | 279,785 |
|
| 2,312 |
| $ | (28,565 | ) | $ | 251,220 |
|
Balance at April 1, 2019 |
| 57,964 |
| $ | 11,436 |
| $ | 391,039 |
|
| 474 |
| $ | (9,863 | ) | $ | (25,867 | ) | $ | 17,582 |
| $ | 384,327 |
| $ | 13,986 |
| $ | 398,313 |
|
|
| 22,611 |
| $ | 282,638 |
|
| 14,452 |
| $ | (180,316 | ) | $ | 102,322 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (218,767 | ) |
| (218,767 | ) |
| (222 | ) |
| (218,989 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Other comprehensive loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (560 | ) |
| — |
|
| (560 | ) |
| (186 | ) |
| (746 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Redeemable convertible preferred stock dividends |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (8,195 | ) |
| (8,195 | ) |
| — |
|
| (8,195 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Common stock dividends ($1.18 per share) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (68,345 | ) |
| (68,345 | ) |
| — |
|
| (68,345 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Allocation of ESOP shares to participants for compensation |
| — |
|
| — |
|
| 4,882 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,882 |
|
| — |
|
| 4,882 |
|
|
| — |
|
| — |
|
| (495 | ) |
| 6,188 |
|
| 6,188 |
|
ESOP special dividend compensation |
| — |
|
| — |
|
| 101,189 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 101,189 |
|
| — |
|
| 101,189 |
|
|
| — |
|
| — |
|
| (11,645 | ) |
| 145,563 |
|
| 145,563 |
|
Exercise of common stock options |
| 168 |
|
| 2 |
|
| 2,430 |
|
| 7 |
|
| (207 | ) |
| — |
|
| — |
|
| 2,225 |
|
| — |
|
| 2,225 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Restricted stock awards |
| 88 |
|
| 1 |
|
| — |
|
| 3 |
|
| (92 | ) |
| — |
|
| — |
|
| (91 | ) |
| — |
|
| (91 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock-based compensation expense |
| — |
|
| — |
|
| 5,012 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,012 |
|
| — |
|
| 5,012 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
ESOP distribution in common stock |
| 176 |
|
| 2 |
|
| 2,851 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,853 |
|
| — |
|
| 2,853 |
|
|
| (228 | ) |
| (2,853 | ) |
| — |
|
| — |
|
| (2,853 | ) |
Common Stock Offering |
| 10,350 |
|
| 104 |
|
| 293,544 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 293,648 |
|
| — |
|
| 293,648 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Balance at September 30, 2019 |
| 68,746 |
|
| 11,545 |
|
| 800,947 |
|
| 484 |
|
| (10,162 | ) |
| (26,427 | ) |
| (277,725 | ) |
| 498,178 |
|
| 13,578 |
|
| 511,756 |
|
|
| 22,383 |
| $ | 279,785 |
|
| 2,312 |
| $ | (28,565 | ) | $ | 251,220 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
Advanced Drainage Systems, Inc.
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
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 July 31, 2019, the Company completed its acquisition (the “Acquisition”) of Infiltrator Water Technologies Ultimate Holdings, Inc. (“Infiltrator Water Technologies”). Infiltrator Water Technologies is a leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. Infiltrator Water Technologies’ products are used in on-site septic wastewater treatment systems in the United States and Canada. Infiltrator Water Technologies manufactures and sells StormTech and ARC Septic Chambers to certain entities affiliated with ADS. See “Note 3. Acquisitions” for additional information on the Acquisition.
The Company is managed based primarily on the geographies in which it operates and reports results of operations in two3 reportable segments: DomesticPipe, Infiltrator Water Technologies and International. The Company also reports its Allied Products and all other business segments as Allied Products and Other.
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, 20182019 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 20182019 (“Fiscal 20182019 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 December 31, 2018September 30, 2019 and the results of operations and cash flows for the three and ninesix months ended December 31, 2018.September 30, 2019. 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 20182019 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
Cloud Computing Leases-On August 29, 2018, In February 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard update (“ASU”) to provide guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. The ASU, which was released in response to a consensus reached by the EITF at its June 2018 meeting, aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU includes in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply CCA guidance to determine which implementation costs should be capitalized in such a CCA. The Company adopted this update effective July 1, 2018 on a prospective basis. The new standard did not have a material impact on the Condensed Consolidated Financial Statements.
Revenue Recognition - In May 2014, the FASB issued an ASU which amends the guidance for revenue recognition. This amendment 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
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Advanced Drainage Systems, Inc.
for goods or services. The amendment 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 additional 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 ASUs 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 adopted these standards on April 1, 2018 using the modified retrospective transition method. See “Note 3. Revenue Recognition” for further information on the adoption of the revenue recognition ASUs.
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 adopted this update effective April 1, 2018 using the retrospective method. The new standard did not have a material impact 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 adopted this update effective April 1, 2018. The new standard did not have an impact 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 adopted this update effective April 1, 2018. The new standard did not have an 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 adopted this update effective April 1, 2018. The new standard did not have an impact on the Condensed Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Adopted
Leases - In February 2016, the FASB issued an ASU which amends the guidance for leases.leases (“ASC 842”). 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
- 7 -
Advanced Drainage Systems, Inc.
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. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption of this standard is permitted. The standard allows 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. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company has implemented a new software solution to improve the process of tracking and accounting for leases under the current and new standards. The Company will adopt this standardadopted these standards effective April 1, 2019 using the modified retrospective transition method in the July 2018 ASU which does not require adjustments to comparative periods or require modified disclosures for those periods. The Company expects to elect theperiods and includes transition relief practical expedients. “Note 5. Leases” for further information on the adoption of the new lease ASUs.
Hedge Accounting - In August 2017, the FASB issued an ASU which expanded an entity’s ability to apply hedge accounting for non-financial and financial risk components and provided a simplified approach for fair value hedging of interest rate risk. The standard also refined how entities assess hedge effectiveness. The Company is continuing to evaluate theadopted this standard effective April 1, 2019. The new standard did not have an impact on itsthe Condensed Consolidated Financial Statements. The Company currently does not expect the adoption of ASC 842 to have a material impact on the Statement of Operations or Statement of Cash Flows. The recording of right-of-use assets and lease liabilities is expected to have a material impact on the Company’s Condensed Consolidated Balance Sheet.
Recent Accounting Guidance Not Yet Adopted
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.
Hedge Accounting – In August 2017, the FASB issued an ASU which expands an entity’s ability to apply hedge accountingExcept for non-financial and financial risk components and provides a simplified approach for fair value hedging of interest rate risk. The standard also refines how entities assess hedge effectiveness. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. The Company expects to adopt this standard effective April 1, 2019. The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.
Fair Value Measurement – In August 2018, the FASB issued an ASU that is intended to improve the effectiveness of disclosures in notes to financial statements. The standard removes, modifies and adds certain disclosure requirements related to fair value measurements. This standard is effective for fiscal years beginning after December 15, 2019. The standard requires the use of the retrospective transition method for specific amendments within the ASU and the prospective treatment of other amendments. Early adoption is permitted. The Company will early adopt this ASU, effective for the Company’s Annual Report on Form 10-K for the year ending March 31, 2019. 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 20182019 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 |
In fiscal 2018, the Company initiated restructuring activities (the “2018 Restructuring Plan”), which will continue throughoutconcluded during fiscal 2019, including closing underutilized manufacturing facilities, reducing headcount, optimizing product offerings and eliminating nonessential costs, designed to improve the Company’s cost structure. The Company closed one and three manufacturing facilities in the nine months ended December 31,
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Advanced Drainage Systems, Inc.
2018 and 2017, respectively. As additional restructuring opportunities may be identified, the Company does not have an estimated completion date or expected total cost estimate for the 2018 Restructuring Plan.
2019. 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 ninesix months ended December 31, 2018September 30, 2019 and 2017:2018:
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||||||||||
Accelerated depreciation |
| $ | — |
|
| $ | — |
|
| $ | 430 |
|
| $ | 3,561 |
|
| $ | — |
|
| $ | 430 |
|
| $ | — |
|
| $ | 430 |
|
Plant severance |
|
| 39 |
|
|
| 1,021 |
|
|
| 122 |
|
|
| 1,848 |
|
|
| — |
|
|
| 118 |
|
|
| — |
|
|
| 83 |
|
Headcount reduction |
|
| 237 |
|
|
| — |
|
|
| 237 |
|
|
| 2,577 |
| ||||||||||||||||
Product optimization |
|
| 48 |
|
|
| — |
|
|
| 351 |
|
|
| — |
|
|
| — |
|
|
| 303 |
|
|
| — |
|
|
| 303 |
|
Other restructuring activities |
|
| 114 |
|
|
| 56 |
|
|
| 316 |
|
|
| 56 |
|
|
| — |
|
|
| 171 |
|
|
| — |
|
|
| 202 |
|
Total 2018 Restructuring Plan activities |
| $ | 438 |
|
| $ | 1,077 |
|
| $ | 1,456 |
|
| $ | 8,042 |
|
| $ | — |
|
| $ | 1,022 |
|
| $ | — |
|
| $ | 1,018 |
|
(Gain) loss on other disposals and partial disposals of property, plant and equipment |
|
| (294 | ) |
|
| 847 |
|
|
| 116 |
|
|
| 2,426 |
| ||||||||||||||||
Loss (gain) on other disposals and partial disposals of property, plant and equipment |
|
| 444 |
|
|
| (698 | ) |
|
| 1,151 |
|
|
| 410 |
| ||||||||||||||||
Acquisition related severance costs |
|
| 1,560 |
|
|
| — |
|
|
| 1,560 |
|
|
| — |
| ||||||||||||||||
Total loss on disposal of assets and costs from exit and disposal activities |
| $ | 144 |
|
| $ | 1,924 |
|
| $ | 1,572 |
|
| $ | 10,468 |
|
| $ | 2,004 |
|
| $ | 324 |
|
| $ | 2,711 |
|
| $ | 1,428 |
|
Approximately $0.3 million and $1.1$0.7 million of the totalTotal 2018 Restructuring Plan activities related to the DomesticPipe reporting segment for the three and ninesix months ended December 31,September 30, 2018, respectively. Approximately $1.1 million and $8.0 million of the total 2018 restructuring Plan activities related to the Domestic reporting segment for the three and nine months ended December 31, 2017, respectively. There was $0.1 and $0.4$0.3 million of the total
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Advanced Drainage Systems, Inc.
Total 2018 Restructuring Plan activities related to the International reporting segment for the three and ninesix months ended December 31, 2018, respectively. There were no 2018 Restructuring Plan activities for the three and nine months ended December 31, 2017 related to the International reporting segment, respectively.September 30, 2018.
A reconciliation of the beginning and ending amounts of restructuring liability related to the 2018 Restructuring Plan at December 31,September 30, 2019 and 2018 and 2017 is as follows:
|
| Nine Months Ended December 31, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
(Amounts in thousands) |
| (In thousands) |
| |||||||||||||
|
| (In thousands) |
| |||||||||||||
Balance at the beginning of the period |
| $ | 3,901 |
|
| $ | — |
|
| $ | 1,696 |
|
| $ | 3,901 |
|
Expenses |
|
| 316 |
|
|
| 56 |
|
|
| — |
|
|
| 214 |
|
Non-cash expenses |
|
| 359 |
|
|
| 4,425 |
|
|
| — |
|
|
| 59 |
|
Payments |
|
| (2,497 | ) |
|
| (1,621 | ) |
|
| (842 | ) |
|
| (1,867 | ) |
Balance at the end of the period |
| $ | 2,079 |
|
| $ | 2,860 |
|
| $ | 854 |
|
| $ | 2,307 |
|
As of December 31, 2018,September 30, 2019, the Company had $0.7$0.2 million of long-term severance liability related to the restructuring activities recorded in other liabilities in the Condensed Consolidated Balance Sheet. The current portion of the restructuring liability is recorded in Other accrued liabilities in the Condensed Consolidated Balance Sheet.
3. |
|
Acquisition of Infiltrator Water Technologies - On April 1, 2018,July 31, 2019 (the “Closing Date”), the Company adopted Accounting Standards Codification Topic 606, Revenuecompleted its Acquisition of Infiltrator Water Technologies pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated July 31, 2019. Infiltrator Water Technologies manufactures and sells wastewater systems for homes and provides drainage chambers for septic and storm water management. The total fair value of consideration transferred was $1,146.0 million. The Merger Agreement was funded through the new Senior Secured Credit Facilities as further described in “Note 11. Debt”. The results of operations of Infiltrator Water Technologies are included in the Condensed Consolidated Statements of Operations after July 31, 2019.
The following table summarizes the consideration transferred and the preliminary purchase price allocation of the assets acquired and liabilities assumed. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from Contracts with Customers (“ASC 606”)the Closing Date), as the Company continues to finalize the valuations of assets acquired and all related amendments usingliabilities assumed. Such finalizations may result in material changes from the modified retrospective transition method. preliminary purchase price allocations.
(Amounts in thousands) |
| Amount |
| |
Cash |
| $ | 57,375 |
|
Total current assets, excluding cash |
|
| 75,847 |
|
Property, plant and equipment, net |
|
| 98,860 |
|
Goodwill |
|
| 567,034 |
|
Intangible assets, net |
|
| 475,000 |
|
Other assets |
|
| 14,366 |
|
Total current liabilities |
|
| (22,756 | ) |
Deferred tax liabilities |
|
| (109,926 | ) |
Other liabilities |
|
| (9,274 | ) |
Total fair value of consideration transferred |
| $ | 1,146,526 |
|
The adoptionfair value of ASC 606 did not impactconsideration transferred includes $6.0 million of Infiltrator Water Technologies payable to the opening retained earnings balance or cause aCompany and $6.6 million of Infiltrator Water Technologies receivable due from the Company.
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Advanced Drainage Systems, Inc.
material shift inThe goodwill of $567.0 million represents the amount or timingexcess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable to expected revenue recognition. Resultssynergies, as well as operating efficiencies and cost savings. The goodwill is not deductible for reporting periods beginning after April 1, 2018 are presented under ASC 606,tax purposes and is assigned to the Infiltrator Water Technologies segment.
Of the $109.9 million of preliminary purchase price allocated to deferred tax liabilities, $59.8 million related to the step up of GAAP basis for fair market valuations, while prior period amountsthe remaining $50.1 million were acquired deferred tax liabilities. Of the total $59.8 million, $55.7 million was attributed to intangible assets. See “Note 13. Income Taxes” for additional information.
The purchase price excludes transaction costs. During the three and six months ended September 30, 2019, the Company incurred $16.6 million and $20.8 million, respectively, of transaction costs related to the Acquisition such as legal, accounting, valuation and other professional services. The Company estimates approximately $7.3 million of transaction costs during the six months ended September 30, 2019 were not adjusteddeductible for tax purposes. These costs are included in general and continue to be reported in a consistent manner with historical accounting policies.
The Company generates revenue by selling pipe and related water management products primarily to distributors, retailers, buying groups and co-operative buying groups. Products are shipped predominately by the Company’s internal fleet, and the Company does not provide any additional revenue generating services after product delivery. Payment terms and conditions vary by contract.
Revenue is recognized at the point in-time obligations under the terms of a contract with a customer are satisfied, which generally occurs upon the transfer of control of the promised goods. In substantially all of the Company’s contracts with customers, control is transferred to the customer upon delivery. The Company recognizes revenue in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenue is presentedadministrative expenses in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income.
The identifiable intangible assets recorded in connection with the closing of the Acquisition are based on valuations including customer relationships, patents and developed technology, and tradename and trademarks totaling $475.0 million. Customer relationships are amortized using an accelerated method over an estimated useful life of 15 years. Patents and developed technology and tradename and trademarks are on a straight-line basis over the respective useful lives of 10 and 20 years.
(Amounts in thousands) |
| Preliminary fair value |
|
| Estimated useful lives | |
Customer relationships |
| $ | 270,000 |
|
| 15 years |
Patents and developed technology |
|
| 140,000 |
|
| 10 years |
Tradename and trademarks |
|
| 65,000 |
|
| 20 years |
Total identifiable intangible assets |
| $ | 475,000 |
|
|
|
The net sales and income before taxes of allowances for returns, rebates, discounts, and taxes collected concurrently with revenue-producing activities.
Refer to “Note 13. Business Segments Information”Infiltrator Water Technologies since the acquisition are included in the Condensed Consolidated Statements of Operations for the Company’s disaggregationthree and six months ended September 30, 2019 were $52.7 million and $6.9 million, respectively.
The unaudited pro forma information for the three and six months ended September 30, 2019 and 2018 presented below includes the effects of Netthe Acquisition as if it had been consummated as of April 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition. Adjustments include those related to the amortization of acquired intangible assets, increases in interest expense due to additional borrowings incurred to finance the Acquisition, transaction costs, the elimination of transactions between the Company and Infiltrator Water Technologies and the estimated tax impacts thereof. The unaudited pro forma information does not reflect any operating efficiency or potential cost savings that could result from the consolidation of Infiltrator Water Technologies. Accordingly, the unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the actual results of the combined company if the Acquisition had occurred at the beginning of the period presented, nor is it indicative of the future results of operations.
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||
(Amounts in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net sales |
| $ | 512,072 |
|
| $ | 466,484 |
|
| $ | 996,016 |
|
| $ | 917,533 |
|
Net income (loss) attributable to ADS |
|
| 45,494 |
|
|
| 30,374 |
|
|
| (170,777 | ) |
|
| 6,020 |
|
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Advanced Drainage Systems, Inc.
4. | REVENUE RECOGNITION |
Revenue Disaggregation - The Company disaggregates net sales by reportable segment. The disclosure of Net salesDomestic, International and Infiltrator Water Technologies and further disaggregates Domestic and International by product type, consistent with its reportable segment is aligned by geographical region and product type anddisclosure. This disaggregation level best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Significant Judgments - The Refer to “Note 15. Business Segments Information” for the Company’s performance obligation under contracts with customers is to sell and deliver pipe and related water management products. The Company’s contracts with customers may contain multiple performance obligationsdisaggregation of Net sales by promising to deliver multiple products to the customer. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.
The Company’s products are generally sold with a right of return, and the Company may provide credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Variable consideration is estimated at contract inception and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.reportable segment.
Contract Balances - The Company recognizes a contract asset representing the Company’s right to recover products upon the receipt of returned products and a contract liability for the customer refund. The adoption of this standard resulted in the Company recording a contract asset for estimated inventory returns. On April 1, 2018, the estimated inventory returns resulted in a $0.6 million decrease in Receivables, net and a $0.6 million increase in Other current assets on the Company’s Consolidated Balance Sheets. The following table presents the balance of the Company’s contract asset and liability as of DecemberSeptember 30, 2019 and March 31, 2018 and April 1, 2018:2019:
|
| December 31, 2018 |
|
| April 1, 2018 |
|
| September 30, 2019 |
|
| March 31, 2019 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Contract asset - product returns |
| $ | 851 |
|
| $ | 577 |
|
| $ | 1,069 |
|
| $ | 646 |
|
Refund liability |
|
| 1,847 |
|
|
| 1,468 |
|
|
| 2,429 |
|
|
| 1,372 |
|
5. | LEASES |
Practical Expedients and ExemptionsASC 842 Adoption- The Company expenses incremental costsadopted the provisions of ASC 842 beginning on April 1, 2019 using the transition methodology in ASC 842 which does not require adjustments to obtain a contract (e.g. sales commissions) when incurred as the amortization period would have been one yearcomparative periods or less. These costs are recorded within selling expenses on the Condensed Consolidated Statements of Operations.
require modified disclosures. The Company haselected the transition relief practical expedient package as described in ASC 842-10-65-1. ASC 842 provides lessees with the option of electing an accounting policy, by class of underlying asset, in which the lessee may choose not to separate nonlease components from lease components. The Company elected this practical expedient for leases of certain classes of equipment, including forklifts and fleet tractors and trailers. The Company also elected the accounting policy election permitted byto not recognize the right-of-use asset and lease liability for leases with an initial expected term of 12 months or less (“Short-term leases”). The adoption of ASC 606842 resulted in the recording of $13.3 million of additional lease liabilities and right-of-use assets to account for shipping and handling costs as activities to fulfill the promise to transfer the goods when these activities are performed after a customer obtains controlbeginning balance of the goods. Revenue willCompany’s Condensed Consolidated Balance Sheet. Infiltrator Water Technologies adopted ASC 842 on July 31, 2019 using the same methodology and policy elections taken by the Company on April 1, 2019. The Infiltrator Water Technologies adoption of ASC 842 resulted in the recording of $11.2 million of additional lease liabilities and corresponding right-of-use assets to the beginning balance of the Company’s Condensed Consolidated Balance Sheet as of September 30, 2019. The adoption did not have an impact on the Company’s Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows.
Nature of the Company’s Leases - The Company has operating and finance leases for plants, yards, corporate offices, tractors, trailers and other equipment. The Company’s leases have a remaining term of less than one year to 30 years. A portion of the Company’s yard leases include an option to extend the leases for up to 5 years. The Company has included renewal options which are reasonably certain to be recognizedexcised in its right-of-use asset and lease liability.
The Company’s lease payments are generally fixed. Certain equipment leases contain residual value guarantees that create a contingent obligation on the part of the Company to compensate the lessor if the leased asset cannot be sold for an amount in excess of a specified minimum value at the pointconclusion of shipment.the lease term. The calculation is based on the original cost of the transportation equipment, less lease payments made, compared to a percentage of the transportation equipment’s fair market value at the time of sale. All leased units covered by this guarantee have been classified as finance leases and a corresponding finance lease obligation was recorded. Therefore, no contingent obligation is needed.
- 1011 -
Advanced Drainage Systems, Inc.
For all leases with an initial expected term of more than 12 months, the Company recorded, at the adoption date of ASC 842 or lease commencement date for leases entered into after the adoption date, a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company has electedwill utilize its collateralized incremental borrowing rate commensurate to the accounting policy to exclude fromlease term as the transaction price all sales taxes that are assessed by a governmental authority and that are imposed on and concurrent with a specific revenue-producing transaction and collected bydiscount rate for its leases, unless the Company from a customer,can specifically determine the lessor’s implicit rate. The incremental borrowing rate for example, sales, use, value added,each lease is determined based on the Company’s credit rating, adjusted for the impacts of collateral, and some excise taxes.the lease term.
