Form 10-Q/A ADVANCED DRAINAGE SYSTEM For: Jun 30

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

(Amendment No. 1 to 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 June 30, 2015

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)

 

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☐

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 April 29, 2016, the registrant had 54,446,402 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 April 29, 2016, 102,223 shares of unvested restricted common stock were outstanding and 24,819,105 shares of ESOP, preferred stock, convertible into 19,090,856 shares of common stock, were outstanding. As of April 29, 2016, 73,639,481 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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TABLE OF CONTENTS

 

				Page
EXPLANATORY NOTE					1
PART I. FINANCIAL INFORMATION
ITEM 1.		Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of June  30, 2015 (Restated) and March 31, 2015 (Restated)			2
		Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 (Restated) and 2014 (Restated)			3
		Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2015 (Restated) and 2014 (Restated)			4
		Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2015 (Restated) and 2014 (Restated)			5
		Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity for the three months ended June 30, 2015 (Restated) and 2014 (Restated)			6
		Notes to the Condensed Consolidated Financial Statements			7
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			39
ITEM 4.		Controls and Procedures			40
PART II. OTHER INFORMATION
ITEM 1.		Legal Proceedings			41
ITEM 1A.		Risk Factors			41
ITEM 2.		Unregistered Sale of Equity Securities			41
ITEM 3.		Defaults Upon Senior Securities			41
ITEM 4.		Mine Safety Disclosures			41
ITEM 5.		Other Information			41
ITEM 6.		Exhibits			42
SIGNATURES					43
EXHIBIT INDEX					44

 

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EXPLANATORY NOTE

Subsequent to the issuance of the Company’s consolidated financial statements for the fiscal year ended March 31, 2016, Advanced Drainage Systems, Inc. identified errors in its historical consolidated financial statements related primarily to the accounting for stock-based compensation, as well as the compensation expense associated with certain executive employment agreements. As a result, Advanced Drainage Systems, Inc. is filing this Amendment No. 1 on Form 10-Q/A to amend and restate in their entirety the following items of its Quarterly Report on Form 10-Q for the three months ended June 30, 2015 as originally filed with the Securities and Exchange Commission on May 31, 2016 (the “Original Form 10-Q”): (i) Item 1 of Part I, “Condensed Consolidated Financial Statements,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (iii) Item 4 of Part I, “Controls and Procedures,” and (iv) Item 1A of Part II, “Risk Factors”. The Company has also updated the signature page, the certifications of the Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, respectively, and the financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101. While no other sections were affected, for the convenience of the reader, all sections included in the Original Form 10-Q are presented herein. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and does not reflect events occurring after that date, or modify or update disclosures, other than as required to reflect the restatement and to provide updated information regarding debt covenant waivers.

For further information about the restatement (the “Stock-Based Compensation Restatement”), see “Note 15. Restatement of Previously Issued Financial Statements” to our unaudited condensed consolidated financial statements included in “Part I. Financial Information” of this Form 10-Q/A. This Form 10-Q/A is being filed concurrently with the Company’s Form 10-K/A for the year ended March 31, 2016 and Forms 10-Q/A for the periods ended September 30, 2015 and December 31, 2015.

 

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PART I. FINANCIAL INFORMATION

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, as restated)⁽¹⁾

 

