Advanced Drainage Systems (WMS) Plans to Restate Prior Period Financial Statements
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Advanced Drainage Systems, Inc. (NYSE: WMS) today announced that the Company will restate its prior period financial statements and related financial information as filed with the Securities and Exchange Commission (“SEC”). The restated financial information will include the consolidated financial statements for the annual periods ended March 31, 2016, 2015 and 2014, selected annual financial information for the annual periods ended 2013 and 2012, as well as the associated consolidated financial statements for the quarterly periods for fiscal years 2016 and 2015. Accordingly, the financial statements, including the related report of independent registered public accounting firm thereon, and all press releases and similar communications issued by the Company relating to those periods should not be relied upon pending completion of the restatement. The Company intends to file its restated financial information as soon as possible.
Historically, the Company has classified its share-based awards as equity awards and recorded the associated compensation expense based on the award’s grant date fair value. Based upon an internal review of its share-based award agreements and related administrative procedures, the Company has concluded that it should have accounted for these awards as liability-classified instead of equity-classified. The fair value of liability-classified awards is remeasured at each reporting period until settlement.
Certain tax withholding provisions that were added to award agreements beginning in fiscal 2009 allowed award recipients to use net shares upon exercise of their award to satisfy tax withholding requirements in amounts greater than the minimum statutory withholding obligations. In addition, prior to the Company’s initial public offering in fiscal 2015, the Company had periodically repurchased shares resulting from option exercises within six months of the exercise date. Both of these practices would result in the liability classification for awards.
As part of its review of the foregoing compensation expense issues, the Company also determined that additional adjustments are required for historic compensation expense associated with certain executive employment agreements as well as certain stock repurchase agreements in place with members of senior management, whereby the Company was required to repurchase shares upon the employee’s death. The stock repurchase agreements were entered into in fiscal 2007 and terminated at the time of the Company’s initial public offering in fiscal 2015.
While the Company continues to assess the impact of adjusting the accounting for its compensation related agreements described above, the effect of such treatment will result in the recognition of either compensation expense or compensation benefit (reduction in compensation expense) for various reporting periods. This recognition of compensation expense or compensation benefit will have a corresponding impact to the Company’s previously reported net income. The Company is in the process of finalizing the impact these adjustments will have to its previously reported financial statements, including the impact to net income. However, due to the nature of the adjustments, the Company does not anticipate that the restatement will impact revenue or Adjusted EBITDA, a non-GAAP financial measure. The Company’s definition of Adjusted EBITDA excludes the impact of share-based compensation and in its restated filings will exclude the impact of retirement or termination related compensation expense. Additional information regarding Adjusted EBITDA is set forth below under “Non-GAAP Financial Measures”.
The Company’s review of its prior period accounting with respect to its share-based awards and other compensation matters are ongoing and subject to change.
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