Further,Lease Cost- The components of lease cost for the Company does not disclosethree and six months ended September 30, 2019 was as follows:
(Amounts in thousands) |
| Income Statement Classification |
| Three Months Ended September 30, 2019 |
|
| Six Months Ended September 30, 2019 |
| ||
Operating lease cost |
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| Cost of goods sold |
| $ | 1,179 |
|
| $ | 2,127 |
|
Operating lease cost |
| General and administrative |
|
| 399 |
|
|
| 489 |
|
Short-term lease cost |
| Cost of goods sold |
|
| 588 |
|
|
| 1,324 |
|
Total operating lease cost |
|
|
| $ | 2,166 |
|
| $ | 3,940 |
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
| Cost of goods sold |
|
| 5,345 |
|
|
| 9,899 |
|
Amortization of right-of-use assets |
| General and administrative |
|
| 361 |
|
|
| 717 |
|
Interest on lease liabilities |
| Interest expense |
|
| 1,168 |
|
|
| 2,327 |
|
Total finance lease cost |
|
|
| $ | 6,874 |
|
| $ | 12,943 |
|
Supplemental cash flow information related to leases for the valuesix months ended September 30, 2019 was as follows:
(Amounts in thousands) |
| 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows from operating leases |
| $ | 2,616 |
|
Operating cash flows from finance leases |
|
| 2,434 |
|
Financing cash flows from finance leases |
|
| 12,375 |
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
Operating leases |
|
| 4,774 |
|
Finance leases(a) |
|
| 1,469 |
|
- 12 -
Advanced Drainage Systems, Inc.
| (a) | The Company acquired $11.9 million of property, plant and equipment under finance leases in the six months ended September 30, 2018. |
Supplemental balance sheet information related to leases as of September 30, 2019 was as follows:
(Amounts in thousands) |
| Balance Sheet Classification |
| 2019 |
| |
Operating leases |
|
|
|
|
|
|
Right-of-use assets |
| Other assets |
| $ | 24,010 |
|
Current lease liabilities |
| Other accrued liabilities |
|
| 6,604 |
|
Non-current lease liabilities |
| Other liabilities |
|
| 17,340 |
|
Total operating lease liabilities |
|
|
| $ | 23,944 |
|
Finance leases |
|
|
|
|
|
|
Right-of-use assets |
| Property, plant and equipment |
|
| 102,948 |
|
Current lease liabilities |
| Current maturities of finance lease obligations |
|
| 22,555 |
|
Non-current lease liabilities |
| Long-term finance lease obligations |
|
| 52,746 |
|
Total finance lease liabilities |
|
|
| $ | 75,301 |
|
|
|
|
|
|
|
|
Weighted average lease term |
|
|
|
|
|
|
Operating leases |
|
|
|
| 7.18 |
|
Finance leases |
|
|
|
| 10.88 |
|
Weighted average discount rate |
|
|
|
|
|
|
Operating leases |
|
|
|
| 3.53 | % |
Finance leases |
|
|
|
| 4.96 | % |
The following is a schedule by year of future minimum lease payments on a rolling twelve-month basis under operating and finance leases and the present value of the net minimum lease payments as of September 30, 2019:
(Amounts in thousands) |
| Operating Leases |
|
| Finance Leases |
| ||
Year 1 |
| $ | 7,443 |
|
| $ | 25,926 |
|
Year 2 |
|
| 6,012 |
|
|
| 21,258 |
|
Year 3 |
|
| 3,742 |
|
|
| 15,777 |
|
Year 4 |
|
| 2,409 |
|
|
| 9,722 |
|
Year 5 |
|
| 1,663 |
|
|
| 5,740 |
|
Thereafter |
|
| 6,719 |
|
|
| 6,525 |
|
Total minimum lease payments |
| $ | 27,988 |
|
| $ | 84,948 |
|
Less: amount representing interest |
|
| 4,044 |
|
|
| 9,647 |
|
Present value of net minimum lease payments |
| $ | 23,944 |
|
| $ | 75,301 |
|
- 13 -
Advanced Drainage Systems, Inc.
Disclosures Related to Periods Prior to Adoption of ASC 842
As of March 31, 2019, total contractual obligations for capital and operating leases were as follows:
(Amounts in thousands) |
| Operating Leases |
|
| Capital Leases |
| ||
2020 |
| $ | 4,159 |
|
| $ | 26,604 |
|
2021 |
|
| 2,924 |
|
|
| 22,507 |
|
2022 |
|
| 1,814 |
|
|
| 18,064 |
|
2023 |
|
| 690 |
|
|
| 11,721 |
|
2024 |
|
| 325 |
|
|
| 7,143 |
|
Thereafter |
|
| 2,236 |
|
|
| 8,198 |
|
Total minimum lease payments |
| $ | 12,148 |
|
| $ | 94,237 |
|
Less: amount representing interest |
|
| — |
|
|
| 9,565 |
|
Present value of net minimum lease payments |
| $ | 12,148 |
|
| $ | 84,672 |
|
6. | INVENTORIES |
Inventories as of the periods presented consisted of the following:
|
| December 31, 2018 |
|
| March 31, 2018 |
|
| September 30, 2019 |
|
| March 31, 2019 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Raw materials |
| $ | 48,488 |
|
| $ | 54,909 |
|
| $ | 60,243 |
|
| $ | 47,910 |
|
Finished goods |
|
| 197,963 |
|
|
| 208,883 |
|
|
| 188,671 |
|
|
| 216,630 |
|
Total inventories |
| $ | 246,451 |
|
| $ | 263,792 |
|
| $ | 248,914 |
|
| $ | 264,540 |
|
There were no0 work-in-process inventories as of the periods presented.
| 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 periods 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, ADSthe Company 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.
- 14 -
Advanced Drainage Systems, Inc.
Recurring Fair Value Measurements -The assets and liabilities carried at fair value as of the periods presented were as follows:
|
| December 31, 2018 |
|
| September 30, 2019 |
| ||||||||||||||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets – diesel fuel contracts |
| $ | 122 |
|
| $ | — |
|
| $ | 122 |
|
| $ | — |
|
| $ | 20 |
|
| $ | — |
|
| $ | 20 |
|
| $ | — |
|
Interest rate swaps |
|
| 2,034 |
|
|
| — |
|
|
| 2,034 |
|
|
| — |
| ||||||||||||||||
Total assets at fair value on a recurring basis |
| $ | 2,156 |
|
| $ | — |
|
| $ | 2,156 |
|
| $ | — |
|
| $ | 20 |
|
| $ | — |
|
| $ | 20 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – diesel fuel contracts |
| $ | 851 |
|
| $ | — |
|
| $ | 851 |
|
| $ | — |
|
| $ | 81 |
|
| $ | — |
|
| $ | 81 |
|
| $ | — |
|
Contingent consideration for acquisitions |
|
| 228 |
|
|
| — |
|
|
| — |
|
|
| 228 |
| ||||||||||||||||
Foreign exchange forward contracts |
|
| 35 |
|
|
| — |
|
|
| 35 |
|
|
| — |
| ||||||||||||||||
Total liabilities at fair value on a recurring basis |
| $ | 1,079 |
|
| $ | — |
|
| $ | 851 |
|
| $ | 228 |
|
| $ | 81 |
|
| $ | — |
|
| $ | 81 |
|
| $ | — |
|
- 11 -
Advanced Drainage Systems, Inc.
|
| March 31, 2018 |
|
| March 31, 2019 |
| ||||||||||||||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets – diesel fuel contracts |
| $ | 596 |
|
| $ | — |
|
| $ | 596 |
|
| $ | — |
|
| $ | 189 |
|
| $ | — |
|
| $ | 189 |
|
| $ | — |
|
Interest rate swaps |
|
| 2,801 |
|
|
| — |
|
|
| 2,801 |
|
|
| — |
|
|
| 1,088 |
|
|
| — |
|
|
| 1,088 |
|
|
| — |
|
Total assets at fair value on a recurring basis |
| $ | 3,397 |
|
| $ | — |
|
| $ | 3,397 |
|
| $ | — |
|
| $ | 1,277 |
|
| $ | — |
|
| $ | 1,277 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - diesel fuel contracts |
| $ | 116 |
|
| $ | — |
|
| $ | 116 |
|
| $ | — |
|
| $ | 283 |
|
| $ | — |
|
| $ | 283 |
|
| $ | — |
|
Foreign exchange contracts |
|
| 60 |
|
|
| — |
|
|
| 60 |
|
|
| — |
| ||||||||||||||||
Contingent consideration for acquisitions |
|
| 578 |
|
|
| — |
|
|
| — |
|
|
| 578 |
|
|
| 203 |
|
|
| — |
|
|
| — |
|
|
| 203 |
|
Total liabilities at fair value on a recurring basis |
| $ | 694 |
|
| $ | — |
|
| $ | 116 |
|
| $ | 578 |
|
| $ | 546 |
|
| $ | — |
|
| $ | 343 |
|
| $ | 203 |
|
For the three and ninesix months ended December 31,September 30, 2019 and 2018, and 2017, respectively, there were no0 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.3. 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 December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||||||||||
Balance at the beginning of the period |
| $ | 325 |
|
| $ | 735 |
|
| $ | 578 |
|
| $ | 1,348 |
|
| $ | 57 |
|
| $ | 460 |
|
| $ | 203 |
|
| $ | 578 |
|
Change in fair value |
|
| 6 |
|
|
| 1 |
|
|
| 15 |
|
|
| 33 |
|
|
| 40 |
|
|
| 7 |
|
|
| 40 |
|
|
| 9 |
|
Payments of contingent consideration liability |
|
| (103 | ) |
|
| (96 | ) |
|
| (365 | ) |
|
| (741 | ) |
|
| (17 | ) |
|
| (142 | ) |
|
| (163 | ) |
|
| (262 | ) |
Balance at the end of the period |
| $ | 228 |
|
| $ | 640 |
|
| $ | 228 |
|
| $ | 640 |
|
| $ | 80 |
|
| $ | 325 |
|
| $ | 80 |
|
| $ | 325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 12 -
Advanced Drainage Systems, Inc.
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(as defined below and further discussed in “Note 12.11. Debt” in the Company’s Fiscal 2018 Form 10-K)) were $100.0$350.0 million and $97.8$355.3 million, respectively, as of December 31, 2018September 30, 2019. The fair value of the Senior Notes was determined based on a quoted market data for the Company’s Senior Notes. The categorization of the framework used to evaluate the Senior Notes is considered Level 2.
The carrying and $125.0fair value of the Company’s Prudential Senior Notes (as defined below and further discussed in “Note 13. Debt” to the Company’s audited financial statements included in the Fiscal 2019 Form 10-K)
- 15 -
Advanced Drainage Systems, Inc.
were zero at September 30, 2019, and $100.0 million and $122.3$98.9 million, respectively, at March 31, 2018.2019. The fair value of the Prudential 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 debt under the Secured Bank Term Loans,Loan Facility and PNC Credit Agreement (as defined below), 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.
| DERIVATIVE TRANSACTIONS |
The Company uses interest rate swaps, commodity options in the form of collars and swaps, and has previously used interest rate swaps and foreign currency forward contracts to manage its various exposures to interest rate, commodity price fluctuations and foreign currency exchange rate fluctuations. For the interestInterest rate swap executed on June 28, 2017, gains and losses resulting from the difference between the spot rate and applicable base rate is recorded in the Condensed Consolidated Statements of Operations in Interest expense. For collars, commodity swaps and foreign currency forward contracts, 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.
The Company 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 December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||||||||||
Diesel fuel option collars |
| $ | 1,067 |
|
| $ | (333 | ) |
| $ | 1,209 |
|
| $ | (735 | ) |
| $ | 7 |
|
| $ | 154 |
|
| $ | 76 |
|
| $ | 142 |
|
Interest rate swaps |
|
| 1,810 |
|
|
| (1,065 | ) |
|
| 767 |
|
|
| (1,253 | ) |
|
| — |
|
|
| (430 | ) |
|
| 1,726 |
|
|
| (1,043 | ) |
Foreign exchange forward contracts |
|
| 35 |
|
|
| — |
|
|
| 35 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| — |
|
Total net unrealized mark-to-market loss (gains) |
| $ | 2,912 |
|
| $ | (1,398 | ) |
| $ | 2,011 |
|
| $ | (1,988 | ) | ||||||||||||||||
Total net unrealized mark-to-market (gains) loss |
| $ | 7 |
|
| $ | (276 | ) |
| $ | 1,795 |
|
| $ | (901 | ) | ||||||||||||||||
Diesel fuel option collars |
|
| (126 | ) |
|
| (203 | ) |
|
| (700 | ) |
|
| (204 | ) |
|
| 150 |
|
|
| (266 | ) |
|
| 157 |
|
|
| (574 | ) |
Foreign exchange forward contracts |
|
| (73 | ) |
|
| — |
|
|
| (163 | ) |
|
| — |
|
|
| 102 |
|
|
| (39 | ) |
|
| 102 |
|
|
| (90 | ) |
Interest rate swaps |
|
| (99 | ) |
|
| 138 |
|
|
| (191 | ) |
|
| 286 |
|
|
| 710 |
|
|
| (67 | ) |
|
| 544 |
|
|
| (92 | ) |
Total net realized (gains) loss |
| $ | (298 | ) |
| $ | (65 | ) |
| $ | (1,054 | ) |
| $ | 82 |
| ||||||||||||||||
Total net realized loss (gains) |
| $ | 962 |
|
| $ | (372 | ) |
| $ | 803 |
|
| $ | (755 | ) |
A summary of the fair value of derivatives is included in “Note 5.7. Fair Value Measurement.”
7.NET
9. | 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.
- 1316 -
Advanced Drainage Systems, Inc.
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 December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||||||||||||
(In thousands, except per share data) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
NET INCOME PER SHARE—BASIC: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ADS |
| $ | 15,812 |
|
| $ | 32,105 |
|
| $ | 76,762 |
|
| $ | 67,710 |
| ||||||||||||||||
Net income (loss) attributable to ADS |
| $ | 7,589 |
|
| $ | 28,670 |
|
| $ | (218,767 | ) |
| $ | 60,950 |
| ||||||||||||||||
Adjustments for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to redeemable convertible preferred stockholders |
|
| (467 | ) |
|
| (456 | ) |
|
| (1,442 | ) |
|
| (1,415 | ) |
|
| (1,355 | ) |
|
| (478 | ) |
|
| (8,196 | ) |
|
| (975 | ) |
Dividends paid to unvested restricted stockholders |
|
| (25 | ) |
|
| (12 | ) |
|
| (55 | ) |
|
| (47 | ) |
|
| (4 | ) |
|
| (15 | ) |
|
| (330 | ) |
|
| (30 | ) |
Net income available to common stockholders and participating securities |
|
| 15,320 |
|
|
| 31,637 |
|
|
| 75,265 |
|
|
| 66,248 |
| ||||||||||||||||
Net income (loss) available to common stockholders and participating securities |
|
| 6,230 |
|
|
| 28,177 |
|
|
| (227,293 | ) |
|
| 59,945 |
| ||||||||||||||||
Undistributed income allocated to participating securities |
|
| (1,027 | ) |
|
| (2,766 | ) |
|
| (6,048 | ) |
|
| (5,588 | ) |
|
| (204 | ) |
|
| (2,310 | ) |
|
| — |
|
|
| (5,022 | ) |
Net income available to common stockholders – Basic |
| $ | 14,293 |
|
| $ | 28,871 |
|
| $ | 69,217 |
|
| $ | 60,660 |
| ||||||||||||||||
Net income (loss) available to common stockholders – Basic |
| $ | 6,026 |
|
| $ | 25,867 |
|
| $ | (227,293 | ) |
| $ | 54,923 |
| ||||||||||||||||
Weighted average number of common shares outstanding – Basic |
|
| 57,180 |
|
|
| 55,917 |
|
|
| 56,925 |
|
|
| 55,497 |
|
|
| 60,222 |
|
|
| 56,929 |
|
|
| 58,906 |
|
|
| 56,776 |
|
Net income per common share – Basic |
| $ | 0.25 |
|
| $ | 0.52 |
|
| $ | 1.22 |
|
| $ | 1.09 |
| ||||||||||||||||
Net income (loss) per common share – Basic |
| $ | 0.10 |
|
| $ | 0.45 |
|
| $ | (3.86 | ) |
| $ | 0.97 |
| ||||||||||||||||
NET INCOME PER SHARE—DILUTED: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders – Diluted |
| $ | 14,293 |
|
| $ | 28,871 |
|
| $ | 69,217 |
|
| $ | 60,660 |
| ||||||||||||||||
Net income (loss) available to common stockholders – Diluted |
| $ | 6,026 |
|
| $ | 25,867 |
|
| $ | (227,293 | ) |
| $ | 54,923 |
| ||||||||||||||||
Weighted average number of common shares outstanding – Basic |
|
| 57,180 |
|
|
| 55,917 |
|
|
| 56,925 |
|
|
| 55,497 |
|
|
| 60,222 |
|
|
| 56,929 |
|
|
| 58,906 |
|
|
| 56,776 |
|
Assumed exercise of stock options |
|
| 505 |
|
|
| 542 |
|
|
| 557 |
|
|
| 627 |
|
|
| 576 |
|
|
| 629 |
|
|
| — |
|
|
| 598 |
|
Restricted stock |
|
| 78 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Weighted average number of common shares outstanding – Diluted |
|
| 57,685 |
|
|
| 56,459 |
|
|
| 57,482 |
|
|
| 56,124 |
|
|
| 60,876 |
|
|
| 57,558 |
|
|
| 58,906 |
|
|
| 57,374 |
|
Net income per common share – Diluted |
| $ | 0.25 |
|
| $ | 0.51 |
|
| $ | 1.20 |
|
| $ | 1.08 |
| ||||||||||||||||
Net income (loss) per common share – Diluted |
| $ | 0.10 |
|
| $ | 0.45 |
|
| $ | (3.86 | ) |
| $ | 0.96 |
| ||||||||||||||||
Potentially dilutive securities excluded as anti-dilutive |
|
| 6,079 |
|
|
| 6,060 |
|
|
| 6,068 |
|
|
| 6,252 |
|
|
| 15,084 |
|
|
| 6,303 |
|
|
| 13,269 |
|
|
| 6,229 |
|
Common Stock Offering – On September 10, 2019, the Company issued and sold an aggregate of 10,350,000 shares of common stock, $0.01 par value per share, which included the full exercise of the underwriters’ option to purchase additional shares, at a price of $29.75 per share, before underwriting discounts and commissions. The common stock was sold pursuant to the Company’s shelf registration statement and related prospectus supplement. The Company received proceeds of $293.6 million from the issuance after deducting underwriting discounts and commissions and offering expenses. The Company used the net proceeds for the repayment of a portion of the outstanding borrowings under the Senior Secured Credit Facility.
Stockholders’ Equity –During the nine months ended December 31, 2017, the Company repurchased 0.4 million shares of common stock at a cost of $7.9 million.- The Company did not0t repurchase any shares of common stock during the three and ninesix months ended December 31,September 30, 2019 and 2018. The repurchases were made underIn February 2017, the Company’s Board of Directors’ authorization in February 2017authorized the Company to repurchase up to $50 million of ADS common stock in accordance with applicable securities laws. As of December 31, 2018,September 30, 2019, 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.discretion.
Special Dividend and the Employees Stock Ownership Plan (“ESOP”) - During the three months ended June 30, 2019, the Board of Directors approved a special cash dividend of $1.00 per share and quarterly dividends of $0.09. The special and quarterly dividend were paid to all stockholders on June 14, 2019 to stockholders of record at the close of business on June 3, 2019. The total dividend payment was $81.6 million. The dividends
- 17 -
Advanced Drainage Systems, Inc.
received by the unallocated redeemable convertible preferred stock held in the ESOP trust was used to pay $12.0 million of the ESOP loan back to the Company resulting in approximately 11.6 million shares of the Company’s redeemable convertible preferred stock being allocated to ESOP participants. The Company recognized $246.8 million in stock-based compensation expense based on the fair value on the date the Board of Directors approved the special dividend. The Board of Director’s approval committed the ESOP to use those proceeds to pay down the ESOP loan. The special dividend compensation expense was recognized in Cost of goods sold - ESOP special dividend compensation and Selling, general and administrative expenses - ESOP special dividend compensation on the Company’s Consolidated Statement of Operations. The Company’s ESOP is further described in “Note 16. Employee Benefit Plans” to the Company’s audited financial statements included in the Fiscal 2019 Form 10-K.
| 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.
ADS Mexicana’s Revolving Credit Facility expired onOn June 22, 2018, the Company and was replaced byADS Mexicana entered into an Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a borrowing capacity of $12.0 million. The Intercompany Note matures on June 22, 2022. The other joint venture partner indemnifies the Company for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are determined by certain
- 14 -
Advanced Drainage Systems, Inc.
base rates or London Interbank Offered Rate (“LIBOR”) plus an applicable margin based on the Leverage Ratio. As of December 31, 2018,September 30, 2019, there were no0 borrowings under the Intercompany Note.
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. The South American Joint Venture operates within Argentina, which on July 1, 2018, was identified for high inflationary accounting. The Company has determined the effect of a change in the exchange rate under high inflationary accounting is not expected to have a material effect on the Company’s results in any interim or annual period. ADS owns 50% of the South American Joint Venture. The Company has concluded that it is appropriate to account for these investments using the equity method, whereby the Company’s share of the income or loss of the joint venture is reported in the Condensed Consolidated Statements of Operations under Equity in net loss (income) of unconsolidated affiliates and the Company’s investment in the joint venture is included in Other assets in the Condensed Consolidated Balance Sheets. 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 December 31, 2018.September 30, 2019. 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 December 31, 2018September 30, 2019 and March 31, 2018,2019, the outstanding principal balances of the credit facility including letters of credit were $12.6$11.2 million and $14.5$12.3 million, respectively. As of December 31, 2018,September 30, 2019, there were no0 U.S. dollar denominated loans. The weighted average interest rate as of December 31, 2018September 30, 2019 was 5.6%5.3% 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 and other product sales to ADS and its other related parties, which totaled $0.4$0.1 million and $1.1million for the three and nine months ended December 31, 2018, respectively, and $0.6 million and $1.4$0.5 million for the three and ninesix months ended December 31, 2017, respectively.September 30, 2019, and 0 and $0.6 million for the three and six months ended September 30, 2018. ADS pipe sales to the South American Joint Venture were $0.3$0.1 million and $0.1$0.4 million for the three and six months ended December 31, 2018September 30, 2019, and 2017, respectively, and $0.8$0.4 million and $0.3$0.6 million for the ninethree and six months ended December 31,September 30, 2018, and 2017, respectively.
BaySaver Tigre USA - BaySaver Technologies LLC (“BaySaver”)Tigre USA was 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. During the third quarter, ADS purchased the remaining 35% ownership interest in BaySaver for a purchase price of $8.8 million. The purchase of the remaining 35% ownership interest was reflected as a reduction in the Redeemable noncontrolling interest in subsidiary in the Condensed Consolidated Balance Sheets and as a financing activity in the Condensed Consolidated Statement of Cash Flows. Additionally, resulting from this transaction, the Company recorded a non-cash adjustment to deferred taxes. BaySaver in now a wholly-owned subsidiary of ADS.
ADS and BaySaver were parties to a shared services arrangement, prior to the acquisition, which provided for the provision of certain joint venture services. Included within this arrangement was the lease of a plant and adjacent yard used to conduct business and operating expenses related to the leased facility.
Tigre-ADS USA - Tigre-ADS USA was a joint venture established to manufacture and sell polyvinyl chloride (“PVC”) fittings for waterworks, plumbing, and HVAC applications primarily in the United States and Canadian markets. In April 2018, the Company and the joint venture partner agreed to exchange the Company’s shares of Tigre-ADS USA for a release from the existing debt guarantees. Following the exchange, the Company no longer has an ownership interest in, Tigre-ADS USA.but the owner is the partner for the South American Joint Venture.
- 18 -
Advanced Drainage Systems, Inc.
ADS purchased $0.3$0.6 million and $0.5$1.2 million of Tigre-ADSTigre USA manufactured products for use in the production of ADS products during the three and six months ended December 31, 2018 and 2017, respectively, and $1.5September 30, 2019. ADS purchased $0.7 million and $1.6$1.2 million of Tigre USA manufactured products for use in the production of ADS products during the ninethree and six months ended December 31, 2018 and 2017, respectively.
- 15 -
Advanced Drainage Systems, Inc.