		As of
(Amounts in thousands, except par value)		June 30, 2015				March 31, 2015
ASSETS
Current assets:
Cash		$	4,847			$	3,623
Receivables (less allowance for doubtful accounts of $5,220 and $5,423, respectively)			229,684				154,294
Inventories			250,322				260,550
Deferred income taxes and other current assets			27,829				25,943
Total current assets			512,682				444,410
Property, plant and equipment, net			389,283				375,813
Other assets:
Goodwill			98,894				98,679
Intangible assets, net			55,761				58,055
Other assets			59,561				61,167
Total assets		$	1,116,181			$	1,038,124
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations		$	10,215			$	9,580
Current maturities of capital lease obligations			17,661				15,731
Accounts payable			109,163				111,893
Current portion of liability-classified stock-based awards			16,320				17,611
Other accrued liabilities			61,821				54,349
Accrued income taxes			10,295				6,299
Total current liabilities			225,475				215,463
Long-term debt obligation			431,754				390,315
Long-term capital lease obligations			56,515				45,503
Deferred tax liabilities			61,112				62,832
Other liabilities			41,169				38,865
Total liabilities			816,025				752,978
Commitments and contingencies (see Note 8)
Mezzanine equity:
Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized; 44,170 shares issued; 25,413 and 25,639 shares outstanding, respectively			317,665				320,490
Deferred compensation – unearned ESOP shares			(210,697	)			(212,469	)
Total mezzanine equity			106,968				108,021
Stockholders’ equity:
Common stock; $0.01 par value: 1,000,000 shares authorized; 153,560 shares issued; 53,839 and 53,522 shares outstanding, respectively			12,393				12,393
Paid-in capital			728,646				723,495
Common stock in treasury, at cost			(443,660	)			(445,065	)
Accumulated other comprehensive loss			(14,430	)			(15,521	)
Retained deficit			(105,918	)			(114,590	)
Total ADS stockholders’ equity			177,031				160,712
Noncontrolling interest in subsidiaries			16,157				16,413
Total stockholders’ equity			193,188				177,125
Total liabilities, mezzanine equity and stockholders’ equity		$	1,116,181			$	1,038,124

 

(1)	See Note 15. Restatement of Previously Issued Financial Statements

See accompanying notes to condensed consolidated financial statements.

 

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, as restated)⁽¹⁾

 

		Three Months Ended June 30,
(Amounts in thousands, except per share data)		2015				2014
Net sales		$	349,124			$	326,434
Cost of goods sold			274,647				265,129
Gross profit			74,477				61,305
Operating expenses:
Selling			21,227				19,752
General and administrative			18,685				18,968
Loss on disposal of assets or businesses			866				64
Intangible amortization			2,526				2,613
Income from operations			31,173				19,908
Other expense:
Interest expense			4,286				5,051
Derivative losses (gains) and other expense (income), net			6,580				(216	)
Income before income taxes			20,307				15,073
Income tax expense			7,879				8,010
Equity in net (income) loss of unconsolidated affiliates			(354	)			662
Net income			12,782				6,401
Less net income attributable to noncontrolling interest			1,088				875
Net income attributable to ADS			11,694				5,526
Change in fair value of Redeemable convertible preferred stock			—				(18,373	)
Dividends to Redeemable convertible preferred stockholders			(371	)			(37	)
Dividends paid to unvested restricted stockholders			(6	)			—
Net income (loss) available to common stockholders and participating securities			11,317				(12,884	)
Undistributed income allocated to participating securities			(969	)			—
Net income (loss) available to common stockholders		$	10,348			$	(12,884	)
Weighted average common shares outstanding:
Basic			53,623				47,536
Diluted			55,000				47,536
Net income (loss) per share:
Basic		$	0.19			$	(0.27	)
Diluted		$	0.19			$	(0.27	)
Cash dividends declared per share		$	0.05			$	—

 

(1)	See Note 15. Restatement of Previously Issued Financial Statements

See accompanying notes to condensed consolidated financial statements.

 

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, as restated)⁽¹⁾

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014
Net income		$	12,782			$	6,401
Other comprehensive income:
Currency translation			509				159
Total other comprehensive income			509				159
Comprehensive income			13,291				6,560
Less other comprehensive loss attributable to noncontrolling interest, net of tax			(582	)			(146	)
Less net income attributable to noncontrolling interest			1,088				875
Total comprehensive income attributable to ADS		$	12,785			$	5,831

 

(1)	See Note 15. Restatement of Previously Issued Financial Statements

See accompanying notes to condensed consolidated financial statements.