September 30, 2018.
Long-term debt as of the periods presented consisted of the following:
|
| December 31, 2018 |
|
| March 31, 2018 |
|
| September 30, 2019 |
|
| March 31, 2019 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Secured Bank Term Loans: |
|
|
|
|
|
|
|
| ||||||||
Revolving Credit Facility — ADS |
| $ | 126,500 |
|
| $ | 171,500 |
| ||||||||
Revolving Credit Facility — ADS Mexicana |
|
| — |
|
|
| — |
| ||||||||
Senior Notes payable |
|
| 100,000 |
|
|
| 125,000 |
| ||||||||
Industrial revenue bonds |
|
| 240 |
|
|
| 940 |
| ||||||||
Term Loan Facility |
| $ | 700,000 |
|
| $ | — |
| ||||||||
Senior Notes |
|
| 350,000 |
|
|
| — |
| ||||||||
Revolving Credit Facility |
|
| — |
|
|
| — |
| ||||||||
PNC Credit Agreement |
|
| — |
|
|
| 134,400 |
| ||||||||
Prudential Senior Notes |
|
| — |
|
|
| 100,000 |
| ||||||||
Equipment financing |
|
| 2,656 |
|
|
| 3,336 |
|
|
| 1,963 |
|
|
| 2,427 |
|
Total |
|
| 229,396 |
|
|
| 300,776 |
|
|
| 1,051,963 |
|
|
| 236,827 |
|
Unamortized debt issuance costs |
|
| (2,467 | ) |
|
| (3,028 | ) |
|
| (2,614 | ) |
|
| (2,293 | ) |
Current maturities |
|
| (26,165 | ) |
|
| (26,848 | ) |
|
| (6,195 | ) |
|
| (25,932 | ) |
Long-term debt obligation |
| $ | 200,764 |
|
| $ | 270,900 |
|
| $ | 1,043,154 |
|
| $ | 208,602 |
|
LettersBridge Credit Facility
On July 31, 2019, the Company entered into a credit agreement (the “Base Credit Agreement”) by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto.
The Base Credit Agreement provided for a term loan facility in an initial aggregate principal amount of up to $1.3 billion (the “Bridge Loan Facility”), a revolving credit facility in an initial aggregate principal amount of up to $350 million (the “Bridge Revolving Credit Facility”), a letter of credit outstanding at December 31, 2018sub-facility in the initial aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility (the “Bridge L/C Facility”) and March 31, 2018 amounteda swing line sub-facility in the aggregate available amount of up to $8.6$50 million, and $13.0 million, respectively, and reduce the availabilityas a sublimit of the Revolving Credit Facilities.
Events Related toFacility (together with the Secured Bank Term Loans - On June 22, 2018,Bridge Loan Facility, the Company’s $12.0 millionBridge Revolving Credit Facility – ADS Mexicana matured. At June 22, 2018, thereand the Bridge L/C Facility, the “Bridge Credit Facility”).
On July 31, 2019, the Company borrowed approximately $1.3 billion under the Bridge Loan Facility and $145 million under the Bridge Revolving Credit Facility, which amounts were noto (i) finance the consideration paid in connection with the closing of the Acquisition, (ii) repay the total outstanding amount as of the Closing Date under the Company’s then existing revolving credit facility with PNC, (iii) repay outstanding amounts of existing indebtedness incurred by Infiltrator Water Technologies under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Bridge Loan Facility. Approximately $300.0 million of outstanding borrowings under the RevolvingBase Credit Agreement were repaid on September 10, 2019 with proceeds from the Company’s public offering of common stock as further described in “Note 9, Net Income Per Share and Stockholders’ Equity” and approximately $300.0 million of outstanding borrowings under the Bridge Loan Facility were repaid on September 23, 2019 with proceeds from the Company’s offering of $350.0 million Senior Notes, as defined and further described below.
- 19 -
Advanced Drainage Systems, Inc.
As a result of this borrowing, on July 31, 2019, the Company initially capitalized approximately $46.9 million of deferred financing fees associated with the Bridge Credit Facility. This amount was later reduced by $14.9 million due to refunds received by ADS. The remaining deferred financing costs were written off due to loss on early extinguishment of debt resulting from the $300.0 million principal payment primarily from the Common Stock Offering, $300.0 million principal payment from the issuance of Senior Notes due 2027, and $700 million principal payment from the issuance of the Senior Secured Credit Facility – ADS Mexicana. Refer to “Note 8. Related Party Transactions” for additional information on September 24, 2019. These financings resulted in the Intercompany Note which replacedCompany treating the RevolvingBridge Credit Facility – ADS Mexicana.as having been extinguished and replaced with the Common Stock Offering, Senior Notes due 2027 and the syndicated Senior Secured Credit Facility for accounting purposes under ASC 470-50. The loss on early extinguishment of debt, which is included in interest expense in the Company's Condensed Consolidated Statements of Operations, primarily reflects the write-off of unamortized debt issuance costs and discounts.
Fiscal 2019 Amendment to the Secured Bank Term Loans – Repayment of Prudential Senior Notes
On July 9, 2018,29, 2019, the Company repaid in full all of its and its subsidiaries’ indebtedness and other obligations totaling $104.4 million under that certain Second Amended and Restated Private Shelf Agreement, dated as of June 22, 2017 (as amended the “Shelf Note Agreement”) of the Company’s Senior Notes (“Prudential Senior Notes”), by and among the Company, as issuer, the guarantors from time to time a party thereto, PGIM, Inc., as a purchaser and the other purchasers from time to time a party thereto. The Company repaid the outstanding indebtedness under the Shelf Note Agreement using borrowings from the Company’s Second Amended and Restated Credit Agreement (the “Credit“PNC Credit Agreement”) as in effect as of July 29, 2019. Concurrently with the repayment, the Shelf Noteholders authorized and directed PNC Bank, National Association, in its capacity as Collateral Agent (as defined in the Shelf Note Agreement) to release the security interests and liens securing the Shelf Note Agreement and the Second AmendedShelf Note Agreement was terminated.
As a result of the repayment described above, the Company expensed approximately $4.2 million primarily consisting of prepayment premiums associated with the debt payoff activity and Restated Private Shelfthe write-off of unamortized deferred financing fees, as the payoff meets the criteria to be accounted for as a debt extinguishment.
Repayment of PNC Credit Agreement
On the Closing Date, using borrowings of the new Bridge Loan Facility the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $239.2 million under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens held by the Collateral Agent (as defined in the PNC Credit Agreement) securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was terminated.
As a result of the repayment described above, the Company expensed approximately $2.0 million primarily consisting of the write-off of unamortized deferred financing fees associated with the debt payoff activity, as the payoff meets the criteria to be accounted for as a debt extinguishment.
Letters of credit outstanding at March 31, 2019 amounted to $8.5 million, and reduced the availability of the revolving credit facilities under the PNC Credit Agreement with PNC Bank, National Association, as administrative agent and various financial institutions thereto at March 31, 2019.
- 20 -
Advanced Drainage Systems, Inc.
Issuance of Senior Notes due 2027
On September 23, 2019, the Company issued $350.0 million aggregate principal amount of 5.0% senior notes due 2027 (the “Senior Notes”) pursuant to an Indenture, dated September 23, 2019 (the “Indenture”), among the Company, the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as Trustee (the “Trustee”). The Senior Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) or to persons outside the United States under Regulation S of the Securities Act.
Interest on the Senior Notes will be payable semi-annually in cash in arrears on March 31 and September 30 of each year, commencing on March 31, 2020, at a rate of 5.0% per annum. The Senior Notes will mature on September 30, 2027. The Company used the majority of the net proceeds from the offering of the Senior Notes for the repayment of $300.0 million of its outstanding borrowings under the Company’s Bridge Loan Facility. The deferred financing costs associated with the Senior Notes totaled $2.1 million as of September 30, 2019 and are recorded as a direct reduction from the carrying amount of the related debt.
The Company may redeem the Senior Notes, in whole or in part, at any time on or after September 30, 2022 at established redemption prices. At any time prior to September 30, 2022, the Company may also redeem up to 40% of the Senior Notes with net cash proceeds of certain equity offerings at a redemption price equal to 105.0% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to September 30, 2022, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium.
The Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants.
New Senior Secured Credit Facility
On September 24, 2019, the Company successfully completed a $700 million syndication of the remaining balance of the Bridge Credit Facility subsequent to the aforementioned Common Stock Offering and Senior Notes due 2027 and in connection with the syndication, the Company amended the Base Credit Agreement (the “Private Shelf Agreement”“Senior Secured Credit Facility”) to amend. The Senior Secured Credit Facility reduced the definition of Consolidated EBITDA and changedapplicable margin utilized in the timingdetermination of the quarterlyinterest rate, adjustments. as well as other provisions.
The Senior Secured Credit Facility provides for a term loan facility in an initial aggregate principal amount of $700 million (the “Term Loan Facility”), a revolving credit facility in an initial aggregate principal amount of up to $350 million (the “Revolving Credit Facility”), a letter of credit sub-facility in the initial aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility (the “L/C Facility”) and a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving Credit Facility (together with the Term Loan Facility, the Revolving Credit Facility and the L/C Facility, the “Senior Secured Credit Facility”). Letters of credit outstanding at September 30, 2019 amounts to $8.5 million and reduced the availability of the Revolving Credit Facility.
- 21 -
Advanced Drainage Systems, Inc.
In addition,connection with entering into the amendmentSenior Secured Credit Facility, the Company capitalized approximately $0.4 million in deferred financing fees. To the extent not previously paid, all then-outstanding amounts under the Term Loan Facility are due and payable on the maturity date of the Term Loan Facility, which is seven years from the Closing Date. Borrowings under the Revolving Credit Facility are available beginning on September 24, 2019 and, to the extent not previously paid, all then-outstanding amounts under the Revolving Credit Agreement clarifiedFacility are due and payable on the processmaturity date of a transition to replace LIBORthe Revolving Credit Facility, which is being phased out. five years from the Closing Date.
At the option of the Company, borrowings under the Term Loan Facility and under the Revolving Credit Facility (subject to certain limitations) bear interest at either a base rate (as determined pursuant to the Senior Secured Credit Facility) or at a Eurocurrency Rate, based on LIBOR (as defined in the Senior Secured Credit Facility), plus the applicable margin as set forth therein from time to time. In the case of the Revolving Credit Facility, the applicable margin is based on the Company’s consolidated senior secured net leverage ratio (as defined in the Senior Secured Credit Facility). All borrowings under the Term Loan Facility used to finance the Merger Consideration as described above initially bear interest at a Eurocurrency Rate applicable to Eurocurrency Loans (as defined in the Senior Secured Credit Facility) denominated in U.S. Dollars.
The Company is also required to pay a commitment fee that is based upon the undrawn amounts of the Revolving Credit Facility at a rate per annum based upon a calculated ratio as prescribed within the Senior Secured Credit Facility. As of September 30, 2019, the rate the Company was committed to paying on the undrawn portion was equal to 0.2%.
The Company’s obligations under the Senior Secured Credit Facility have been secured by granting a first priority lien on substantially all of the Company’s assets (subject to certain exceptions and limitations), and each of Stormtech, LLC, Advanced Drainage of Ohio, Inc. and Infiltrator Water Technologies, LLC (collectively the “Guarantors”) has agreed to guarantee the obligations of the Company under the Senior Secured Credit Facility and to secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s assets (subject to certain exceptions and limitations).
Principal Maturities – Maturities of long-term debt (excluding interest and deferred financing costs) as of September 30, 2019 are summarized below:
|
| Twelve Months Ended September 30, |
| |||||||||||||||||||||||||
(Amounts in thousands) |
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| Thereafter |
|
| Total |
| |||||||
Principal maturities |
| $ | 6,195 |
|
| $ | 7,931 |
|
| $ | 7,084 |
|
| $ | 7,000 |
|
| $ | 7,000 |
|
| $ | 1,016,753 |
|
| $ | 1,051,963 |
|
| 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 non-cancelable purchase contracts in place at December 31, 2018,September 30, 2019, the Company has agreed to purchase resin over the period JanuaryOctober 2019 through December 2019 at a committed purchase cost of $23.5$5.9 million.
The Company enters into equipment purchase contracts with manufacturers. Under such non-cancelable purchase contracts in place at September 30, 2019, the Company has agreed to purchase equipment to be delivered in fourth quarter of fiscal 2020 at a committed purchase cost of $1.4 million.
Litigation and Other Proceedings –As previously disclosed in the Company’s Fiscal 2018 Form 10-K, the Company’s historical accounting practices were the subject of an investigation by SEC’s Division of Enforcement (the “Enforcement Division”), which began in August 2015. That matter was resolved on July 10, 2018 via a settlement between the Company and the SEC. Pursuant to the settlement, the Company consented to the entry of an administrative order without admitting or denying the findings therein. The order required the Company to cease and desist from committing or causing any violations and any future violations of certain provisions of the federal securities laws and the rules promulgated thereunder and to pay a civil monetary penalty of $1.0 million, which payment has been made. The Company previously accrued an expense for the penalty amount during Fiscal 2018.
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
- 16 -
Advanced Drainage Systems, Inc.
securities laws. An amended complaint was filed on April 28, 2016. The amended complaint alleged that the Company made material misrepresentations and/or omissions of material
- 22 -
Advanced Drainage Systems, Inc.
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. The Second Circuit denied the petition for rehearing on November 28, 2017. On November 27, 2018, the plaintiff filed with the District Court a motion for relief from final judgment and for leave to file an amended complaint, withwhich, the defendants opposed. On July 3, 2019, the District Court. The defendants have opposedCourt denied the plaintiff’s motion and are awaiting a decision bymotion. The Plaintiff did not appeal the District Court. While itCourt’s decision and the matter is reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but it could be material.concluded.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. 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.
Other Commitments and Contingencies
In March 2019, the Company initiated an internal investigation process, under the guidelines of the Company’s Code of Business Conduct and Ethics, into its consolidated joint venture affiliate ADS Mexicana’s senior management’s ethical and business conduct, as well as compliance of certain products with, along with considerations into, Mexican laws and regulations over the previous 12 months. The Company has recorded an accrual for the current estimate of probable losses resulting from the investigation which is not material to our Condensed Consolidated Financial Statements. However due to the inherent uncertainties in determining the use, installation application and location of our ADS Mexicana products sold, along with the consideration of Mexican laws and regulations related to warranty and product liability obligations, the Company is unable to determine the maximum potential future losses that may occur, which could be material to the Condensed Consolidated Financial Statements.
| INCOME TAXES |
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rate from 35% to 21%, full expensing on qualified property, eliminates the domestic manufacturing deduction and implements a territorial tax system. The 21% U.S. corporate income tax rate was effective January 1, 2018.
The Company previously recognized the provisional tax impacts related to revaluation of deferred tax assets and liabilities and deemed repatriated earnings and included these amounts in its financial statements for the year ended March 31, 2018. During the three months ended December 31, 2018, the Company finalized the accounting for the Tax Act. During the three and nine months ended December 31, 2018, the Company did not make any material adjustments to its provisional amounts included in its consolidated financial statements for the year ended March 31, 2018.
The Company recognized a provisional amount for revaluing its deferred tax attributes resulting in a $16.0 million tax benefit that was recorded for the fiscal year ended March 31, 2018. On the basis of revised computations in filing the U.S. federal tax return during the third quarter, the Company recognized an additional measurement-period adjustment of $0.4 million to deferred tax expense for the three and nine months ended December 31, 2018. A total deferred tax benefit of $15.6 million was recorded. The Company’s accounting for its deferred tax attributes is now complete.
The Company had $26.5 million of undistributed earnings on its foreign subsidiaries subject to the deemed mandatory repatriation. The Company recognized a provisional amount of $5.2 million of income tax expense that was recorded for the fiscal year ended March 31, 2018. After the utilization of existing foreign tax credits, the Company expected to pay additional U.S. federal taxes of approximately $1.0 million as of the fiscal year ended March 31, 2018. On the basis of revised computations in filing the U.S. federal tax return during the third quarter, the Company recognized an additional measurement-period adjustment of $0.6 million to income tax benefit for the three and nine months ended December 31, 2018. A total transition tax expense of $4.6 million was recorded. After the utilization of existing foreign tax credits, the Company paid an additional U.S. federal taxes of $0.7 million. The Company’s accounting for the deemed mandatory repatriation tax is now complete.
The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other one-time charges, as well as discrete events. For the three months ended September 30, 2019 and 2018, the Company utilized an effective tax rate of (75.3%) and 28.9%, respectively, to calculate its provision for income taxes. The decrease in the effective tax rate is primarily driven by the nearly break-even pre-tax income in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 and the changes to the Company’s projected annual effective tax rate. The change in the Company’s projected annual effective tax rate was due to the financial results of the recent acquisition of Infiltrator Water Technologies. Further, the Company recognized additional expense of approximately $1.1 million related to non-deductible transaction costs. Consistent with the three months ended September 30, 2018, state and local income taxes and the Company’s ESOP increased the rate for the three months ended September 30, 2019. |
For the six months ended September 30, 2019 and 2018, the Company utilized an effective tax rate of (9.4%) and 29.4%, respectively, to calculate its provision for income taxes. In addition to the special dividend made on June 14, 2019, there were additional transaction costs related to the Infiltrator Acquisition noted above, that attributed to large pretax losses for the six months ended September 30, 2019, that did not occur in the comparison period. Consistent with the six months ended September 30, 2018, state and local income taxes and the Company’s ESOP increased the rate for the six months ended September 30, 2019. Additionally, the effective tax rate for the six months ended September 30, 2019 differed from the federal statutory rate primarily due to a $60.7 million discrete income tax expense. This discrete event related to the 11.6 million shares allocated from the ESOP as a result of the special dividend made on June 14, 2019 and the Company recognizing approximately $246.8 million in additional stock-based compensation expense. Of the total stock- |
- 1723 -
Advanced Drainage Systems, Inc.
The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other one-time charges, as well as discrete events. For the three months ended December 31, 2018 and 2017, the Company utilized an effective tax rate of 13.4% and (29.4)%, respectively, to calculate its provision for income taxes. For the nine months ended December 31, 2018 and 2017, the Company utilized an effective tax rate of 26.6% and 18.6%, respectively, to calculate its provision for income taxes.The effective tax rate for the three months ended December 31, 2018 differed from the federal statutory rate due to a $1.8 million discrete income tax benefit related to the release of tax reserves due to the lapse of statute of limitations. The Company’s effective tax rate is higher than the federal statutory rate primarily due to state and local income taxes and our Employee Stock Ownership Plan (“ESOP”) for the nine months ended December 31, 2018. The Company’s effective tax rate varied significantly from the federal statutory rate as a result of the Tax Act and other discrete items during the three and nine months ended December 31, 2017.
based compensation expense, approximately $237.6 million related to non-deductible stock appreciation. This discrete event reduced the effective tax rate by 30.3%. |
As discussed in “Note 3. Acquisitions”, the Company acquired Infiltrator Water Technologies on July 31, 2019. The unrecognized tax benefits increased by $1.4 million during the quarter, related to positions taken by Infiltrator Water Technologies prior to the Acquisition. Infiltrator Water Technologies was previously indemnified for this position, and based on the nature of the Acquisition, the indemnification is still in place. Lastly, as part of the purchase price, approximately $109.9 million was attributed to deferred tax liabilities. Of the $109.9 million, $59.8 million related to the step up of GAAP basis for fair market valuations, while the remaining $50.1 million were acquired deferred tax liabilities. Of the total $59.8 million, $55.7 million was attributed to intangibles. |
| 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. 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 ninesix months ended December 31, 2018September 30, 2019 and 2017:2018:
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||||||||||
Component of income before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
| $ | 84 |
|
| $ | 45 |
|
| $ | 228 |
|
| $ | 135 |
|
| $ | 189 |
|
| $ | 82 |
|
| $ | 301 |
|
| $ | 144 |
|
Selling expenses |
|
| 48 |
|
|
| 27 |
|
|
| 134 |
|
|
| 79 |
|
|
| 179 |
|
|
| 50 |
|
|
| 235 |
|
|
| 86 |
|
General and administrative expenses |
|
| 1,526 |
|
|
| 1,568 |
|
|
| 4,667 |
|
|
| 4,926 |
|
|
| 2,803 |
|
|
| 1,680 |
|
|
| 4,476 |
|
|
| 3,141 |
|
Total stock-based compensation expense |
| $ | 1,658 |
|
| $ | 1,640 |
|
| $ | 5,029 |
|
| $ | 5,140 |
|
| $ | 3,171 |
|
| $ | 1,812 |
|
| $ | 5,012 |
|
| $ | 3,371 |
|
The following table summarizes stock-based compensation expense by award type for the three and ninesix months ended December 31, 2018September 30, 2019 and 2017:2018:
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||||||||||
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-classified Stock Options |
| $ | 516 |
|
| $ | 898 |
|
| $ | 2,084 |
|
| $ | 2,991 |
|
| $ | 700 |
|
| $ | 795 |
|
| $ | 1,251 |
|
| $ | 1,568 |
|
Restricted Stock |
|
| 863 |
|
|
| 430 |
|
|
| 2,169 |
|
|
| 1,158 |
|
|
| 957 |
|
|
| 528 |
|
|
| 1,599 |
|
|
| 974 |
|
Performance Units |
|
| 1,201 |
|
|
| 235 |
|
|
| 1,573 |
|
|
| 332 |
| ||||||||||||||||
Non-Employee Directors |
|
| 279 |
|
|
| 312 |
|
|
| 776 |
|
|
| 991 |
|
|
| 313 |
|
|
| 254 |
|
|
| 589 |
|
|
| 497 |
|
Total stock-based compensation expense |
| $ | 1,658 |
|
| $ | 1,640 |
|
| $ | 5,029 |
|
| $ | 5,140 |
|
| $ | 3,171 |
|
| $ | 1,812 |
|
| $ | 5,012 |
|
| $ | 3,371 |
|
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.
- 1824 -
Advanced Drainage Systems, Inc.
Restricted Stock - During the ninethree and six months ended December 31, 2018,September 30, 2019, the Company granted 0.1 million and 0.2 million shares of restricted stock with a grant date fair value of $3.6 million.million and $6.9 million, respectively.
Performance Units - In addition, during the ninesix months ended December 31, 2018,September 30, 2019, the Company granted 0.1 million performance units, subject to performance and services conditions. The grant date fair value of the performance units was $3.0$3.4 million, based on the market price of the Company’s common stock at the date of the grant. For the performance units, 50% of the award is based upon the achievement of certain levels of Return on Invested Capital for the performance period and 50% is based upon the achievement of certain levels of Free Cash Flow for the performance period. The performance units have a 3-year performance period from April 1, 20182019 through March 31, 2021.2022. The performance units, and any accrued dividend equivalents, will be settled in shares of the Company’s common stock, if the applicable performance and service conditions are satisfied.