 

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, as restated)⁽¹⁾

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014
Cash Flows from Operating Activities		$	(18,142	)		$	(18,542	)
Cash Flows from Investing Activities
Capital expenditures			(10,595	)			(7,432	)
Proceeds from disposition of assets or businesses			—				60
Investment in unconsolidated affiliates			—				(7,566	)
Additions of capitalized software			(940	)			(408	)
Issuance of note receivable to related party			(3,854	)			—
Other investing activities			(172	)			(310	)
Net cash used in investing activities			(15,561	)			(15,656	)
Cash Flows from Financing Activities
Proceeds from Revolving Credit Facility			130,400				91,000
Payments on Revolving Credit Facility			(90,100	)			(50,600	)
Payments on term loan			(1,875	)			(1,250	)
Proceeds from notes, mortgages and other debt			6,926				—
Payments of notes, mortgages, and other debt			(3,217	)			(317	)
Payments on capital lease obligations			(4,192	)			(3,504	)
Cash dividends paid			(3,784	)			(509	)
Other financing activities			587				253
Net cash provided by financing activities			34,745				35,073
Effect of exchange rate changes on cash			182				(86	)
Net change in cash			1,224				789
Cash at beginning of period			3,623				3,931
Cash at end of period		$	4,847			$	4,720

 

(1)	See Note 15. Restatement of Previously Issued Financial Statements

See accompanying notes to condensed consolidated financial statements.

 

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY

(Unaudited, as restated)⁽¹⁾

 