Options –- During the ninesix months ended December 31, 2018,September 30, 2019, the Company granted 0.20.3 million nonqualified stock options under the 2017 Incentive Plan. The grant date fair value of the nonqualified stock options was $2.0$2.7 million. 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 ninesix months ended December 31, 2018:September 30, 2019:
|
|
|
|
Common stock price |
|
|
|
Expected stock price volatility |
|
|
|
Risk-free interest rate |
|
|
|
Weighted-average expected option life (years) |
| 6.0 |
|
Dividend yield |
|
|
|
- 1925 -
Advanced Drainage Systems, Inc.
| BUSINESS SEGMENTS INFORMATION |
TheFollowing the Acquisition of Infiltrator Water Technologies, the Company operatesrevised its business in two distinct operating and reportable segments based onto reflect how the markets it serves: “Domestic” and “International.” The Chief Operating Decision Maker (“CODM”) evaluatescurrently reviews financial information and makes operational decisions. After the Acquisition, ADS operates its business in 3 distinct reportable segments: “Pipe”, “International” and “Infiltrator Water Technologies.” “Allied Products & Other” represents the Company’s Allied Products and all other business segments. “Pipe” and “Allied Products & Other” were previously included as Domestic. With the change in reportable segments, the CODM is now evaluating segment reporting based on Net salesSales and Segment Adjusted EBITDA.Gross Profit. The Company calculatescalculated Segment Adjusted EBITDAGross Profit as net income or loss before interest, income taxes,sales less costs of goods sold, depreciation and amortization, stock-based compensation expense,and non-cash charges and certain other expenses. Beginning April 1, 2018,charges. A measure of assets is not applicable, as segment assets are not regularly reviewed by the Company revised its allocation of allowancesCODM for returns, rebates, and discounts between Pipe and Allied Products for segment reporting purposes. Prior to April 1, 2018, the Company allocated substantially all returns, rebates, and discounts to Pipe net sales. These changes did not impact the Company’s previously reported consolidated financial results.evaluating performance or allocating resources. The prior period segment results and related disclosures have been recast to conform to the current year presentation underpresentation.
Pipe – The Pipe segment manufactures and markets high performance thermoplastic corrugated pipe throughout the new allocation methodology. United States. The Company maintains and serves these markets through product distribution relationships with many of the largest national and independent waterworks distributors, buying groups and co-ops, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the U.S.
Products include single wall pipe, N-12 HDPE pipe sold into the Storm sewer, Infrastructure and Agriculture markets, High Performance polypropylene pipe sold into the Storm sewer, Infrastructure and sanitary sewer markets. Products are designed primarily for storm water management in the construction and infrastructure marketplace across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure. Products are manufactured using HDPE and polypropylene plastic material.
Infiltrator Water Technologies – Infiltrator Water Technologies is a leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. Infiltrator Water Technologies products are used in on-site septic wastewater treatment systems in the United States and Canada.
International – The International segment manufactures and markets pipe and allied products in certain regions outside of the United States, including Company owned facilities in Canada, subsidiaries that distribute to Europe and the Middle East, exports and through the Company’s joint ventures with local partners in Mexico and South America. The Company’s Mexican joint venture, ADS Mexicana, primarily serves the Mexican and Central American markets, while its South American Joint Venture, Tigre-ADS, is the primary channel to serve the South American markets. The Company’s International product lines include single wall pipe, N-12 HDPE pipe, high performance PP pipe and certain geographies also sell our broad line of Allied Products.
Allied Products & Other – Allied Products and Other manufactures and markets products throughout the United States. Products include StormTech, Nyloplast, ARC Septic Chambers, Inserta Tee, BaySaver filters and water quality structures, Fittings, and FleXstorm. The Company maintains and serves these markets through product distribution relationships with many of the largest national and independent waterworks distributors, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the U.S. The Company also sells through a broad variety of buying groups and co-ops in the United States.
- 26 -
Advanced Drainage Systems, Inc.
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, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
|
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
| ||||||
Pipe | $ | 281,405 |
|
| $ | (342 | ) |
| $ | 281,063 |
|
| $ | 249,380 |
|
| $ | — |
|
| $ | 249,380 |
|
Infiltrator Water Technologies |
| 64,889 |
|
|
| (12,189 | ) |
|
| 52,700 |
|
|
| — |
|
|
| — |
|
|
| — |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International - Pipe |
| 34,617 |
|
|
| — |
|
|
| 34,617 |
|
|
| 44,008 |
|
|
| — |
|
|
| 44,008 |
|
International - Allied Products |
| 13,167 |
|
|
| — |
|
|
| 13,167 |
|
|
| 11,278 |
|
|
| — |
|
|
| 11,278 |
|
Total International |
| 47,784 |
|
|
| — |
|
|
| 47,784 |
|
|
| 55,286 |
|
|
| — |
|
|
| 55,286 |
|
Allied Products & Other |
| 114,358 |
|
|
| — |
|
|
| 114,358 |
|
|
| 101,889 |
|
|
| — |
|
|
| 101,889 |
|
Intersegment Eliminations |
| (12,531 | ) |
|
| 12,531 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Consolidated | $ | 495,905 |
|
| $ | — |
|
| $ | 495,905 |
|
| $ | 406,555 |
|
| $ | — |
|
| $ | 406,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| |||||||||||||||||||||
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
|
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
| ||||||
Pipe | $ | 543,586 |
|
| $ | (342 | ) |
| $ | 543,244 |
|
| $ | 491,450 |
|
| $ | — |
|
| $ | 491,450 |
|
Infiltrator Water Technologies |
| 64,889 |
|
|
| (12,189 | ) |
|
| 52,700 |
|
|
| — |
|
|
| — |
|
|
| — |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International - Pipe |
| 63,902 |
|
|
| — |
|
|
| 63,902 |
|
|
| 78,456 |
|
|
| — |
|
|
| 78,456 |
|
International - Allied Products |
| 23,216 |
|
|
| — |
|
|
| 23,216 |
|
|
| 22,179 |
|
|
| — |
|
|
| 22,179 |
|
Total International |
| 87,118 |
|
|
| — |
|
|
| 87,118 |
|
|
| 100,635 |
|
|
| — |
|
|
| 100,635 |
|
Allied Products & Other |
| 226,551 |
|
|
| — |
|
|
| 226,551 |
|
|
| 202,317 |
|
|
| — |
|
|
| 202,317 |
|
Intersegment Eliminations |
| (12,531 | ) |
|
| 12,531 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Consolidated | $ | 909,613 |
|
| $ | — |
|
| $ | 909,613 |
|
| $ | 794,402 |
|
| $ | — |
|
| $ | 794,402 |
|
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
|
| (In thousands) |
| |||||||||||||
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
| $ | 196,675 |
|
| $ | 198,713 |
|
| $ | 688,025 |
|
| $ | 683,512 |
|
Allied Products |
|
| 82,504 |
|
|
| 78,159 |
|
|
| 284,921 |
|
|
| 264,741 |
|
Total domestic |
|
| 279,179 |
|
|
| 276,872 |
|
|
| 972,946 |
|
|
| 948,253 |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
|
| 29,580 |
|
|
| 33,231 |
|
|
| 108,036 |
|
|
| 101,560 |
|
Allied Products |
|
| 9,354 |
|
|
| 10,729 |
|
|
| 31,533 |
|
|
| 30,427 |
|
Total international |
|
| 38,934 |
|
|
| 43,960 |
|
|
| 139,569 |
|
|
| 131,987 |
|
Total Net sales |
| $ | 318,113 |
|
| $ | 320,832 |
|
| $ | 1,112,515 |
|
| $ | 1,080,240 |
|
- 27 -
Advanced Drainage Systems, Inc.
The following sets forth certain additional financial information attributable to the reportable segments for the periods presented:
presented.
|
| Domestic |
|
| International |
|
| Total |
| |||
|
| (In thousands) |
| |||||||||
For the three months ended December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 279,179 |
|
| $ | 38,934 |
|
| $ | 318,113 |
|
Segment Adjusted EBITDA |
|
| 42,460 |
|
|
| 5,974 |
|
|
| 48,434 |
|
Interest expense |
|
| 5,621 |
|
|
| 74 |
|
|
| 5,695 |
|
Income tax expense |
|
| 1,885 |
|
|
| 605 |
|
|
| 2,490 |
|
Depreciation and amortization |
|
| 15,690 |
|
|
| 1,859 |
|
|
| 17,549 |
|
Equity in net loss (income) of unconsolidated affiliates |
|
| — |
|
|
| (466 | ) |
|
| (466 | ) |
Capital expenditures |
|
| 10,720 |
|
|
| 1,111 |
|
|
| 11,831 |
|
For the three months ended December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 276,872 |
|
| $ | 43,960 |
|
| $ | 320,832 |
|
Segment Adjusted EBITDA |
|
| 48,790 |
|
|
| 7,209 |
|
|
| 55,999 |
|
Interest expense |
|
| 3,007 |
|
|
| 79 |
|
|
| 3,086 |
|
Income tax (benefit) expense |
|
| (9,117 | ) |
|
| 1,746 |
|
|
| (7,371 | ) |
Depreciation and amortization |
|
| 15,804 |
|
|
| 2,048 |
|
|
| 17,852 |
|
Equity in net loss (income) of unconsolidated affiliates |
|
| 952 |
|
|
| (1,720 | ) |
|
| (768 | ) |
Capital expenditures |
|
| 7,820 |
|
|
| 269 |
|
|
| 8,089 |
|
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Segment adjusted gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
| $ | 74,246 |
|
| $ | 53,561 |
|
| $ | 131,739 |
|
| $ | 112,027 |
|
Infiltrator Water Technologies |
|
| 30,144 |
|
|
| — |
|
|
| 30,144 |
|
|
| — |
|
International |
|
| 10,841 |
|
|
| 12,088 |
|
|
| 20,068 |
|
|
| 21,874 |
|
Allied Products & Other |
|
| 57,621 |
|
|
| 47,160 |
|
|
| 114,808 |
|
|
| 96,172 |
|
Intersegment Elimination |
|
| (978 | ) |
|
| — |
|
|
| (978 | ) |
|
| — |
|
Total |
| $ | 171,874 |
|
| $ | 112,809 |
|
| $ | 295,781 |
|
| $ | 230,073 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
| $ | 11,557 |
|
| $ | 11,811 |
|
| $ | 23,104 |
|
| $ | 24,030 |
|
Infiltrator Water Technologies |
|
| 1,859 |
|
|
| — |
|
|
| 1,859 |
|
|
| — |
|
International |
|
| 1,590 |
|
|
| 1,524 |
|
|
| 3,097 |
|
|
| 3,021 |
|
Allied Products & Other(a) |
|
| 11,560 |
|
|
| 4,201 |
|
|
| 15,200 |
|
|
| 8,312 |
|
Total |
| $ | 26,566 |
|
| $ | 17,536 |
|
| $ | 43,260 |
|
| $ | 35,363 |
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
| $ | 9,383 |
|
| $ | 9,303 |
|
| $ | 16,357 |
|
| $ | 14,016 |
|
Infiltrator Water Technologies |
|
| 3,883 |
|
|
| — |
|
|
| 3,883 |
|
|
| — |
|
International |
|
| 623 |
|
|
| 816 |
|
|
| 1,877 |
|
|
| 1,808 |
|
Allied Products & Other(a) |
|
| 2,010 |
|
|
| 2,306 |
|
|
| 3,505 |
|
|
| 3,475 |
|
Total |
| $ | 15,899 |
|
| $ | 12,425 |
|
| $ | 25,622 |
|
| $ | 19,299 |
|
- 20 -
Advanced Drainage Systems, Inc.
|
| Domestic |
|
| International |
|
| Total |
| |||
|
| (In thousands) |
| |||||||||
For the nine months ended December, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 972,946 |
|
| $ | 139,569 |
|
| $ | 1,112,515 |
|
Segment Adjusted EBITDA |
|
| 175,831 |
|
|
| 19,267 |
|
|
| 195,098 |
|
Interest expense |
|
| 13,812 |
|
|
| 216 |
|
|
| 14,028 |
|
Income tax expense |
|
| 26,660 |
|
|
| 2,308 |
|
|
| 28,968 |
|
Depreciation and amortization |
|
| 47,281 |
|
|
| 5,631 |
|
|
| 52,912 |
|
Equity in net loss of unconsolidated affiliates |
|
| — |
|
|
| 225 |
|
|
| 225 |
|
Capital expenditures |
|
| 28,211 |
|
|
| 2,919 |
|
|
| 31,130 |
|
For the nine months ended December, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 948,253 |
|
| $ | 131,987 |
|
| $ | 1,080,240 |
|
Segment Adjusted EBITDA |
|
| 167,352 |
|
|
| 15,876 |
|
|
| 183,228 |
|
Interest expense |
|
| 12,363 |
|
|
| 257 |
|
|
| 12,620 |
|
Income tax expense |
|
| 12,583 |
|
|
| 3,229 |
|
|
| 15,812 |
|
Depreciation and amortization |
|
| 49,725 |
|
|
| 6,068 |
|
|
| 55,793 |
|
Equity in net loss (income) of unconsolidated affiliates |
|
| 1,607 |
|
|
| (2,103 | ) |
|
| (496 | ) |
Capital expenditures |
|
| 33,601 |
|
|
| 1,523 |
|
|
| 35,124 |
|
The following sets forth certain additional financial information attributable to the reportable segments as of the periods presented:
|
| December 31, 2018 |
|
| March 31, 2018 |
| ||
|
| (In thousands) |
| |||||
Investments in unconsolidated affiliates |
|
|
|
|
|
|
|
|
International |
| $ | 10,007 |
|
| $ | 12,343 |
|
Total |
| $ | 10,007 |
|
| $ | 12,343 |
|
Total identifiable assets |
|
|
|
|
|
|
|
|
Domestic |
| $ | 892,658 |
|
| $ | 904,718 |
|
International |
|
| 126,474 |
|
|
| 142,822 |
|
Eliminations |
|
| (12,092 | ) |
|
| (4,298 | ) |
Total |
| $ | 1,007,040 |
|
| $ | 1,043,242 |
|
- 21 -
Advanced Drainage Systems, Inc.
The following reconciles net income to segment adjusted EBITDA for the periods presented:
|
| For the Three Months Ended December 31, |
| |||||||||||||
|
| 2018 |
|
| 2017 |
| ||||||||||
|
| Domestic |
|
| International |
|
| Domestic |
|
| International |
| ||||
|
| (In thousands) |
| |||||||||||||
Reconciliation of Segment Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 13,333 |
|
| $ | 3,217 |
|
| $ | 29,755 |
|
| $ | 3,460 |
|
Depreciation and amortization |
|
| 15,690 |
|
|
| 1,859 |
|
|
| 15,804 |
|
|
| 2,048 |
|
Interest expense |
|
| 5,621 |
|
|
| 74 |
|
|
| 3,007 |
|
|
| 79 |
|
Income tax expense (benefit) |
|
| 1,885 |
|
|
| 605 |
|
|
| (9,117 | ) |
|
| 1,746 |
|
Segment EBITDA |
|
| 36,529 |
|
|
| 5,755 |
|
|
| 39,449 |
|
|
| 7,333 |
|
Derivative fair value adjustments |
|
| 1,067 |
|
|
| — |
|
|
| (145 | ) |
|
| — |
|
Foreign currency transaction gains |
|
| — |
|
|
| (423 | ) |
|
| — |
|
|
| (430 | ) |
Loss (gain) on disposal of assets and costs from exit and disposal activities |
|
| 89 |
|
|
| 55 |
|
|
| 1,940 |
|
|
| (16 | ) |
Unconsolidated affiliates interest, tax, depreciation and amortization(a) |
|
| — |
|
|
| 587 |
|
|
| 315 |
|
|
| 322 |
|
Contingent consideration remeasurement |
|
| (8 | ) |
|
| — |
|
|
| 1 |
|
|
| — |
|
Stock-based compensation expense |
|
| 1,658 |
|
|
| — |
|
|
| 1,640 |
|
|
| — |
|
ESOP deferred stock-based compensation |
|
| 2,724 |
|
|
| — |
|
|
| 2,737 |
|
|
| — |
|
Executive retirement expense |
|
| 50 |
|
|
| — |
|
|
| 73 |
|
|
| — |
|
Restatement-related costs(b) |
|
| (742 | ) |
|
| — |
|
|
| 888 |
|
|
| — |
|
Legal settlement |
|
| — |
|
|
| — |
|
|
| 1,800 |
|
|
| — |
|
Transaction costs(c) |
|
| 83 |
|
|
| — |
|
|
| 92 |
|
|
| — |
|
Strategic growth and operational improvement initiatives(d) |
|
| 1,010 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Segment Adjusted EBITDA |
| $ | 42,460 |
|
| $ | 5,974 |
|
| $ | 48,790 |
|
| $ | 7,209 |
|
- 22 -
Advanced Drainage Systems, Inc.
|
| For the Nine Months Ended December 31, |
| |||||||||||||
|
| 2018 |
|
| 2017 |
| ||||||||||
|
| Domestic |
|
| International |
|
| Domestic |
|
| International |
| ||||
|
| (In thousands) |
| |||||||||||||
Reconciliation of Segment Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 70,539 |
|
| $ | 9,034 |
|
| $ | 61,837 |
|
| $ | 7,811 |
|
Depreciation and amortization |
|
| 47,281 |
|
|
| 5,631 |
|
|
| 49,725 |
|
|
| 6,068 |
|
Interest expense |
|
| 13,812 |
|
|
| 216 |
|
|
| 12,363 |
|
|
| 257 |
|
Income tax expense (benefit) |
|
| 26,660 |
|
|
| 2,308 |
|
|
| 12,583 |
|
|
| 3,229 |
|
Segment EBITDA |
|
| 158,292 |
|
|
| 17,189 |
|
|
| 136,508 |
|
|
| 17,365 |
|
Derivative fair value adjustments |
|
| 1,209 |
|
|
| — |
|
|
| (735 | ) |
|
| — |
|
Foreign currency transaction (gains) losses |
|
| — |
|
|
| 224 |
|
|
| — |
|
|
| (2,878 | ) |
Loss on disposal of assets and costs from exit and disposal activities |
|
| 961 |
|
|
| 611 |
|
|
| 10,253 |
|
|
| 215 |
|
Unconsolidated affiliates interest, tax, depreciation and amortization(a) |
|
| — |
|
|
| 1,237 |
|
|
| 886 |
|
|
| 1,174 |
|
Contingent consideration remeasurement |
|
| (15 | ) |
|
| — |
|
|
| 33 |
|
|
| — |
|
Stock-based compensation expense |
|
| 5,029 |
|
|
| — |
|
|
| 5,140 |
|
|
| — |
|
ESOP deferred stock-based compensation |
|
| 11,113 |
|
|
| — |
|
|
| 7,946 |
|
|
| — |
|
Executive retirement (benefit) expense |
|
| (228 | ) |
|
| — |
|
|
| 982 |
|
|
| — |
|
Restatement-related (benefit) costs(b) |
|
| (1,938 | ) |
|
| — |
|
|
| 3,390 |
|
|
| — |
|
Legal settlement |
|
| — |
|
|
| — |
|
|
| 1,800 |
|
|
| — |
|
Transaction costs(c) |
|
| 398 |
|
|
| 6 |
|
|
| 1,149 |
|
|
| — |
|
Strategic growth and operational improvement initiatives(d) |
|
| 1,010 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Segment Adjusted EBITDA |
| $ | 175,831 |
|
| $ | 19,267 |
|
| $ | 167,352 |
|
| $ | 15,876 |
|
| (a) | Includes depreciation and amortization and capital expenditures not allocated to a reportable segment. |
Reconciliation of Gross Profit to Segment Adjusted Gross profit
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Reconciliation of Segment Adjusted Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit |
| $ | 146,524 |
|
| $ | 95,373 |
|
| $ | 84,366 |
|
| $ | 195,064 |
|
Depreciation and amortization |
|
| 15,708 |
|
|
| 14,354 |
|
|
| 29,392 |
|
|
| 29,072 |
|
ESOP and stock-based compensation expense |
|
| 3,869 |
|
|
| 3,082 |
|
|
| 7,640 |
|
|
| 5,937 |
|
ESOP special dividend compensation |
|
| — |
|
|
| — |
|
|
| 168,610 |
|
|
| — |
|
Inventory step up related to Infiltrator Water Technologies acquisition |
|
| 5,773 |
|
|
| — |
|
|
| 5,773 |
|
|
| — |
|
Total Segment Adjusted Gross Profit |
| $ | 171,874 |
|
| $ | 112,809 |
|
| $ | 295,781 |
|
| $ | 230,073 |
|
|
|
|
|
|
|
|
|
| SUBSEQUENT EVENTS |
Dividends on Common Stock Dividend- During the fourththird quarter of fiscal 2019,2020, the Company declared a quarterly cash dividend of $0.08$0.09 per share of common stock. The dividend is payable on March 15,December 13, 2019 to stockholders of record at the close of business on March 1,November 29, 2019.
- 2328 -
Advanced Drainage Systems, Inc.
Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” “us,” “ADS” and the “Company” refer to Advanced Drainage Systems, Inc. and its directly- and indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean only Advanced Drainage Systems, Inc. exclusive of its subsidiaries.
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, 20192020 refers to fiscal 2019,2020, which is the period from April 1, 20182019 to March 31, 2019.2020.
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 20182019 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 30, 2018.2019. 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 former joint venture, Tigre-ADS USA.Venture.
Overview
We are the leading global manufacturer of high performance thermoplastic corrugated pipe, providing a comprehensive suite of water management products and superior drainage solutions for usenon-residential, residential, infrastructure and agricultural applications. With the acquisition of Infiltrator Water Technologies in the undergroundsecond quarter of fiscal 2020, we are now a leading provider of plastic leach field chambers, septic tanks and accessories, for use primarily in residential applications.
Executive Summary
Second Quarter Fiscal 2020 Results
• | Net sales increased 22.0% to $495.9 million |
• | Net income of $8.5 million as compared to $29.4 million in the prior year |
• | Adjusted EBITDA (Non-GAAP) increased 65.2% to $118.2 million |
Net sales increased $89.4 million or 22.0% to $495.9 million, as compared to $406.6 million in the prior year. Domestic pipe sales increased $32.0 million or 12.8% to $281.4 million. Allied & Other sales increased $12.5 million or 12.2% to $114.4 million. These increases were driven by strong performance in both the U.S. construction and infrastructure marketplace. Our innovative products are used across a broad range ofagriculture end marketsmarkets. International net sales decreased $7.5 million or 13.6% to $47.8 million, driven primarily by decreases in Canada 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 nationalMexico sales. Infiltrator Water Technologies contributed an additional $64.9 million to net 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 $11 billion of annual revenue opportunity. In addition, we believe the increasing acceptance of thermoplastic pipe products in international markets represents an attractive growth opportunity.quarter.
Our products are generally lighter, more durable, more cost effective and easierGross profit increased $51.2 million or 53.6% 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$146.5 million as compared to $95.4 million in the late 1980s, our pipe products have been displacing products made with traditional materials, such as reinforced concrete, corrugated steel and polyvinyl chloride (“PVC”), acrossprior year. The increase is primarily due to an ever expanding range of end markets. This has allowed us to consistently gain market 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, PPincrease in both pipe and related water management products. Building on our core drainage businesses, we have aggressively pursued attractive ancillaryallied product categories suchsales as storm and septic chambers, PVC drainage structures, fittings and filters, and water quality filters and separators. We referwell as favorable material cost. Infiltrator Water Technologies contributed an additional $22.5 million to these ancillary product categoriesgross profit in the quarter.
Adjusted EBITDA (Non-GAAP) increased $46.6 million or 65.2% to $118.2 million, as Allied Products. Givencompared to $71.5 million in the scopeprior year. The increase is primarily due to the factors mentioned above. As a percentage of our overallnet sales, and distribution platform, we have been ableAdjusted EBITDA was 23.8% as compared to drive growth within our Allied Products and believe there are significant growth opportunities going forward.17.6% in the prior year.
- 2429 -
Advanced Drainage Systems, Inc.
Restructuring ActivitiesYear-to-Date Fiscal 2020 Results
• | Net sales increased 14.5% to $909.6 million |
• | Net loss of $219.0 million as compared to net income of $63.0 million in the prior year |
o | Includes $246.8 million of additional ESOP stock-based compensation expense due to the ESOP special dividend |
• | Adjusted EBITDA (Non-GAAP) increased 35.3% to $198.5 million |
• | Cash provided by operating activities increased $113.6 million to $171.7 million |
• | Free cash flow (Non-GAAP) increased $107.2 million to $146.1 million |
In fiscal 2018, we initiated restructuring activities designedNet sales increased $115.2 million or 14.5% to improve our cost structure, including closing underutilized manufacturing facilities, reducing headcount and eliminating nonessential costs. These activities will continue throughout fiscal 2019. The Company closed one and three manufacturing facilities$909.6 million, as compared to $794.4 million in the nine months ended December 31, 2018prior year. Domestic pipe sales increased $52.1 million or 10.6% to $543.6 million. Allied & Other sales increased $24.2 million or 12.0% to $226.6 million. These increases were driven by strong performance in both the U.S. construction and 2017, respectively. The following table summarizesagriculture end markets. International net sales decreased $13.5 million or 13.4% to $87.1 million as compared to $100.6 million in the restructuring activity includedprior year, driven primarily by a decrease in Loss on disposalMexico sales. Infiltrator Water Technologies contributed an additional $64.9 million to net sales.
Gross profit decreased $110.7 million to $84.4 million due to the $168.6 million ESOP compensation expense described above. Excluding the one-time ESOP compensation, gross profit increased $57.9 million or 29.7%, primarily due to an increase in both pipe and allied product sales as well as favorable pricing and material cost. This was partially offset by unfavorable inventory absorption cost due to retention of assets and costs from exit and disposal activities recordedkey manufacturing employees during the three and nine months ended December 31, 2018 and 2017:
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Accelerated depreciation |
| $ | — |
|
| $ | — |
|
| $ | 430 |
|
| $ | 3,561 |
|
Plant severance |
|
| 39 |
|
|
| 1,021 |
|
|
| 122 |
|
|
| 1,848 |
|
Headcount reduction |
|
| 237 |
|
|
| — |
|
|
| 237 |
|
|
| 2,577 |
|
Product optimization |
|
| 48 |
|
|
| — |
|
|
| 351 |
|
|
| — |
|
Other restructuring activities |
|
| 114 |
|
|
| 56 |
|
|
| 316 |
|
|
| 56 |
|
Total restructuring activities |
| $ | 438 |
|
| $ | 1,077 |
|
| $ | 1,456 |
|
| $ | 8,042 |
|
The following table summarizes the line items of the Condensed Consolidated Statements of Operations where the expenses above would have been recorded to absent of a restructuring program:
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| |||||
|
| (in thousands) |
|
|
|
|
|
|
|
|
| |||||
Cost of goods sold |
| $ | 201 |
|
| $ | 1,077 |
|
| $ | 1,219 |
|
| $ | 6,023 |
|
Selling expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,390 |
|
General and administrative expenses |
|
| 237 |
|
|
| — |
|
|
| 237 |
|
|
| 629 |
|
Total restructuring activities |
| $ | 438 |
|
| $ | 1,077 |
|
| $ | 1,456 |
|
| $ | 8,042 |
|
The restructuring costs above represent one-time expenses and are not indicative of expected costs or cost savings in future periods.
Strategic Growth and Operational Improvement Initiatives
In the thirdfourth quarter of fiscal 2019 we began incurring professional feesdespite lower production volume. Infiltrator Water Technologies contributed an additional $22.5 million to gross profit.
Adjusted EBITDA (Non-GAAP) increased $51.8 million or 35.3% to $198.5 million, as compared to $146.7 million in connection with strategic growth and operational improvement initiatives. These initiatives include market feasibility assessments, acquisition strategies, operational improvement initiatives, which include evaluationthe prior year, primarily as a result of our manufacturing network, and improvement initiatives associated with various operational support functions.the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 21.8% as compared to 18.5% in the prior year.
- 2530 -
Advanced Drainage Systems, Inc.
Comparison of the Three monthsMonths ended December 31,September 30, 2019 to the Three Months ended September 30, 2018 Compared With three months ended December 31, 2017
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 December 31, 2018September 30, 2019 and 2017.2018. We believe this presentation is useful to investors in comparing historical results.
|
| For the Three Months Ended December 31, |
|
| For the Three Months Ended September 30, |
| ||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||||||||||
Consolidated Statements of Operations data: |
|
|
|
|
|
|
|
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Net sales |
|
| 100.0 | % |
|
| 100.0 | % |
| $ | 495,905 |
|
|
| 100.0 | % |
| $ | 406,555 |
|
|
| 100.0 | % |
Cost of goods sold |
|
| 77.2 |
|
|
| 75.7 |
|
|
| 349,381 |
|
|
| 70.5 |
|
|
| 311,182 |
|
|
| 76.5 |
|
Gross profit |
|
| 22.8 |
|
|
| 24.3 |
|
|
| 146,524 |
|
|
| 29.5 |
|
|
| 95,373 |
|
|
| 23.5 |
|
Selling |
|
| 7.3 |
|
|
| 7.1 |
|
|
| 29,971 |
|
|
| 6.0 |
|
|
| 24,731 |
|
|
| 6.1 |
|
General and administrative |
|
| 7.0 |
|
|
| 7.4 |
|
|
| 48,030 |
|
|
| 9.7 |
|
|
| 21,584 |
|
|
| 5.3 |
|
Loss on disposal of assets and costs from exit and disposal activities |
|
| - |
|
|
| 0.6 |
|
|
| 2,004 |
|
|
| 0.4 |
|
|
| 324 |
|
|
| 0.1 |
|
Intangible amortization |
|
| 0.6 |
|
|
| 0.6 |
|
|
| 9,300 |
|
|
| 1.9 |
|
|
| 1,985 |
|
|
| 0.5 |
|
Income from operations |
|
| 7.8 |
|
|
| 8.5 |
| ||||||||||||||||
Income (loss) from operations |
|
| 57,219 |
|
|
| 11.5 |
|
|
| 46,749 |
|
|
| 11.5 |
| ||||||||
Interest expense |
|
| 1.8 |
|
|
| 1.0 |
|
|
| 52,332 |
|
|
| 10.6 |
|
|
| 4,531 |
|
|
| 1.1 |
|
Derivative loss (gains) and other expense (income), net |
|
| 0.2 |
|
|
| (0.3 | ) |
|
| 175 |
|
|
| — |
|
|
| 94 |
|
|
| — |
|
Income before income taxes |
|
| 5.8 |
|
|
| 7.8 |
| ||||||||||||||||
Income tax expense (benefit) |
|
| 0.8 |
|
|
| (2.3 | ) | ||||||||||||||||
Income (loss) before income taxes |
|
| 4,712 |
|
|
| 1.0 |
|
|
| 42,124 |
|
|
| 10.4 |
| ||||||||
Income tax (benefit) expense |
|
| (3,547 | ) |
|
| (0.7 | ) |
|
| 12,194 |
|
|
| 3.0 |
| ||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| (0.1 | ) |
|
| (0.2 | ) |
|
| (203 | ) |
|
| — |
|
|
| 558 |
|
|
| 0.1 |
|
Net income |
|
| 5.2 |
|
|
| 10.4 |
| ||||||||||||||||
Less: net income attributable to noncontrolling interest |
|
| 0.2 |
|
|
| 0.3 |
| ||||||||||||||||
Net income attributable to ADS |
|
| 5.0 | % |
|
| 10.0 | % | ||||||||||||||||
Net income (loss) |
|
| 8,462 |
|
|
| 1.7 |
|
|
| 29,372 |
|
|
| 7.2 |
| ||||||||
Less: net income (loss) attributable to noncontrolling interest |
|
| 873 |
|
|
| 0.2 |
|
|
| 702 |
|
|
| 0.2 |
| ||||||||
Net income (loss) attributable to ADS |
| $ | 7,589 |
|
|
| 1.5 | % |
| $ | 28,670 |
|
|
| 7.1 | % |
Net sales - Net sales were $318.1increased by $89.4 million, in the three months ended December 31, 2018, decreasing $2.7of which $52.7 million or 0.8%, over the comparable period in fiscal 2018.represented sales from Infiltrator Water Technologies. Net sales excluding Infiltrator Water Technologies are referred to as organic sales (Non-GAAP).
| For the Three Months Ended December 31, |
|
|
|
|
|
|
|
|
| ||||||
|
| 2018 |
|
| 2017 |
|
| $ Variance |
|
| % Variance |
| ||||
|
| (In thousands) |
|
|
|
|
|
|
|
|
| |||||
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
| $ | 196,675 |
|
| $ | 198,713 |
|
| $ | (2,038 | ) |
|
| (1.0 | %) |
Allied Products |
|
| 82,504 |
|
|
| 78,159 |
|
|
| 4,345 |
|
|
| 5.6 | % |
Total domestic |
|
| 279,179 |
|
|
| 276,872 |
|
|
| 2,307 |
|
|
| 0.8 | % |
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
|
| 29,580 |
|
|
| 33,231 |
|
|
| (3,651 | ) |
|
| (11.0 | %) |
Allied Products |
|
| 9,354 |
|
|
| 10,729 |
|
|
| (1,375 | ) |
|
| (12.8 | %) |
Total international |
|
| 38,934 |
|
|
| 43,960 |
|
|
| (5,026 | ) |
|
| (11.4 | %) |
Total net sales |
| $ | 318,113 |
|
| $ | 320,832 |
|
| $ | (2,719 | ) |
|
| (0.8 | %) |
| Three Months Ended |
| |||||||||||||||||||||
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
|
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
| ||||||
Pipe | $ | 281,405 |
|
| $ | (342 | ) |
| $ | 281,063 |
|
| $ | 249,380 |
|
| $ | — |
|
| $ | 249,380 |
|
Infiltrator Water Technologies |
| 64,889 |
|
|
| (12,189 | ) |
|
| 52,700 |
|
|
| — |
|
|
| — |
|
|
| — |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International - Pipe |
| 34,617 |
|
|
| — |
|
|
| 34,617 |
|
|
| 44,008 |
|
|
| — |
|
|
| 44,008 |
|
International - Allied Products |
| 13,167 |
|
|
| — |
|
|
| 13,167 |
|
|
| 11,278 |
|
|
| — |
|
|
| 11,278 |
|
Total International |
| 47,784 |
|
|
| — |
|
|
| 47,784 |
|
|
| 55,286 |
|
|
| — |
|
|
| 55,286 |
|
Allied Products & Other |
| 114,358 |
|
|
| — |
|
|
| 114,358 |
|
|
| 101,889 |
|
|
| — |
|
|
| 101,889 |
|
Intersegment Eliminations |
| (12,531 | ) |
|
| 12,531 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Consolidated | $ | 495,905 |
|
| $ | — |
|
| $ | 495,905 |
|
| $ | 406,555 |
|
| $ | — |
|
| $ | 406,555 |
|
Domestic net sales increased $2.3 million, or 0.8%, in the three months ended December 31, 2018, over the comparable period in the previous fiscal year. Our domestic pipe sales decreased by $2.0 million, or 1.0%, which was primarily attributable to a $7.3 million decrease in pipe volume. This decrease was offset by price increases and changes in product mix of $3.7 million. Allied Product sales increased $4.3 million, or 5.6%.
| • | Pipe net sales to all customers for the three months ended September 30, 2019 increased by $32.0 million, or 12.8%, compared to the three months ended September 30, 2018. The increase was due to an increase in |
- 2631 -
Advanced Drainage Systems, Inc.
International net sales decreased $5.0 million, or 11.4%, in the three months ended December 31, 2018 over the comparable period in the previous fiscal year. Our international pipe sales decreased by $3.7 million, or 11.0%, which was primarily attributable to volume decreases. In addition, Allied Product sales decreased $1.4 million.
pipe volume resulting in a $35.0 million increase in sales offset by a $1.9 million decrease as a result of price and product mix. |
• | Infiltrator Water Technologies net sales to all customers increased by $64.9 million. The Company acquired Infiltrator Water Technologies during the three months ended September 30, 2019 and therefore did not report any Infiltrator Water Technologies sales in the three months September 30, 2018. |
• | International net sales to all customers for the three months ended September 30, 2019 decreased by $7.5 million, or 13.6%, compared to the three months ended September 30, 2018. The decrease was primarily attributable to a $9.3 million decrease in International Pipe Sales, attributable to volume decreases, offset by a $1.8 million increase in International Allied Product sales. |
• | Allied Products & Other net sales to all customers for the three months ended September 30, 2019 increased by $12.5 million, or 12.2%, compared to the three months ended September 30, 2018. The increase was due to an increase in price and product mix of $6.7 million and an increase in sales volume of $5.0 million. |
Cost of goods sold and Gross profit - Cost of goods sold increased by $2.7$38.2 million, or 1.1%12.3%, and gross profit decreasedincreased by $5.4$51.2 million, or 7.0%53.6%, in the three months ended December 31, 2018September 30, 2019 over the comparable period in the previous fiscal year. Gross profit excluding Infiltrator Water Technologies, referred to as organic gross profit (Non-GAAP), increased 31.1%.
| For the Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
| For the Three Months Ended September 30, |
|
|
|
|
|
|
|
|
| |||||||||||
|
| 2018 |
|
| 2017 |
|
| $ Variance |
|
| % Variance |
|
| 2019 |
|
| 2018 |
|
| $ Variance |
|
| % Variance |
| ||||||||
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
| ||||||||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Domestic |
| $ | 64,630 |
|
| $ | 69,880 |
|
| $ | (5,250 | ) |
|
| (7.5 | %) | ||||||||||||||||
Pipe |
| $ | 59,103 |
|
| $ | 38,904 |
|
| $ | 20,199 |
|
|
| 51.9 | % | ||||||||||||||||
International |
|
| 7,769 |
|
|
| 7,946 |
|
|
| (177 | ) |
|
| (2.2 | %) |
|
| 9,247 |
|
|
| 10,560 |
|
|
| (1,313 | ) |
|
| (12.4 | ) |
Allied Products & Other |
|
| 56,653 |
|
|
| 45,909 |
|
|
| 10,744 |
|
|
| 23.4 |
| ||||||||||||||||
Organic gross profit |
|
| 125,003 |
|
|
| 95,373 |
|
|
| 29,630 |
|
|
| 31.1 |
| ||||||||||||||||
Infiltrator Water Technologies |
|
| 22,499 |
|
|
| — |
|
|
| 22,499 |
|
|
| 100.0 |
| ||||||||||||||||
Intersegment eliminations |
|
| (978 | ) |
|
| — |
|
|
| (978 | ) |
|
| 100.0 |
| ||||||||||||||||
Total gross profit |
| $ | 72,399 |
|
| $ | 77,826 |
|
| $ | (5,427 | ) |
|
| (7.0 | %) |
| $ | 146,524 |
|
| $ | 95,373 |
|
| $ | 51,151 |
|
|
| 53.6 | % |
| • | Pipe gross profit increased primarily due to the increase in volume sold, offset by the decrease in the price and product mix of net sales discussed above. The increase in Pipe gross profit was also attributable to lower material and transportation cost, which was partially offset by higher labor and overhead costs. |
• | The Company acquired Infiltrator Water Technologies during the three months ended September 30, 2019 and therefore did not report any Infiltrator Water Technologies gross profit in the three months September 30, 2018. |
• | International gross profit decreased primarily due to the decreased sales discussed above partially offset by decreased material and transportation costs. |
• | Allied Products & Other gross profit increased primarily due to the increase in net sales discussed above. |
Selling expenses - As a percentage of net sales, selling expenses were relatively flat at 7.3%6.0% in the three months ended December 31, 2018September 30, 2019 compared to 7.1%6.1% in three months ended December 31, 2017.September 30, 2018.
General and administrative expenses - General and administrative expenses for the three months ended December 31, 2018 decreased $1.7September 30, 2019 increased $26.4 million from the prior year period. The decreaseincrease was primarily due to a $1.8an increase of $16.5 million legal settlement in transaction costs primarily related to the three months ended December 31, 2017.Acquisition, $4.8 million increase in salary, bonus and stock-based compensation expenses to support growth and $3.3 million in general and administrative expenses at Infiltrator Water Technologies.
- 32 -
Advanced Drainage Systems, Inc.
Loss on disposal of assets and costs from exit and disposal activities – - In the three months ended December 31, 2018, we recorded $0.4 million of expense related to restructuring activities. In addition, September 30, 2019, we recorded a gainloss on the saledisposal of assets and costs from exit and disposal activities of approximately $2.0 million compared to a $0.3 million loss on the disposal of property, plant and equipment from the prior year period. The increase is primarily due to $1.6 million of approximately $0.3 million.Acquisition related severance costs incurred at Infiltrator Water Technologies. See “Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities” for additional discussion.
Intangible amortization - Intangible amortization remained relatively flatincreased as a percentage of net sales.sales primarily due the addition of intangible assets related to the Acquisition.
Interest expense - Interest expense increased $2.6$47.8 million in the three months ended December 31, 2018 compared to the same period in the previous fiscal year, primarily due to a $1.8 million unrealized loss on the interest rate swap.
Derivative loss (gains) and other expense (income), net - Derivative loss (gains) and other expense (income) decreased by $1.6 million for the three months ended December 31, 2018 compared to the same period in the previous fiscal year. The decrease is primarily due to changes in realized and unrealized losses on diesel fuel option collar contracts.
Income tax expense (benefit) - For the three months ended December 31, 2018 and 2017, the effective tax rates were 13.4% and (29.4%), respectively. The change in the effective tax rate was primarily due to the impact of Tax Act items not affecting the current year and certain other discrete items. See “Note 11. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net (income) loss of unconsolidated affiliates
- 27 -
Advanced Drainage Systems, Inc.
decreased by $0.3 million for the three months ended December 31, 2018 asSeptember 30, 2019 compared to the same period in the previous fiscal year. The decrease isincrease was primarily the resultdue to $33.2 million of the $1.9write-off of deferred financing costs and $4.2 million gain recognized as a resultprepayment penalty related to the extinguishment of debt instruments. The remainder of the contribution of outstanding receivables we madeincrease was due to the South American Joint Ventureincreased debt levels and changes in the three months ended December 31, 2017. This decrease was partially offset by the disposal of Tigre-ADS USA in April 2018. We recognized a $1.0 millioninterest rates. See “Note 11. Debt” for additional discussion.
Derivative loss representing our proportionate share of Tigre-ADS USA(gains) and other expense (income), net - Derivative loss in the three months ended December 31, 2017.
Net(gains) and other (expense) income attributable to noncontrolling interest - Net income attributable to noncontrolling interest decreased by $0.4$0.1 million for the three months ended December 31, 2018September 30, 2019 compared to the same period in the previous fiscal year.
Income tax (benefit) expense - For the three months ended September 30, 2019 and 2018, the effective tax rates were (75.3%) and 28.9%, respectively. The effective tax rate for the three months ended September 30, 2019 and September 30, 2018 differed primarily due to the acquisition of the noncontrolling interest in BaySaver.
Nine months ended December 31, 2018 Compared With nine months ended December 31, 2017
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 nine months ended December 31, 2018 and 2017. We believe this presentation is useful to investors in comparing historical results
|
| For the Nine Months Ended December 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Consolidated Statements of Operations data: |
|
|
|
|
|
|
|
|
Net sales |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of goods sold |
|
| 76.0 |
|
|
| 76.5 |
|
Gross profit |
|
| 24.0 |
|
|
| 23.5 |
|
Selling |
|
| 6.5 |
|
|
| 6.5 |
|
General and administrative |
|
| 5.8 |
|
|
| 6.9 |
|
Loss on disposal of assets and costs from exit and disposal activities |
|
| 0.1 |
|
|
| 1.0 |
|
Intangible amortization |
|
| 0.5 |
|
|
| 0.6 |
|
Income from operations |
|
| 11.0 |
|
|
| 8.6 |
|
Interest expense |
|
| 1.3 |
|
|
| 1.2 |
|
Derivative loss (gains) and other expense (income), net |
|
| - |
|
|
| (0.4 | ) |
Income before income taxes |
|
| 9.8 |
|
|
| 7.9 |
|
Income tax expense (benefit) |
|
| 2.6 |
|
|
| 1.5 |
|
Equity in net (income) loss of unconsolidated affiliates |
|
| - |
|
|
| - |
|
Net income |
|
| 7.2 |
|
|
| 6.4 |
|
Less: net income attributable to noncontrolling interest |
|
| 0.3 |
|
|
| 0.2 |
|
Net income attributable to ADS |
|
| 6.9 | % |
|
| 6.3 | % |
- 28 -
Advanced Drainage Systems, Inc.
Net sales - Net sales were $1,112.5 million in the nine months ended December 31, 2018, increasing $32.3 million, or 3.0%, over the comparable period in the previous fiscal year.
| For the Nine Months Ended December 31, |
|
|
|
|
|
|
|
|
| ||||||
|
| 2018 |
|
| 2017 |
|
| $ Variance |
|
| % Variance |
| ||||
|
| (In thousands) |
|
|
|
|
|
|
|
|
| |||||
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
| $ | 688,025 |
|
| $ | 683,512 |
|
| $ | 4,513 |
|
|
| 0.7 | % |
Allied Products |
|
| 284,921 |
|
|
| 264,741 |
|
|
| 20,180 |
|
|
| 7.6 | % |
Total domestic |
|
| 972,946 |
|
|
| 948,253 |
|
|
| 24,693 |
|
|
| 2.6 | % |
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
|
| 108,036 |
|
|
| 101,560 |
|
|
| 6,476 |
|
|
| 6.4 | % |
Allied Products |
|
| 31,533 |
|
|
| 30,427 |
|
|
| 1,106 |
|
|
| 3.6 | % |
Total international |
|
| 139,569 |
|
|
| 131,987 |
|
|
| 7,582 |
|
|
| 5.7 | % |
Total net sales |
| $ | 1,112,515 |
|
| $ | 1,080,240 |
|
| $ | 32,275 |
|
|
| 3.0 | % |
Domestic net sales increased $24.7 million, or 2.6%, in the nine months ended December 31, 2018, over the comparable period in the previous fiscal year. Our domestic pipe sales increased by $4.5 million, or 0.7%, which was primarily attributable to price increases and changes in product mix of $35.6 million. The increase in pipe is offset by a $30.2 million decrease in pipe volume. Allied Product sales increased $20.2 million, or 7.6%.
International net sales increased $7.6 million, or 5.7%, in the nine months ended December 31, 2018 over the comparable period in the previous fiscal year. International pipe sales increased by $6.5 million, or 6.4%, which is attributable to price increases, changes in product mix and an increase in pipe volume. In addition, Allied Products sales increased $1.1 million, or 3.6%.
Cost of goods sold and Gross profit - Cost of goods sold increased by $19.2 million, or 2.3%, and gross profit increased by $13.1 million, or 5.1%, in the nine months ended December 31, 2018 over the comparable period in the previous fiscal year.
| For the Nine Months Ended December 31, |
|
|
|
|
|
|
|
|
| ||||||
|
| 2018 |
|
| 2017 |
|
| $ Variance |
|
| % Variance |
| ||||
|
| (In thousands) |
|
|
|
|
|
|
|
|
| |||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 240,850 |
|
| $ | 233,914 |
|
| $ | 6,936 |
|
|
| 3.0 | % |
International |
|
| 26,613 |
|
|
| 20,452 |
|
|
| 6,161 |
|
|
| 30.1 | % |
Total gross profit |
| $ | 267,463 |
|
| $ | 254,366 |
|
| $ | 13,097 |
|
|
| 5.1 | % |
The increase in domestic gross profit of $6.9 million, or 3.0%, is due to the gross profit impact of the net sales increase discussed above and a decrease in labor and overhead costs of $12.7 million. These increases were partially offset by an increase in material and transportation costs of $20.5 million.
International gross profit increased $6.2 million, or 30.1%, in the nine months ended December 31, 2018 compared to the same period in the previous fiscal year, primarily due to the gross profit impact of the net sales increase discussed above offset by an increase in material and transportation costs.
Selling expenses - As a percentage of net sales, selling expenses remained flat at 6.5% in the nine months ended December 31, 2018 and 2017.
General and administrative expenses - General and administrative expenses for the nine months ended December 31, 2018 decreased $9.3 million from the prior year period. The decrease was primarily due to a decrease in professional and legal fees, including insurance proceeds, of $5.9 million, and a $1.8 million legal settlement in the three months ended December 31, 2017.
- 29 -
Advanced Drainage Systems, Inc.
Loss on disposal of assets and costs from exit and disposal activities - In the nine months ended December 31, 2018, we recorded $1.5 million of expense related to restructuring activities, including closing one underutilized manufacturing facility. In addition, we recorded a loss on other disposals and partial disposals of property, plant and equipment of approximately $0.1 million.Acquisition. See “Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities” for additional discussion.
Intangible amortization - Intangible amortization remained flat as a percentage of net sales.
Interest expense - Interest expense increased $1.4 million in the nine months ended December 31, 2018 compared to the same period in the previous fiscal year, primarily due to a $0.8 million unrealized loss on the interest rate swap.
Derivative losses (gains) and other expense (income), net - Derivative losses (gains) and other expense (income), net decreased by $4.4 million for the nine months ended December 31, 2018 compared to the same period in the previous fiscal year. The decrease is primarily due to other non-operating income of $3.5 million for the nine months ended December 31, 2017.
Income tax expense – For the nine months ended December 31, 2018 and 2017, the Company had effective tax rates of 26.6% and 18.6%, respectively. The increase in the effective tax rate was primarily due to the impact of Tax Act items not affecting the current year and certain other discrete items. See “Note 11.13. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net (income) loss of unconsolidated affiliates decreased to a $0.2by $0.8 million loss for the ninethree months ended December 31, 2018 from a $0.5 million income for the nine months ended December 31, 2017. The decrease is primarily the result of the $1.9 million gain recognizedSeptember 30, 2019 as a result of the contribution of outstanding receivables we madecompared to the South American Joint Venturesame period in the nine months ended December 31, 2017. This decrease was partially offset by the disposal of Tigre-ADS USA in April 2018. We recognized a $1.6 million loss representingprevious fiscal year. In fiscal 2019, our proportionate share of Tigre-ADS USAincome or loss in the three months ended December 31, 2017.BaySaver was included in equity in net (income) loss of unconsolidated affiliates.
Net income (loss) attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased by $0.2 million for the three months ended September 30, 2019 to a net income of $0.9 million compared to a net income of $0.7 million in the same period in the previous fiscal year.
- 33 -
Advanced Drainage Systems, Inc.
Comparison of the Six Months ended September 30, 2019 to the Six Months ended September 30, 2018
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 six months ended September 30, 2019 and 2018. We believe this presentation is useful to investors in comparing historical results.
|
| For the Six Months Ended September 30, |
| |||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||
Consolidated Statements of Operations data: |
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Net sales |
| $ | 909,613 |
|
|
| 100.0 | % |
| $ | 794,402 |
|
|
| 100.0 | % |
Cost of goods sold |
|
| 656,637 |
|
|
| 72.2 |
|
|
| 599,338 |
|
|
| 75.4 |
|
Cost of goods sold - ESOP special dividend compensation |
|
| 168,610 |
|
|
| 18.5 |
|
|
| — |
|
|
| — |
|
Gross profit |
|
| 84,366 |
|
|
| 9.3 |
|
|
| 195,064 |
|
|
| 24.6 |
|
Selling |
|
| 56,336 |
|
|
| 6.2 |
|
|
| 48,896 |
|
|
| 6.2 |
|
General and administrative |
|
| 79,463 |
|
|
| 8.7 |
|
|
| 42,966 |
|
|
| 5.4 |
|
Selling, general and administrative - ESOP special dividend compensation |
|
| 78,142 |
|
|
| 8.6 |
|
|
| — |
|
|
| — |
|
Loss on disposal of assets and costs from exit and disposal activities |
|
| 2,711 |
|
|
| 0.3 |
|
|
| 1,428 |
|
|
| 0.2 |
|
Intangible amortization |
|
| 10,842 |
|
|
| 1.2 |
|
|
| 3,969 |
|
|
| 0.5 |
|
Income (loss) from operations |
|
| (143,128 | ) |
|
| (15.7 | ) |
|
| 97,805 |
|
|
| 12.3 |
|
Interest expense |
|
| 57,596 |
|
|
| 6.3 |
|
|
| 8,333 |
|
|
| 1.0 |
|
Derivative loss (gains) and other expense (income), net |
|
| 79 |
|
|
| — |
|
|
| (720 | ) |
|
| (0.1 | ) |
Income (loss) before income taxes |
|
| (200,803 | ) |
|
| (22.1 | ) |
|
| 90,192 |
|
|
| 11.4 |
|
Income tax (benefit) expense |
|
| 18,823 |
|
|
| 2.1 |
|
|
| 26,478 |
|
|
| 3.3 |
|
Equity in net (income) loss of unconsolidated affiliates |
|
| (637 | ) |
|
| (0.1 | ) |
|
| 691 |
|
|
| 0.1 |
|
Net income (loss) |
|
| (218,989 | ) |
|
| (24.1 | ) |
|
| 63,023 |
|
|
| 7.9 |
|
Less: net income (loss) attributable to noncontrolling interest |
|
| (222 | ) |
|
| — |
|
|
| 2,073 |
|
|
| 0.3 |
|
Net income (loss) attributable to ADS |
| $ | (218,767 | ) |
|
| (24.1 | )% |
| $ | 60,950 |
|
|
| 7.7 | % |
Net sales - Net sales increased by $115.2 million, of which $52.7 million represented sales from Infiltrator Water Technologies. Net sales excluding Infiltrator Water Technologies are referred to as organic sales (Non-GAAP).
| Six Months Ended |
| |||||||||||||||||||||
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
|
| Net Sales |
|
| Intersegment Net Sales |
|
| Net Sales from External Customers |
| ||||||
Pipe | $ | 543,586 |
|
| $ | (342 | ) |
| $ | 543,244 |
|
| $ | 491,450 |
|
| $ | — |
|
| $ | 491,450 |
|
Infiltrator Water Technologies |
| 64,889 |
|
|
| (12,189 | ) |
|
| 52,700 |
|
|
| — |
|
|
| — |
|
|
| — |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International - Pipe |
| 63,902 |
|
|
| — |
|
|
| 63,902 |
|
|
| 78,456 |
|
|
| — |
|
|
| 78,456 |
|
International - Allied Products |
| 23,216 |
|
|
| — |
|
|
| 23,216 |
|
|
| 22,179 |
|
|
| — |
|
|
| 22,179 |
|
Total International |
| 87,118 |
|
|
| — |
|
|
| 87,118 |
|
|
| 100,635 |
|
|
| — |
|
|
| 100,635 |
|
Allied Products & Other |
| 226,551 |
|
|
| — |
|
|
| 226,551 |
|
|
| 202,317 |
|
|
| — |
|
|
| 202,317 |
|
Intersegment Eliminations |
| (12,531 | ) |
|
| 12,531 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Consolidated | $ | 909,613 |
|
| $ | — |
|
| $ | 909,613 |
|
| $ | 794,402 |
|
| $ | — |
|
| $ | 794,402 |
|
- 34 -
Advanced Drainage Systems, Inc.
• | Pipe net sales to all customers for the six months ended September 30, 2019 increased by $52.1 million, or 10.6%, compared to the six months ended September 30, 2018. The increase was due to an increase in pipe volume resulting in a $53.3 million increase in sales offset by a $0.7 million decrease as a result of price and product mix. |
• | Infiltrator Water Technologies net sales to all customers increased by $64.9 million. The Company acquired Infiltrator Water Technologies during the six months ended September 30, 2019 and therefore did not report any Infiltrator Water Technologies sales in the six months September 30, 2018. |
• | International net sales to all customers for the six months ended September 30, 2019 decreased by $13.5 million, or 13.4%, compared to the six months ended September 30, 2018. International Pipe sales decreased by $14.5 million, attributable to volume decreases, offset by an increase of $1.0 million in International Allied Product Sales |
• | Allied Products & Other net sales to all customers for the six months ended September 30, 2019 increased by $24.2 million, or 12.0%, compared to the six months ended September 30, 2018. The increase was due to an increase in price and product mix of $13.7 million and an increase in sales volume of $10.0 million. |
Cost of goods sold and Gross profit - Cost of goods sold increased by $57.3 million, or 9.6%, and gross profit decreased by $110.7 million, or 56.7% in the six months ended September 30, 2019 over the comparable period in the previous year. The decrease in gross profit was primarily due to the ESOP special dividend compensation expense from the special dividend of $168.6 million allocated to Cost of goods sold. Gross profit excluding Infiltrator Water Technologies, referred to as organic gross profit (Non-GAAP), increased 18.7%.
|
| For the Six Months Ended September 30, |
|
|
|
|
|
|
|
|
| |||||
|
| 2019 |
|
| 2018 |
|
| $ Variance |
|
| % Variance |
| ||||
|
| (In thousands) |
|
|
|
|
|
|
|
|
| |||||
Pipe |
| $ | 101,561 |
|
| $ | 82,523 |
|
| $ | 19,038 |
|
|
| 23.1 | % |
International |
|
| 16,963 |
|
|
| 18,845 |
|
|
| (1,882 | ) |
|
| (10.0 | ) |
Allied Products & Other |
|
| 112,931 |
|
|
| 93,696 |
|
|
| 19,235 |
|
|
| 20.5 |
|
Organic gross profit |
|
| 231,455 |
|
|
| 195,064 |
|
|
| 36,391 |
|
|
| 18.7 |
|
Infiltrator Water Technologies |
|
| 22,499 |
|
|
| — |
|
|
| 22,499 |
|
|
| 100.0 |
|
Cost of goods sold - ESOP special dividend compensation |
|
| (168,610 | ) |
|
| — |
|
|
| (168,610 | ) |
|
| 100.0 |
|
Intersegment eliminations |
|
| (978 | ) |
|
| — |
|
|
| (978 | ) |
|
| 100.0 |
|
Total gross profit |
| $ | 84,366 |
|
| $ | 195,064 |
|
| $ | (110,698 | ) |
|
| (56.7 | %) |
• | Pipe gross profit increased primarily due to the increase in volume sold, offset by the decrease in the price and product mix of net sales discussed above. The increase in Pipe gross profit was also attributable to lower material and transportation cost, which was partially offset by higher labor and overhead costs. |
• | The Company acquired Infiltrator Water Technologies during the six months ended September 30, 2019 and therefore did not report any Infiltrator Water Technologies gross profit in the six months September 30, 2018. |
• | International gross profit decreased primarily due to the decreased sales discussed above partially offset by decreased material and transportation costs. |
• | Allied Products & Other gross profit increased primarily due to the increase in net sales discussed above. |
Selling expenses - As a percentage of net sales, selling expenses remained flat at 6.2% in the six months ended September 30, 2019 and 2018.
- 35 -
Advanced Drainage Systems, Inc.
General and administrative expenses - General and administrative expenses for the six months ended September 30, 2019 increased $36.5 million from the prior year period. The increase was primarily due to an increase of $20.5 million in transaction costs primarily related to the Acquisition, $6.6 million increase in salary, bonus and stock-based compensation expenses to support growth, $3.3 million in general and administrative expenses at Infiltrator Water Technologies, $2.9 million of strategic growth and operational improvement initiatives expenses and $2.9 million of expenses related to our investigation into our consolidated joint venture.
Loss on disposal of assets and costs from exit and disposal activities - In the six months ended September 30, 2019, we recorded $2.7 million of expense related to loss on disposal of assets and costs from exit and disposal activities compared to $1.4 million in the six months ended September 30, 2018. The increase is primarily due to $1.6 million of Acquisition related severance costs. See “Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities” for additional discussion.
Intangible amortization - Intangible amortization increased as a percentage of net sales primarily due the addition of intangible assets related to the Acquisition.
Interest expense - Interest expense increased $49.3 million in the six months ended September 30, 2019 compared to the same period in the previous fiscal year. The increase was primarily due to $33.2 million of the write-off of deferred financing costs and $4.2 million prepayment penalty from the extinguishment of debt instruments. The remainder of the increase was due to increased debt levels and changes in interest rates. See “Note 11. Debt” for additional discussion.
Derivative losses (gains) and other expense (income), net – Derivative loss (gains) and other (expense) income, net decreased by $0.8 million for the six months ended September 30, 2019 compared to the same period in the previous fiscal year. The decrease is primarily due to changes in realized diesel fuel collars.
Income tax expense – For the six months ended September 30, 2019 and 2018, the Company had effective tax rates of (9.4)% and 29.4%, respectively. The change in the effective tax rate was primarily due to a discrete income tax event related to stock appreciation from the additional ESOP shares allocated and the Acquisition. See “Note 13. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net (income) loss of unconsolidated affiliates increased to a $0.6 million income for the six months ended September 30, 2019 from a $0.7 million loss for the six months ended September 30, 2018. In fiscal 2019, our proportionate share of income or loss in BaySaver was included in equity in net (income) loss of unconsolidated affiliates.
Net income (loss) attributable to noncontrolling interest - Net income (loss) attributable to noncontrolling interest decreased from net income of $1.9$2.1 million for the ninesix months ended December 31, 2017September 30, 2018 to net incomeloss of $2.8$0.2 million for the ninesix months ended December 31, 2018.September 30, 2019. The change is primarily attributable to fluctuations in the disposalprofitability of Tigre ADS-USA.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 and Free Cash Flow. TheseAdjusted EBITDA Margin - Adjusted EBITDA and Adjusted EBITDA Margin, which are 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.
Adjusted EBITDA - Adjusted EBITDA, a non-GAAP financial measure, has been presented in this Quarterly Report on Form 10-Q as a supplemental measuremeasures of financial performance that isare not required by, or presented in accordance with GAAP. We calculate adjustedAdjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.
Adjusted EBITDA isand Adjusted EBITDA Margin are included in this Quarterly Report on Form 10-Q because it is athey are key metricmetrics used by management and our Boardboard of Directorsdirectors to assess our consolidated financial performance. Adjusted EBITDA isand Adjusted EBITDA Margin are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use adjustedAdjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP measures of performance to evaluate the
- 36 -
Advanced Drainage Systems, Inc.
effectiveness of our consolidated business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.
- 30 -
Advanced Drainage Systems, Inc.
We use Adjusted EBITDA isMargin to evaluate our ability to generate profitable sales.
Adjusted EBITDA and Adjusted EBITDA Margin are not a GAAP measuremeasures of our financial performance and should not be considered as an alternativealternatives to net income as a measuremeasures of financial performance or cash flows from operations or any other performance measure derived in accordance with GAAP, and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Adjusted EBITDA containsand Adjusted EBITDA Margin contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs, and cash costs to replace assets being depreciated and amortized.amortized and interest expense, or the cash requirements necessary to service interest on principal payments on our indebtedness. In evaluating adjustedAdjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency transaction losses. Our presentation of adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using adjustedAdjusted EBITDA as a supplemental measurement.and Adjusted EBITDA Margin supplementally. Our measuremeasures of adjustedAdjusted EBITDA isand Adjusted EBITDA Margin are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods indicated.
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
|
| (In thousands) |
| |||||||||||||
Net income |
| $ | 16,550 |
|
| $ | 33,215 |
|
| $ | 79,573 |
|
| $ | 69,648 |
|
Depreciation and amortization |
|
| 17,549 |
|
|
| 17,852 |
|
|
| 52,912 |
|
|
| 55,793 |
|
Interest expense |
|
| 5,695 |
|
|
| 3,086 |
|
|
| 14,028 |
|
|
| 12,620 |
|
Income tax expense (benefit) |
|
| 2,490 |
|
|
| (7,371 | ) |
|
| 28,968 |
|
|
| 15,812 |
|
EBITDA |
|
| 42,284 |
|
|
| 46,782 |
|
|
| 175,481 |
|
|
| 153,873 |
|
Derivative fair value adjustments |
|
| 1,067 |
|
|
| (145 | ) |
|
| 1,209 |
|
|
| (735 | ) |
Foreign currency transaction (gains) losses |
|
| (423 | ) |
|
| (430 | ) |
|
| 224 |
|
|
| (2,878 | ) |
Loss on disposal of assets and costs from exit and disposal activities |
|
| 144 |
|
|
| 1,924 |
|
|
| 1,572 |
|
|
| 10,468 |
|
Unconsolidated affiliates interest, tax, depreciation and amortization(a) |
|
| 587 |
|
|
| 637 |
|
|
| 1,237 |
|
|
| 2,060 |
|
Contingent consideration remeasurement |
|
| (8 | ) |
|
| 1 |
|
|
| (15 | ) |
|
| 33 |
|
Stock-based compensation expense |
|
| 1,658 |
|
|
| 1,640 |
|
|
| 5,029 |
|
|
| 5,140 |
|
ESOP deferred stock-based compensation |
|
| 2,724 |
|
|
| 2,737 |
|
|
| 11,113 |
|
|
| 7,946 |
|
Executive retirement expense (benefit) |
|
| 50 |
|
|
| 73 |
|
|
| (228 | ) |
|
| 982 |
|
Restatement-related (benefit) costs(b) |
|
| (742 | ) |
|
| 888 |
|
|
| (1,938 | ) |
|
| 3,390 |
|
Legal settlement |
|
| — |
|
|
| 1,800 |
|
|
| — |
|
|
| 1,800 |
|
Transaction costs(c) |
|
| 83 |
|
|
| 92 |
|
|
| 404 |
|
|
| 1,149 |
|
Strategic growth and operational improvement initiatives(d) |
|
| 1,010 |
|
|
| — |
|
|
| 1,010 |
|
|
| — |
|
Adjusted EBITDA |
| $ | 48,434 |
|
| $ | 55,999 |
|
| $ | 195,098 |
|
| $ | 183,228 |
|
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Net income (loss) |
| $ | 8,462 |
|
| $ | 29,372 |
|
| $ | (218,989 | ) |
| $ | 63,023 |
|
Depreciation and amortization |
|
| 26,566 |
|
|
| 17,536 |
|
|
| 43,260 |
|
|
| 35,363 |
|
Interest expense |
|
| 52,332 |
|
|
| 4,531 |
|
|
| 57,596 |
|
|
| 8,333 |
|
Income tax (benefit) expense |
|
| (3,547 | ) |
|
| 12,194 |
|
|
| 18,823 |
|
|
| 26,478 |
|
EBITDA |
|
| 83,813 |
|
|
| 63,633 |
|
|
| (99,310 | ) |
|
| 133,197 |
|
Loss on disposal of assets and costs from exit and disposal activities |
|
| 2,004 |
|
|
| 324 |
|
|
| 2,711 |
|
|
| 1,428 |
|
ESOP and stock-based compensation expense |
|
| 8,657 |
|
|
| 6,180 |
|
|
| 16,082 |
|
|
| 11,760 |
|
ESOP special dividend compensation(a) |
|
| — |
|
|
| — |
|
|
| 246,752 |
|
|
| — |
|
Transaction costs(b) |
|
| 16,590 |
|
|
| 65 |
|
|
| 20,835 |
|
|
| 321 |
|
Inventory step up related to Infiltrator Water Technologies acquisition |
|
| 5,773 |
|
|
| — |
|
|
| 5,773 |
|
|
| — |
|
Strategic growth and operational improvement initiatives(c) |
|
| 701 |
|
|
| — |
|
|
| 2,896 |
|
|
| — |
|
Other adjustments(d) |
|
| 626 |
|
|
| 1,319 |
|
|
| 2,721 |
|
|
| (42 | ) |
Adjusted EBITDA |
| $ | 118,164 |
|
| $ | 71,521 |
|
| $ | 198,460 |
|
| $ | 146,664 |
|
Adjusted EBITDA Margin |
|
| 23.8 | % |
|
| 17.6 | % |
|
| 21.8 | % |
|
| 18.5 | % |
(a) |
|
(b) | Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with |
|
|
- 31 -
Advanced Drainage Systems, Inc.
operational improvement initiatives, which include evaluation of our manufacturing network and improvement initiatives. |
(d) | Includes derivative fair value adjustments, foreign currency transaction (gains) losses, the proportionate share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is |
Free Cash Flow- Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures. Free cash flow is a measure used by management and our Board37 -
Free cash flow is not a GAAP measure of our liquidity and 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.
Advanced Drainage Systems, Inc.
accounted for under the equity method of accounting, contingent consideration remeasurement, executive retirement expense (benefit) and restatement related costs. The other adjustments in fiscal 2020 also includes expenses related to the ADS Mexicana’s investigation as described in “Note 12. Commitments and Contingencies”. The other adjustments for fiscal 2019 also includes insurance proceeds received in connection with the Company’s restatement of prior period financial statements as reflected on the Company’s Form 10-K for the fiscal year ended March 31, 2015 and the Form 10-K for the fiscal year ended March 31, 2016, as amended. |
The following table presents a reconciliation of free cash flowour Adjusted EBITDA for the Company prior to Cash flow from operating activities, the most comparable GAAP measure, for eachAcquisition (“Legacy ADS”), which consists of the periods indicated.combination of the Segment Adjusted Gross Profit for Pipe, Allied Products & Other, and International plus the portion of corporate and selling expenses which impacts Adjusted EBITDA and Infiltrator Water Technologies prior to the Acquisition (“Legacy Infiltrator Water Technologies”), which consists of the combination of the Segment adjusted gross profit for Infiltrator Water Technologies plus the portion of corporate and selling expenses which impacts Adjusted EBITDA.
|
| Nine Months Ended December 31, |
| |||||
| 2018 |
|
| 2017 |
| |||
|
| (In thousands) |
| |||||
Cash flow from operating activities |
| $ | 148,022 |
|
| $ | 138,909 |
|
Capital expenditures |
|
| (31,130 | ) |
|
| (35,124 | ) |
Free Cash Flow |
| $ | 116,892 |
|
| $ | 103,785 |
|
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Legacy ADS Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe Adjusted Gross Profit |
| $ | 74,246 |
|
| $ | 53,561 |
|
| $ | 131,739 |
|
| $ | 112,027 |
|
International Adjusted Gross Profit |
|
| 10,841 |
|
|
| 12,088 |
|
|
| 20,068 |
|
|
| 21,874 |
|
Allied Products & Other Adjusted Gross Profit |
|
| 57,621 |
|
|
| 47,160 |
|
|
| 114,808 |
|
|
| 96,172 |
|
Unallocated corporate and selling expenses |
|
| (48,621 | ) |
|
| (41,288 | ) |
|
| (92,232 | ) |
|
| (83,409 | ) |
Legacy ADS Adjusted EBITDA |
| $ | 94,087 |
|
| $ | 71,521 |
|
| $ | 174,383 |
|
| $ | 146,664 |
|
Legacy Infiltrator Water Technologies Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infiltrator Water Technologies Adjusted Gross Profit |
|
| 30,144 |
|
|
| — |
|
|
| 30,144 |
|
|
| — |
|
Unallocated corporate and selling expenses |
|
| (5,089 | ) |
|
| — |
|
|
| (5,089 | ) |
|
| — |
|
Legacy Infiltrator Water Technologies Adjusted EBITDA |
| $ | 25,055 |
|
| $ | — |
|
| $ | 25,055 |
|
| $ | — |
|
Intersegment eliminations |
|
| (978 | ) |
|
| — |
|
|
| (978 | ) |
|
| — |
|
Consolidated Adjusted EBITDA |
| $ | 118,164 |
|
| $ | 71,521 |
|
| $ | 198,460 |
|
| $ | 146,664 |
|
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 capitalfinance 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 December 31, 2018,September 30, 2019, we had $12.3$13.6 million in cash that was held by our foreign subsidiaries. Prior to the Tax Act, our intent was to indefinitely reinvest our earnings in foreign subsidiaries with the exception of cash dividends paid by our ADS Mexicana joint venture. As a result of the Tax Act, weWe continue to evaluate our strategy with regard toregarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested.
Debt and Equity Financing Transactions
As further described below, during the second fiscal quarter ended September 30, 2019, the Company and certain of its subsidiaries entered into a series of transactions that resulted in the refinancing of the existing external borrowings of the Company with the new financings, as well as the completion of an underwritten public offering of common stock. These financing activities were effected in connection with the completion of the Acquisition of Infiltrator Water Technologies.
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Advanced Drainage Systems, Inc.
On July 29, 2019, the Company repaid in full all of its outstanding indebtedness and other obligations totaling $104.4 million under the Shelf Note Agreement by using borrowings from the Company’s existing credit facility under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens securing the Shelf Note Agreement were terminated and released, and the Shelf Note Agreement was terminated.
On July 31, 2019, the Company entered into the Base Credit Agreement with Barclays Bank PLC, as administrative agent and the several lenders from time to time party thereto, pursuant to which the Company borrowed under the Credit Agreement which borrowings were used to (i) finance the Merger Consideration for the acquisition of Infiltrator Water Technologies, (ii) repay the total outstanding amount under the existing PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred by Infiltrator Water Technologies under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Credit Agreement.
Thereafter, on the Acquisition Closing Date, using borrowings of the Bridge Loan Facility and Bridge Revolving Facility under the Bridge Credit Facility, the Company repaid in full all of its indebtedness and other obligations totaling $239.2 million under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was terminated.
On September 10, 2019, the Company closed the underwritten public offering of common stock (the “Common Stock Offering”) and received net proceeds of approximately $293.6 million after deducting underwriting discounts and offering expenses, the proceeds of which were used in part to repay outstanding borrowings under the Bridge Credit Facility. On September 23, 2019, the Company issued $350.0 million aggregate principal amount of its Senior Notes, the proceeds of which were used in part to repay outstanding borrowings under the Bridge Credit Facility.
On September 24, 2019, the Company entered into the Senior Secured Credit Facility that amended certain pricing and related terms under the Base Credit Agreement. In connection with the Senior Secured Credit Facility, the Company also prepaid outstanding borrowings under the Term Loan Facility of the Senior Secured Credit Facility in an aggregate principal amount of $600 million.
Working Capital and Cash Flows
As of December 31, 2018,September 30, 2019, we had $509.7$395.7 million in liquidity, including $19.8$54.2 million of cash, $414.9$341.5 million in borrowings available under our Revolving Credit FacilityAgreement, net of $8.6$8.5 million of outstanding letters of credit, and $75.0 million under the Senior Notes, described below.credit. We believe that our cash on hand, together with the availability of borrowings under our Revolvingnew Credit FacilityAgreement and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled principal and interest payments on our indebtedness and the dividend payment requirement for our convertible preferred stock for at least the next twelve months.
Working Capital - Working capital decreasedincreased to $236.3$322.9 million as of December 31, 2018,September 30, 2019, from $237.2$260.2 million as of March 31, 2018.2019. The decreaseincrease in working capital is primarily due to the addition of Infiltrator Water Technologies working capital of $47.4 million. The increase in working capital, excluding the impact of Infiltrator Water Technologies, is due to an increase in cash and accounts receivable of $45.3 million and $42.3 million, respectively, and a decrease in accounts payablecurrent maturities of $39.2 milliondebt obligations of $19.7 million. These increases were partially offset by a $19.4 million decrease in Legacy ADS inventory of $55.8 million and an increase in accounts receivablepayable and a $17.3 million decrease in inventory.other accrued liabilities of $38.7 million.
|
| Six Months Ended September 30, |
| |||||
(Amounts in thousands) |
| 2019 |
|
| 2018 |
| ||
Net cash provided by operating activities |
| $ | 171,711 |
|
| $ | 58,161 |
|
Net cash used in investing activities |
|
| (1,114,355 | ) |
|
| (18,870 | ) |
Net cash provided by (used in) financing activities |
|
| 988,137 |
|
|
| (39,090 | ) |
- 39 -
Advanced Drainage Systems, Inc.
Operating Cash Flows -Cash flows provided by operating activities for the ninesix months ended December 31, 2018September 30, 2019 was $148.0$171.7 million as compared with cash provided by operating activities of $138.9$58.2 million for the ninesix months
- 32 -
Advanced Drainage Systems, Inc.
ended December 31, 2017.September 30, 2018. Cash flows from operating activities during the ninesix months ended December 31, 2018September 30, 2019 was primarily impacted by increased income from continuing operations offset by changes in working capital.capital, including accounts receivable, inventory and current liabilities.
Investing Cash Flows - During the ninesix months ended December 31,September 30, 2019 and 2018, and 2017, cash used in investing activities was $30.0$1,114.4 million and $31.7$18.9 million, respectively. The decreaseincrease in cash used for investing activities was primarily due to decreasesthe Acquisition of Infiltrator Water Technologies, net of cash acquired. Capital expenditures during the six months ended September 30, 2019 increased by $6.3 million compared to the same period in capital expenditures and purchases of property, plant and equipment through financing.fiscal 2019. Our capital expenditures for the ninesix months ended December 31, 2018September 30, 2019 were used primarily for new equipment and facility expansions and upgrades.
Financing Cash Flows - During the ninesix months ended December 31,September 30, 2019, cash provided by financing activities was $988.1 million due to the new Term Loan Facility, Senior Notes and common stock offering. These cash inflows were offset by the repayment of the PNC Credit Agreement and Prudential Senior Notes, the special and quarterly dividend payments of $76.3 million and payments on our finance lease obligations of $12.3 million. The table below summarizes the cash flows from the Acquisition, and the related debt and equity transactions.
(Amounts in thousands) |
| Sources |
|
| Uses |
| ||
Bridge Loan Facility |
| $ | 1,300,000 |
|
| $ | — |
|
Bridge Revolver |
|
| 145,000 |
|
|
| — |
|
PNC Credit Agreement draw |
|
| 104,429 |
|
|
| — |
|
Prudential Senior Notes payoff |
|
| — |
|
|
| (104,429 | ) |
PNC Credit Agreement payoff |
|
| — |
|
|
| (239,240 | ) |
Acquisition of Infiltrator Water Technologies, fair value of consideration transferred |
|
| — |
|
|
| (1,146,526 | ) |
Common stock offering, net of offering costs |
|
| 293,648 |
|
|
| — |
|
Bridge Loan Facility - payment |
|
| — |
|
|
| (300,000 | ) |
Proceeds from Senior Notes Issuance |
|
| 350,000 |
|
|
| — |
|
Bridge Loan Facility - payment |
|
| — |
|
|
| (300,000 | ) |
Term Loan Facility |
|
| 700,000 |
|
|
| — |
|
Bridge Loan Facility - payment |
|
| — |
|
|
| (700,000 | ) |
Debt issuance costs |
|
| — |
|
|
| (34,606 | ) |
Cash to Balance Sheet |
|
| — |
|
|
| (68,276 | ) |
Total |
| $ | 2,893,077 |
|
| $ | (2,893,077 | ) |
During the six months ended September 30, 2018, cash used in financing activities was $115.4$39.1 million due to netpayments on the Prudential Senior notes, dividends paid and payments on our Revolving Credit Facility, payments on our Senior Notes, dividends paid, payments on our capitalfinance lease obligations and the acquisition of noncontrolling interest in BaySaver. During the nine months ended December 31, 2017, used in financing activities was $94.5 million due to repayments on our Revolving Credit Facility, Term Loan and Senior Notes, $7.9 million of repurchases of our common stock under the stock repurchase program, offset by ournet borrowings on our Senior NotesPNC Credit Agreement.
Free Cash Flow and Revolving Credit Facility associatedFree Cash Flow Conversion - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures. Free cash flow and free cash flow conversion are measures used by management and our Board of Directors to assess our ability to generate cash. Free cash flow conversion is a non-GAAP financial measure that comprises free cash flow divided by cash flow from operations. Accordingly, free cash flow and free cash flow conversion have been presented in this Quarterly Report on Form 10-Q as supplemental measures of liquidity that is not required by, or presented in accordance with GAAP, because management believes that free cash flow and free cash flow conversion provide useful information to investors and others in understanding and evaluating our ability to generate cash flow from operations after capital expenditures.
Free cash flow and free cash flow conversion are not GAAP measures of our liquidity and 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 measures of free cash flow and free cash flow conversion are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
- 40 -
Advanced Drainage Systems, Inc.
The following table presents a reconciliation of free cash flow and free cash flow conversion to Cash flow from operating activities, the debt refinancing.most comparable GAAP measure, for each of the periods indicated.
|
| Six Months Ended September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
| (In thousands) |
| |||||
Cash flow from operating activities |
| $ | 171,711 |
|
| $ | 58,161 |
|
Capital expenditures |
|
| (25,622 | ) |
|
| (19,299 | ) |
Free Cash Flow |
| $ | 146,089 |
|
| $ | 38,862 |
|
Free Cash Flow Conversion |
|
| 85.1 | % |
|
| 66.8 | % |
Capital Expenditures
Capital expenditures totaled $31.1$25.6 million and $35.1$19.3 million for the ninesix months ended December 31,September 30, 2019 and 2018, and 2017, respectively. Our capital expenditures for the ninesix months ended December 31, 2018September 30, 2019 were used primarily to support facility expansions, equipment replacements, our recycled resin initiatives and technology.
We currently anticipate that we will make capital expenditures of approximately $40$85 to $50$100 million in fiscal year 2019.2020. Such capital expenditures are expected to be financed using funds generated by operations. As of December 31, 2018,September 30, 2019, there were no material contractual obligations or commitments related to these planned capital expenditures.expenditures, except as disclosed in “Note 12. Commitments and Contingencies.”
Employee Stock Ownership Plan (“ESOP”)
The Company established the Advanced Drainage Systems, Inc. ESOP (the “ESOP” or the “Plan”) effective April 1, 1993 to enable eligible employees to acquire stock ownership in ADS in the form of redeemable convertible preferred shares. The Plan was funded by an existing tax-qualified profit-sharing retirement plan, as well as a 30-year term loan from ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than March 2023, the ESOP committee can direct the shares of redeemable convertible preferred stock owned by the ESOP willto be converted into shares of the Company’s common stock.
The Company is obligated to make contributions to the Plan, which, when aggregated with the Plan’s dividends, equal the amount necessary to enable the Plan to make its regularly scheduled payments of principal and interest due on its term loan to ADS. Compensation expense is recognized based upon the average annual fair value of the shares during the period which ADS receives payments on the term loan, and the number of ESOP shares allocated to participant accounts.
As disclosed in “Note 15.16. Employee Benefit Plans” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 20182019 Form 10-K, redeemable convertible preferred stock can convert to common stock upon retirement, disability, death, or vested terminations over the life of the Plan. As stated above, within 30 days following the repayment of the ESOP loan, all redeemable convertible preferred stock will be converted to common stock, which will be no later than March 2023.
The ESOP’s conversion of redeemable convertible preferred stock into common stock will have a meaningful impact on the Company’s net income, net income per share and common shares outstanding. The outstanding shares of common stock would be 31%29% greater after conversion.
Impact on Net Income – - Following the repayment of the ESOP loan discussed above, the Company will no longer be required to apply the two-class method to determine Net income per share. In addition, the Company would not be
- 33 -
Advanced Drainage Systems, Inc.
required to recognize the fair value of ESOP deferred compensation attributable to the shares of redeemable convertible preferred shares allocated.
- 41 -
Advanced Drainage Systems, Inc.
The impact of the ESOP on net income includes the fair value of 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 and not deductible for income tax purposes.
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| |||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (In thousands) |
|
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||||||||||
Net income attributable to ADS |
| $ | 15,812 |
|
| $ | 32,105 |
|
| $ | 76,762 |
|
| $ | 67,710 |
|
| ||||||||||||||||
Net income (loss) attributable to ADS |
| $ | 7,589 |
|
| $ | 28,670 |
|
| $ | (218,767 | ) |
| $ | 60,950 |
| |||||||||||||||||
ESOP special dividend compensation |
|
| — |
|
|
| — |
|
|
| 246,752 |
|
|
| — |
| |||||||||||||||||
ESOP deferred stock-based compensation |
|
| 2,724 |
|
|
| 2,737 |
|
|
| 11,113 |
|
|
| 7,946 |
|
|
|
| 5,486 |
|
|
| 4,368 |
|
|
| 11,070 |
|
|
| 8,389 |
|
Impact on Common Stock Outstanding – - The repayment of the ESOP loan and related conversion of redeemable convertible preferred shares will have an impact on the number of common shares outstanding. As shares are converted, the number of common shares outstanding will increase.
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
|
|
| Three Months Ended September 30, |
|
| Six Months Ended September 30, |
| |||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (Shares in millions) |
|
|
| (Shares in millions) |
|
| (Shares in millions) |
| |||||||||||||||||||||||
Weighted average common shares outstanding |
|
| 57.1 |
|
|
| 55.9 |
|
|
| 56.8 |
|
|
| 55.5 |
|
|
|
| 60.2 |
|
|
| 56.9 |
|
|
| 58.9 |
|
|
| 56.8 |
|
Conversion of redeemable convertible shares |
|
| 17.7 |
|
|
| 18.2 |
|
|
| 17.8 |
|
|
| 18.4 |
|
|
|
| 17.2 |
|
|
| 17.7 |
|
|
| 17.3 |
|
|
| 17.8 |
|
Financing Transactions
Secured BankPNC Term Loans - On June 22, 2017, we entered into a Second Amended and Restatedthe PNC Credit Agreement, with PNC, which amends and restates the original agreement dated as of June 12, 2013, to providewhich provided us with a $550 million Revolving Credit Facility,revolving credit facility, which is more fully described in our Fiscal 20182019 Form 10-K.
As On the Closing Date, using borrowings of December 31, 2018, the outstanding principal drawn onnew Term Loan Facility the RevolvingCompany repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $239.2 million under the PNC Credit FacilityAgreement. Concurrently with the repayment, all security interests and liens held by the Collateral Agent (as defined in the PNC Credit Agreement) securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was $126.5 million, with $414.9 million available to be drawn on the U.S. facility, net of $8.6 million of outstanding letters of credit.terminated.
ADS Mexicana Revolving Credit Facility - On June 22, 2018, the Company’s $12.0 million Revolving Credit Facility –The Company and ADS Mexicana matured. At June 22, 2018, there were no borrowings under the Revolving Credit Facility – ADS Mexicana.
ADS Mexicana’s Revolving Credit Facility was replaced byentered into an Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a capacity of $12.0 million.million on June 22, 2018. The Intercompany Note matures on June 22, 2022. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are determined by certain base rates or LIBOR rates plus an applicable margin based on the Leverage Ratio. As of December 31, 2018September 30, 2019, there were no borrowings under the Intercompany Note.
Fiscal 2019 Amendment to the Secured Bank Term Loans – On July 9, 2018, the Company amended the Second Amended and Restated Credit (the “Credit Agreement”) and the Second Amended and Restated Private Shelf Agreement (the “Private Shelf Agreement”) to amend the definition of Consolidated EBITDA and changed the timing of the quarterly rate adjustments. In addition, the amendment to the Credit Agreement clarified the process of a transition to replace LIBOR which is being phased out.
Prudential 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. On June 22, 2017, we entered into
- 34 -
Advanced Drainage Systems, Inc.
the Second Amended and Restated Private Shelf Note Agreement with Prudential, which amends and restates the agreement dated as of September 24, 2010, to provide for the issuance of secured senior notes to Prudential or its affiliatesthe Shelf Note Lenders from time to time in the aggregate principal amount of up to $175 million, which is more fully described in our Fiscal 20182019 Form 10-K. We have $75On July 29, 2019, the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $104.4 million available for issuance of senior notes under the private shelf agreement. Shelf Note Agreement using borrowings from the PNC Credit Agreement as in effect as of July 29, 2019. Concurrently with the repayment, the Prudential Shelf Noteholders authorized and directed PNC Bank, National Association, in its capacity as Collateral Agent (as defined in the Shelf Note Agreement) to release the security interests and liens securing the Shelf Note Agreement and the Shelf Note Agreement was terminated.
Bridge Credit Facility – On July 31, 2019, we entered into the Base Credit Agreement with Barclays Bank PLC, as administrative agent and the several lenders from time to time party thereto. The Base Credit Agreement provides for up to $1.3 billion as a Term Loan Facility, up to $350 million as a Revolving Facility, up to $50 million as an L/C Facility and up to $50 million, as a sublimit of the Revolving Facility.
On July 31, 2019, the Company borrowed under the Base Credit Agreement which was used to (i) finance the Merger Consideration paid in connection with the closing of the acquisition of Infiltrator Water Technologies by us which occurred on July 31, 2019 (the “Merger”), (ii) and repay the total outstanding amount as of the Closing Date
- 42 -
Advanced Drainage Systems, Inc.
under the PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred by Infiltrator Water Technologies under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Base Credit Agreement.
New Senior Secured Credit Facility - On September 24, 2019, the joint lead arrangers informed the Company that the parties had successfully completed a syndication of the remaining balance of the Bridge credit Facility.The Senior Secured Credit Facility provided for a Term Loan Facility with an initial aggregate amount of $700 million, up to $350 million as a Revolving Facility, up to $50 million as an L/C Facility and up to $50 million, as a sublimit of the Revolving Facility.
The Term Loan Facility must be repaid in equal quarterly installments commencing on January 1, 2020 and continuing on the first day of each consecutive April, July, October and January thereafter. To the extent not previously paid, all then-outstanding amounts under the Term Loan Facility are due and payable on the maturity date of the Term Loan Facility, which is seven years from the Closing Date. Borrowings under the Revolving Facility are available beginning on the Closing Date and, to the extent not previously paid, all then-outstanding amounts under the Revolving Facility are due and payable on the maturity date of the Revolving Facility, which is five years from the Closing Date.
The Senior Secured Credit Facility includes customary representations, warranties, covenants and events of default.
At Decemberthe option of the Company, borrowings under the Term Loan Facility and under the Revolving Facility (subject to certain limitations) bear interest at either a base rate (as determined pursuant to the Senior Secured Credit Facility) or at a Eurocurrency Rate, based on LIBOR (as defined in the Senior Secured Credit Facility), plus the applicable margin as set forth therein from time to time. In the case of the Revolving Facility, the applicable margin is based on the Company’s consolidated senior secured net leverage ratio (as defined in the Senior Secured Credit Facility). All borrowings under the Term Loan Facility used to finance the Merger Consideration as described above initially bear interest at a Eurocurrency Rate (as defined in the Senior Secured Credit Facility).
The Company’s obligations under the Credit Agreement have been secured by granting a first priority lien on substantially all of the Company’s assets (subject to certain exceptions and limitations), and each of Stormtech, LLC, Advanced Drainage of Ohio, Inc. and Infiltrator Water Technologies, LLC (collectively the “Guarantors”) has agreed to guarantee the obligations of the Company under the Senior Secured Credit Facility and to secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s assets (subject to certain exceptions and limitations).
The Senior Secured Credit Facility requires, if the aggregate amount of outstanding exposure under the Revolving Facility exceeds $122.5 million at the end of any fiscal quarter, the Company to maintain a consolidated senior secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2018,2020) not to exceed 4.25 to 1.00 for any four consecutive fiscal quarter periods.
The Senior Secured Credit Facility also includes other covenants, including negative covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Senior Secured Credit Facility) ability to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of their property; (iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose of all or substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make certain investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new lines of business; (x) modify certain material contractual obligations, organizational documents, accounting policies or fiscal year; or (xi) create or permit restrictions on the ability of any subsidiary of any Loan Party (as defined in the Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.
The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory prepayments (subject to certain exceptions and limitations): (i) annual prepayments (beginning with the fiscal year ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii) 100% of the net cash proceeds from any non-ordinary course sale of assets and certain casualty or condemnation
- 43 -
Advanced Drainage Systems, Inc.
events; and (iii) 100% of the net cash proceeds of indebtedness not permitted to be incurred under the Senior Secured Credit Facility.
Issuance of Senior Notes due 2027 - On September 23, 2019, the Company issued $350.0 million aggregate principal amount of its Senior Notes, pursuant to the Indenture among the Company, the Guarantors and the Trustee. The Senior Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act or to persons outside the United States under Regulation S of the Securities Act.
Interest on the Senior Notes will be payable semi-annually in cash in arrears on March 31 and September 30 of each year, commencing on March 31, 2020, at a rate of 5.000% per annum. The Senior Notes will mature on September 30, 2027. The Company used the majority of the net proceeds from the offering of the Senior Notes for the repayment of $300.0 million of its outstanding borrowings under the Company’s Bridge Loan Facility.
The Company may redeem the Senior Notes, in whole or in part, at any time on or after September 30, 2022 at established redemption prices. At any time prior to September 30, 2022, the Company may also redeem up to 40% of the Senior Notes with net cash proceeds of certain equity offerings at a redemption price equal to 105.000% of the principal balance on these notes was $100 million.amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to September 30, 2022, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium.
The Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants.
Covenant Compliance
OurThe Senior Secured Credit Facility requires, if the aggregate amount of outstanding debt agreements and instruments contain various restrictiveexposure under the Revolving Facility exceeds $122.5 million at the end of any fiscal quarter, the Company to maintain a consolidated senior secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2020) not to exceed 4.25 to 1.00 for any four consecutive fiscal quarter periods.
The Senior Secured Credit Facility also includes other covenants, including but not limitednegative covenants that, subject to limitationscertain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Credit Agreement) ability to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of their property; (iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose of all or substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make certain investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new lines of business; (x) modify certain material contractual obligations, organizational documents, accounting policies or fiscal year; or (xi) create or permit restrictions on additional indebtednessthe ability of any subsidiary of any Loan Party (as defined in the Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.
The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory prepayments (subject to certain exceptions and capital distributions, including dividend payments. The two primary debt covenantslimitations): (i) annual prepayments (beginning with the fiscal year ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii) 100% of the amended ADS Revolving Credit Facilitynet cash proceeds from any non-ordinary course sale of assets and Senior Notes include a Leverage Ratiocertain casualty or condemnation events; and an Interest 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 (or 4.25 as(iii) 100% of the datenet cash proceeds of any acquisitionsindebtedness not permitted to be incurred under the amended agreement for which the aggregate consideration is $100.0 million or greater). The Interest Coverage Ratio is calculated by dividing the sum of Consolidated EBITDA by consolidated interest expense. The current minimum ratio is 3.0 times.Senior Secured Credit Facility.
For further information, see “Note 12.11. Debt” to the Condensed Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2018 Form 10-K.this Quarterly Report. We are in compliance with our debt covenants as of December 31, 2018.September 30, 2019.
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Advanced Drainage Systems, Inc.
Universal Shelf Registration Statement
On August 1, 2019, the Company filed a universal shelf Registration Statement on Form S-3 (the “Registration Statement”) with the SEC in accordance with the Securities Act of 1933, as amended, Registration Statement was declared effective on August 14, 2019. The Registration Statement registers debt securities, common stock, preferred stock, depositary shares, warrants, purchase contracts, units, subscription rights and any combination of the foregoing, for a maximum aggregate offering price of up to $500 million, which may be sold from time to time. The terms of any securities offered under the Registration Statement and intended use of proceeds will be established at the times of the offerings and will be described in prospectus supplements filed with the SEC at the times of the offerings. The Registration Statement will have a three year term from the date of effectiveness.
Common Stock Offering
On September 10, 2019, the Company issued and sold an aggregate of 10,350,000 shares of common stock, $0.01 par value per share, which included the full exercise of the underwriters’ option to purchase additional shares, at a price of $29.75 per share, before underwriting discounts and commissions. The common stock was sold pursuant to the Company’s Registration Statement and related prospectus supplement. We received proceeds of approximately $293.6 million from the issuance after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company used the net proceeds for the repayment of a portion of the outstanding borrowings under the Senior Secured Credit Facility, with the remaining proceeds used for general corporate purposes.
Contractual Obligations as of September 30, 2019
|
| Payments Due by Period |
| |||||||||||||||||
(Amounts in thousands) |
| Total |
|
| Less than 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| More than 5 Years |
| |||||
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1) |
| $ | 1,051,963 |
|
| $ | 6,195 |
|
| $ | 15,015 |
|
| $ | 14,000 |
|
| $ | 1,016,753 |
|
Interest payments(2) |
|
| 347,930 |
|
|
| 48,808 |
|
|
| 96,464 |
|
|
| 95,308 |
|
|
| 107,350 |
|
Operating leases |
|
| 27,988 |
|
|
| 7,443 |
|
|
| 9,754 |
|
|
| 4,072 |
|
|
| 6,719 |
|
Finance leases |
|
| 84,948 |
|
|
| 25,926 |
|
|
| 37,035 |
|
|
| 15,462 |
|
|
| 6,525 |
|
Total |
| $ | 1,512,829 |
|
| $ | 88,372 |
|
| $ | 158,268 |
|
| $ | 128,842 |
|
| $ | 1,137,347 |
|
(1) | The Term Loan matures in 2026 and the Senior Notes mature in 2027. |
(2) | Based on applicable rates and pricing margins as of September 30, 2019. |
(3) | Purchase obligations include commitments with vendors to purchase raw material. |
Off-Balance Sheet Arrangements
Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 8.10. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of December 31, 2018,September 30, 2019, our South American Joint Venture had approximately $12.6$12.2 million of outstanding debt subject to our guarantees. 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
With the exception of the accounting pronouncements adopted during fiscal 20182020 discussed in “Note 1. Background and Summary of Significant Accounting Policies” and “Note 3. Revenue Recognition,5. Leases,” there have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 20182019 Form 10-K.
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Advanced Drainage Systems, Inc.
This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements. 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 “Management’s 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;
• | 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;
• | 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;
• | 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;
• | 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;
• | uncertainties surrounding the integration of acquisitions and similar transactions, including the recently completed acquisition of Infiltrator Water Technologies and the integration of Infiltrator Water Technologies; |
the effect of weather or seasonality;
• | our ability to realize the anticipated benefits from the acquisition of Infiltrator Water Technologies; |
the loss of any of our significant customers;
• | risks that the acquisition of Infiltrator Water Technologies and related transactions may involve unexpected costs, liabilities or delays |
the risks of doing business internationally;
• | 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 risks of conducting a portion of our operations through joint ventures;
• | the effect of weather or seasonality; |
our ability to expand into new geographic or product markets;
• | the loss of any of our significant customers; |
our ability to achieve the acquisition component of our growth strategy;
• | the risks of doing business internationally; |
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 remediate the material weakness in our internal control over financial reporting, including remediation of the control environment for our joint venture affiliate ADS Mexicana, S.A. de C.V. as described in “Item 9A. Controls and Procedures” of our Fiscal 2019 Form 10-K; |
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Advanced Drainage Systems, Inc.
• | our ability to expand into new geographic or product markets, including risks associated with new markets and products associated with our recent acquisition of Infiltrator Water Technologies; 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 |
our ability to protect our intellectual property rights;
• | our ability to protect our intellectual property rights; |
changes in laws and regulations, including environmental laws and regulations;
• | changes in laws and regulations, including environmental laws and regulations; |
our ability to project product mix;
• | our ability to project product mix; |
the risks associated with our current levels of indebtedness;
• | the risks associated with our current levels of indebtedness, including borrowings under our new Credit Agreement and outstanding indebtedness under our Senior Notes; |
fluctuations in our effective tax rate, including from the recently enacted Tax Cuts and Jobs Act;
• | the nature, cost and outcome of any future litigation and other legal proceedings, including any such proceedings related to our acquisition of Infiltrator Water Technologies as may be instituted against the Company and others; |
changes to our operating results, cash flows and financial condition attributable to the recently enacted Tax Cuts and Jobs Act;
• | fluctuations in our effective tax rate, including from the Tax Cuts and Jobs Act of 2017; |
our ability to meet future capital requirements and fund our liquidity needs;
• | changes to our operating results, cash flows and financial condition attributable to the Tax Cuts and Jobs Act of 2017; |
the risk that information may arise that would require the Company to make adjustments or revisions or to restate further the financial statements and other financial data for certain prior periods and any future periods;
• | our ability to meet future capital requirements and fund our liquidity needs; |
any delay in the filing of any filings with the SEC;
• | the risk that information may arise that would require the Company to make adjustments or revisions or to restate further the financial statements and other financial data for certain prior periods and any future periods; |
the review of potential weaknesses or deficiencies in the Company’s disclosure controls and procedures, and discovering further weaknesses of which we are not currently aware or which have not been detected; and
• | any delay in the filing of any filings with the SEC; |
• | the review of potential weaknesses or deficiencies in the Company’s 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.
• | 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.
We are subject to various market risks, primarily related to changes in interest rates, credit, raw material supply prices and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions. Our exposure to market risk has not
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Advanced Drainage Systems, Inc.
materially changed from what we previously disclosed in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.2019.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for evaluating the effectiveness of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) rules 13a-15(e) and 15d-15(e). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As previously disclosed in our Fiscal 2019 Form 10-K, we concluded that our internal control over financial reporting was not effective based upon the material weakness identified as of March 31, 2019. See “Item 9A - Controls and Procedures” in our Fiscal 2019 Form 10-K. Our CEO and CFO have concluded that the material weakness previously identified in the Fiscal 2019 Form 10-K was still present as of September 30, 2019 (the “Evaluation Date”). Based on thosethe material weaknesses,weakness, and the evaluation of our disclosure controls and
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Advanced Drainage Systems, Inc.
procedures, the Company’sour CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2018.the Evaluation Date.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the three months ended December 31, 2018September 30, 2019 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
During the three months ended September 30, 2019, the Company completed the Acquisition of Infiltrator Water Technologies, see “Note 3. Acquisitions” for additional information on the Acquisition. the Company is currently integrating Infiltrator Water Technologies into its operations and internal control processes and, pursuant to the SEC’s guidance that a recently acquired business may be excluded from the scope of an assessment of internal control over financial reporting in the year of acquisition, the scope of its assessment of the effectiveness of its internal controls over financial reporting at March 31, 2020 will exclude Infiltrator Water Technologies to the extent not integrated into the Company’s control environment.
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Advanced Drainage Systems, Inc.
As previously disclosed in the Company’s Fiscal 2018 Form 10-K, the Company’s historical accounting practices were the subject of an investigation by SEC’s Division of Enforcement (the “Enforcement Division”), which began in August 2015. That matter was resolved on July 10, 2018 via a settlement between the Company and the SEC. Pursuant to the settlement, the Company consented to the entry of an administrative order without admitting or denying the findings therein. The order required the Company to cease and desist from committing or causing any violations and any future violations of certain provisions of the federal securities laws and the rules promulgated thereunder and to pay a civil monetary penalty of $1.0 million, which payment has been made. The Company previously accrued an expense for the penalty amount during Fiscal 2018.
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. 1:1:15-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 alleged 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. The Second Circuit denied the petition for rehearing on November 28, 2017. On November 27, 2018, the plaintiff filed with the District Court a motion for relief from final judgment and for leave to file an amended complaint, withwhich, the defendants opposed. On July 3, 2019, the District Court. The defendants have opposedCourt denied the plaintiff’s motion and are awaiting a decision bymotion. The Plaintiff did not appeal the District Court. While itCourt’s decision and the matter is reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but it could be material.concluded.
Please see “Note 10.12. Commitments and Contingencies,” of the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for more information regarding legal proceedings.
ImportantThe following risk factors are related to the acquisition of Infiltrator Water Technologies and related financings. Additional important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in “Part I, Item 1A — Risk Factors” of our Fiscal 20182019 Form 10-K. These factors are further supplemented by those discussed in “Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 20182019 Form 10-K and in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and “Part II, Item 1 — Legal Proceedings” of this Quarterly Report on Form 10-Q.
We may be unable to successfully integrate our and Infiltrator Water Technologies’ businesses in order to realize the anticipated benefits of the acquisition or do so within the intended timeframe.
We will be required to devote significant management attention and resources to integrating the business practices and operations of Infiltrator Water Technologies with our business. We may be unable to realize the planned synergies from the acquisition or other benefits in the timeframe that we expect or at all. We continue to assess synergies that we may realize as a combined company, the realization of which will depend on a number of factors.
The success of the acquisition, including anticipated synergies, benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate our current operations with Infiltrator Water Technologies’ business. If we experience difficulties with the integration process or other unforeseen costs, the anticipated benefits and cost savings of the acquisition may not be realized fully or at all, or may take longer to realize than expected. The integration planning and implementation process will result in significant costs and divert management attention and resources. These integration matters could have an adverse effect on our combined company for an undetermined period after completion of the acquisition. In addition, the actual cost savings of the acquisition could be less than anticipated, or otherwise offset by other factors.
Additional difficulties we may encounter as part of the integration process include the following:
• | the costs of integration and compliance and the possibility that the full benefits anticipated to result from our acquisition of Infiltrator Water Technologies will not be realized; |
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Advanced Drainage Systems, Inc.
| any delay in the integration of |
• | diversion of the attention of each company’s management as a result of our acquisition of Infiltrator Water Technologies; |
• | differences in business backgrounds, corporate cultures and management philosophies that may delay successful integration; |
• | the ability to retain key employees; |
• | the ability to create and enforce uniform standards, controls, procedures, policies and information systems; |
• | the challenge of integrating complex systems, technology, networks and other assets of Infiltrator Water Technologies into those of ours in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; |
• | potential unknown liabilities and unforeseen increased expenses or delays associated with the acquisition, including costs to integrate Infiltrator Water Technologies beyond current estimates; and |
• | the disruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies. |
Any of these factors could adversely affect each company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or could reduce each company’s earnings or otherwise adversely affect our business and financial results after the acquisition. These risks are not limited to our acquisition of Infiltrator Water Technologies and could also apply to our future acquisitions.
Uncertainties associated with our acquisition of Infiltrator Water Technologies may cause a loss of management personnel and other key employees, which could adversely affect our future business, operations and financial results.
The acquisition of Infiltrator Water Technologies could disrupt our and Infiltrator Water Technologies’ businesses. We are dependent on the experience and industry knowledge of senior management and other key employees to execute our business plans, which could be disrupted by the unanticipated departure of any key member of our management team or employee base, as well as management or key employees of Infiltrator Water Technologies. Our and Infiltrator Water Technologies’ current and prospective employees may experience uncertainty about their roles within our company, which may have an adverse effect on the ability of each of us to attract or retain key management and other key personnel.
Accordingly, no assurance can be given that we will be able to attract or retain our and Infiltrator Water Technologies’ key management personnel and other key employees to the same extent that our companies have previously been able to attract or retain such employees. In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, engineering, technical, marketing and support personnel. Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel.
Our results after our acquisition of Infiltrator Water Technologies may suffer if we do not effectively manage our expanded operations following the acquisition.
Following our acquisition of Infiltrator Water Technologies, the size and complexity of our business will increase significantly beyond the current size of either our or Infiltrator Water Technologies’ existing business. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and new types of manufacturing processes and products and associated increased costs and complexity. There can be no assurances that we will be successful after completion of the acquisition or that we will realize the expected benefits currently anticipated from our acquisition of Infiltrator Water Technologies.
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Advanced Drainage Systems, Inc.
The business of Infiltrator Water Technologies may underperform relative to our expectations.
We may not be able to maintain the levels of revenue, earnings or operating efficiency that we and Infiltrator Water Technologies have achieved or might achieve separately. The business and financial performance of Infiltrator Water Technologies is subject to certain risks and uncertainties, including the risk of the loss of, or changes to, its relationships with its customers. We may be unable to achieve the same growth, revenues and profitability that Infiltrator Water Technologies has achieved in the past.
The unaudited pro forma financial information related to the acquisition may not accurately reflect our financial position or results of operations.
The unaudited pro forma financial information contained in “Note 3 - Acquisitions” to the notes to our unaudited financial statements included in this Quarterly Report and the unaudited pro forma financing information included in our Current Report on Form 8-K dated August 1, 2019, was presented for illustrative purposes only and may not be an indication of what our financial position or results of operations would have been had the Merger been completed on the dates indicated. The unaudited pro forma financial information was derived from our audited and unaudited historical financial statements along with those of Infiltrator Water Technologies, and certain adjustments and assumptions were made regarding the combined company after giving effect to the Merger. The assets and liabilities of Infiltrator Water Technologies were measured at fair value based on various preliminary estimates using assumptions that Infiltrator Water Technologies’ management believed to be reasonable utilizing information currently available. The process for estimating the fair value of acquired assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. These estimates and assumptions may be revised as additional information becomes available and as additional analyses are performed. Differences between preliminary estimates in the pro forma financial information and the final acquisition accounting will occur and could have a material impact on the pro forma financial information and the combined company’s financial position and future results of operations. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the Merger. Any potential decline in our financial condition or results of operations may cause significant variations in the trading price of our common stock following the Merger.
Our level of indebtedness could adversely affect our business, financial conditions or results of operations and prevent us from fulfilling our obligations under the agreements governing the terms of our indebtedness.
As of September 30, 2019, we had, on a consolidated basis, total indebtedness (excluding capital lease obligations) of approximately $1,052 million (excluding $8.5 million of outstanding letters of credit), excluding $341.5 million of undrawn availability under the Revolving Credit Facility portion of the Senior Secured Credit Facility. Our indebtedness could have risks. For example, it could:
• | make it more difficult for us to satisfy our obligations with respect to the Senior Notes and our Senior Secured Credit Facility; |
• | increase our vulnerability to and compromise our flexibility to plan for, or react to, general adverse economic, industry or competitive conditions, including interest rate fluctuations, because a portion of our borrowings, will be at variable rates of interest; |
• | cause us to be unable to meet the financial covenants contained in our debt agreements, or to generate cash sufficient to make required debt payments, which circumstances would have the potential of accelerating the maturity of some or all of our outstanding indebtedness; |
• | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, joint ventures and investments and other general corporate purposes, that could improve our competitive position, results of operations or share price; |
• | require us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; |
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Advanced Drainage Systems, Inc.
• | expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest; |
• | increase our vulnerability to downturns or adverse changes in general economic, industry or competitive conditions and adverse changes in government regulations; |
• | place us at a competitive disadvantage compared to our competitors that do not have the same level of indebtedness as we do and competitors that may be in a more favorable position to access additional capital resources; |
• | limit our ability to execute business development and acquisition activities to support our strategies; |
• | limit our ability to obtain additional indebtedness or equity financing for working capital, capital expenditures, service line development, debt service requirements, acquisitions and general corporate or other purposes due to applicable financial and restrictive covenants in our debt agreements; and |
• | limit our ability to refinance our substantial indebtedness on more favorable terms. |
We expect to pay expenses and to pay principal and interest on current and future debt from cash provided by from operating activities. Therefore, our ability to meet these payment obligations will depend on future financial performance and cash availability, which is subject in part to numerous economic, business and financial factors beyond our control. If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to reduce or delay expansion plans and capital expenditures, limit payment of dividends, sell material assets or operations, obtain additional capital or restructure our debt.
We borrowed under our new Credit Agreement to finance our acquisition of Infiltrator Water Technologies. Any failure by us to comply with operating and financial restrictions and covenants under the Senior Secured Credit Facility could result in the accelerated maturity of debt obligations, which could materially and adversely affect our liquidity.
In connection with our acquisition of Infiltrator Water Technologies, we replaced our PNC Credit Agreement and Shelf Note Agreement with the Senior Secured Credit Facility under the new Credit Agreement, which was used to finance the acquisition of Infiltrator Water Technologies. The Credit Agreement contains numerous restrictive covenants that limit our discretion in the operation of our business, which could, in turn, have a materially adverse effect on our business, financial condition and results of operations. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required repayments under the Credit Agreement, or if we fail to comply with the requirements of the covenant pertaining to limitations on our indebtedness, we could trigger an event of default under the Credit Agreement. Any default that is not cured or waived could result in the acceleration of the obligations under the Credit Agreement. Any such default which actually causes an acceleration of obligations could have a material adverse effect on our liquidity and financial condition. Additionally, the covenants in the Credit Agreement may restrict the conduct of our business, which could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be beneficial to our business. Our ability to comply with covenants contained in the Credit Agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions.
The credit agreement governing our Senior Secured Credit Facility and the Indenture governing our Senior Notes each permit us and our subsidiaries to incur substantial additional indebtedness. This could exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness, including additional secured debt, in the future. Although the terms of the Indenture governing the Senior Notes offered hereby and the Credit Agreement governing our Senior Secured Credit Facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial. As of September 30, 2019, after giving effect to the Transactions, we would have had, on a consolidated basis, total indebtedness (excluding capital lease obligations) of $1,052 million (excluding $8.5 million of outstanding letters of credit), excluding $341.5 million of undrawn availability under the Revolving Credit Facility portion of the Senior Secured Credit Facility. In addition,
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Advanced Drainage Systems, Inc.
the Indenture governing the Senior Notes allows us to issue additional notes under certain circumstances and to incur other types of indebtedness, which will also be guaranteed by the subsidiary guarantors. In addition, the Indenture does prevent us from incurring certain other liabilities that do not constitute “Indebtedness” (as defined in the Indenture). If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries new face could intensify.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations and to fund working capital, planned capital expenditures and expansion efforts and any strategic alliances or acquisitions we may make in the future depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, restructure or refinance our debt or sell assets. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds sought from them, and these proceeds may not be adequate to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations, and we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms.
Although we believe that our current cash position and the additional committed funding available under our Senior Secured Credit Facility is sufficient for our current operations, any reductions in our available borrowing capacity, or our inability to renew or replace our debt facilities when required or when business conditions warrant, could have a material adverse effect on our business, financial condition and results of operations. The economic conditions, credit market conditions, and economic climate affecting our industry, as well as other factors, may constrain our financing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. The market conditions and the macroeconomic conditions that affect our industry could have a material adverse effect on our ability to secure financing on favorable terms, if at all.
If financing is not available when needed, or is available on unfavorable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
The agreements and instruments governing our indebtedness impose or will impose restrictions that may limit our operating and financial flexibility.
The operating and financial covenants and restrictions in each of the Credit Agreement that governs the Senior Secured Credit Facility and the Indenture that governs the Senior Notes may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. The agreements governing our indebtedness will restrict, subject to certain important exceptions and qualifications, our and our subsidiaries’ ability to, among other things:
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Advanced Drainage Systems, Inc.
• | incur additional debt or issue certain disqualified stock and preferred stock; |
• | create liens; |
• | pay dividends or distributions or redeem or repurchase equity; |
• | prepay subordinated debt or make certain investments; |
• | transfer and sell assets; |
• | engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of their assets; |
• | enter into agreements that restrict dividends, loans and other distributions from our subsidiaries; and |
• | enter into transactions with affiliates. |
These covenants could have the effect of limiting our flexibility in planning for or reacting to changes in our business and the markets in which we compete. In addition, the agreements governing our Senior Secured Credit Facility will require us to comply with a financial maintenance covenant. Operating results below current levels or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with the financial covenant contained in the Credit Agreement. If we violate covenants under the Credit Agreement and are unable to obtain a waiver from our lenders, our indebtedness under our Senior Secured Credit Facility would be in default and could be accelerated by our lenders. Because of cross-default provisions in the agreements and instruments governing our debt, a default under one agreement or instrument could result in a default under, and the acceleration of, our other debt.
If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, on terms that are acceptable to us, or at all. If our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of the Senior Notes and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
Item 2.Unregistered Sale of Equity Securities
In February 2017, our Board of Directors authorized the repurchase of up to $50 million of our common stock. Repurchases of common stock will be made in accordance with applicable securities laws. We did not repurchase any shares of common stock during the three months ended December 31, 2018.September 30, 2019. As of December 31, 2018,September 30, 2019, approximately $42.1 million of common stock may be repurchased under the authorization. The stock repurchase program does not obligate us to acquire any particular amount of common stock and may be suspended or terminated at any time at our discretion.
None.
Not applicable.
None.
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Advanced Drainage Systems, Inc.
The following exhibits are filed herewith or incorporated herein by reference.
Exhibit Number |
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4.1 | ||
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS* |
| Inline XBRL Instance |
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101.SCH* |
| Inline XBRL Taxonomy Extension Schema. |
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101.CAL* |
| Inline XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF* |
| Inline XBRL Taxonomy Extension Definition Linkbase. |
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101.LAB* |
| Inline XBRL Taxonomy Extension Label Linkbase. |
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101.PRE* |
| Inline XBRL Taxonomy Extension Presentation Linkbase. |
104 | The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, has been formatted in Inline XBRL. |
* Filed herewith
†Management contract or compensatory plan.
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Advanced Drainage Systems, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 7,November 12, 2019
ADVANCED DRAINAGE SYSTEMS, INC. | ||
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By: |
| /s/ D. Scott Barbour |
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| D. Scott Barbour |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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By: |
| /s/ Scott A. Cottrill |
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| Scott A. Cottrill |
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| Executive Vice President, Chief Financial Officer and Secretary |
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| (Principal Financial Officer) |
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By: |
| /s/ Tim A. Makowski |
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| Tim A. Makowski |
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| Vice President, Controller, and Chief Accounting Officer |
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