		Common Stock								Paid-In Capital				Common Stock in Treasury								Accumulated Other Comprehensive Loss				Retained Deficit				Total ADS Stockholders’ (Deficit) Equity				Non- controlling Interest in Subsidiaries				Total Stockholders’ (Deficit) Equity				Redeemable Common Stock								Redeemable Convertible Preferred Stock								Deferred Compensation – Unearned ESOP Shares								Total Mezzanine Equity
(Amounts in thousands)		Shares				Amount								Shares				Amount																								Shares				Amount				Shares				Amount				Shares				Amount
Balance at April 1, 2014, as previously reported			109,951			$	11,957			$	12,438				100,810			$	(448,439	)		$	(6,830	)		$	(2,412	)		$	(433,286	)		$	18,584			$	(414,702	)			38,320			$	549,119				26,129			$	291,720				17,727			$	(197,888	)		$	642,951
Cumulative revision and restatement adjustments			(17	)			—			$	(4,069	)			—				—				—			$	(34,268	)		$	(38,337	)			—			$	(38,337	)			17			$	240				—				—				—				—			$	240
Balance April 1, 2014 (Unaudited, As Restated)(1)			109,934			$	11,957			$	8,369				100,810			$	(448,439	)		$	(6,830	)		$	(36,680	)		$	(471,623	)		$	18,584			$	(453,039	)			38,337			$	549,359				26,129			$	291,720				17,727			$	(197,888	)		$	643,191
Net income			—				—				—				—				—				—				5,526				5,526				875				6,401				—				—				—				—				—				—				—
Other comprehensive income (loss)			—				—				—				—				—				305				—				305				(146	)			159				—				—				—				—				—				—				—
Dividend paid to noncontrolling interest holder			—				—				—				—				—				—				—				—				(509	)			(509	)			—				—				—				—				—				—				—
Allocation of ESOP shares to participants for compensation			—				—				(900	)			—				—				—				—				(900	)			—				(900	)			—				—				—				—				(269	)			3,587				3,587
Exercise of common stock options			—				—				931				(56	)			251				—				—				1,182				—				1,182				—				—				—				—				—				—				—
Redemption of common shares to exercise stock options			—				—				93				7				(93	)			—				—				—				—				—				—				—				—				—				—				—				—
Restricted stock awards			—				—				(592	)			(73	)			289				—				—				(303	)			—				(303	)			—				—				—				—				—				—				—
Adjustments to redeemable convertible preferred stock fair value measurement			—				—				(7,901	)			—				—				—				(10,472	)			(18,373	)			—				(18,373	)			—				—				—				57,178				—				(38,805	)			18,373
Adjustments to redeemable common stock fair value measurement			—				—				—				—				—				—				(110,312	)			(110,312	)			—				(110,312	)			—				110,312				—				—				—				—				110,312
Adjustments to redeemable common stock agreements			(105	)			—				—				—				—				—				(1,813	)			(1,813	)			—				(1,813	)			105				1,813				—				—				—				—				1,813
Balance June 30, 2014 (Unaudited, as Restated)(1)			109,829			$	11,957			$	—				100,688			$	(447,992	)		$	(6,525	)		$	(153,751	)		$	(596,311	)		$	18,804			$	(577,507	)			38,442			$	661,484				26,129			$	348,898				17,458			$	(233,106	)		$	777,276
Balance at April 1, 2015, as previously reported			153,560			$	12,393			$	700,977				100,038			$	(445,065	)		$	(15,521	)		$	(62,621	)		$	190,163			$	16,413			$	206,576				—				—				25,639			$	320,490				16,990			$	(212,469	)		$	108,021
Cumulative revision and restatement adjustments			—				—				22,518				—				—				—				(51,969	)			(29,451	)			—				(29,451	)			—				—				—				—				—				—				—
Balance April 1, 2015 (Unaudited, As Restated)(1)			153,560				12,393				723,495				100,038				(445,065	)			(15,521	)			(114,590	)			160,712				16,413				177,125				—				—				25,639				320,490				16,990			$	(212,469	)		$	108,021
Net income			—				—				—				—				—				—				11,694				11,694				1,088				12,782				—				—				—				—				—				—				—
Other comprehensive income (loss)			—				—				—				—				—				1,091				—				1,091				(582	)			509				—				—				—				—				—				—				—
Redeemable convertible preferred stock dividends			—				—				—				—				—				—				(333	)			(333	)			—				(333	)			—				—				—				—				—				—				—
Common stock dividend ($ 0.05 per share)			—				—				—				—				—				—				(2,689	)			(2,689	)			—				(2,689	)			—				—				—				—				—				—
Dividend paid to noncontrolling interest holder			—				—				—				—				—				—				—				—				(762	)			(762	)			—				—				—				—				—				—				—
Allocation of ESOP shares to participants for compensation			—				—				1,353								—				—				—				1,353				—				1,353				—				—				—				—				(142	)			1,772				1,772
Exercise of common stock options			—				—				1,773				(77	)			341				—				—				2,114				—				2,114				—				—				—				—				—				—				—
Stock-based compensation			—				—				—				—				—				—				—				—				—				—				—				—				—				—				—				—				—
Restricted stock awards			—				—				(27	)			(66	)			291				—				—				264				—				264				—				—				—				—				—				—				—
ESOP distribution in common stock			—				—				2,052				(174	)			773				—				—				2,825				—				2,825				—				—				(226	)			(2,825	)			—				—				(2,825	)
Balance June 30, 2015 (Unaudited, as Restated)(1)			153,560			$	12,393			$	728,646				99,721			$	(443,660	)		$	(14,430	)		$	(105,918	)		$	177,031			$	16,157			$	193,188				—			$	—				25,413			$	317,665				16,848			$	(210,697	)		$	106,968

 

(1)	See Note 15. Restatement of Previously Issued Financial Statements

See accompanying notes to condensed consolidated financial statements.

 

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, AS RESTATED)

(Amounts in thousands, except per share data)

 

1.	BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Advanced Drainage Systems, Inc. (collectively with its subsidiaries referred to as “ADS”, the “Company”, “we”, “us” and “our”), incorporated in Delaware, designs, manufactures and markets high performance thermoplastic corrugated pipe and related water management products, primarily in North and South America and Europe. Our broad product line includes corrugated high density polyethylene (or “HDPE”) pipe, polypropylene (or “PP”) pipe and related water management products.

The Company is managed based primarily on the geographies in which it operates and reports results of operations in two reportable segments. The reportable segments are Domestic and International.

Historically, sales of the 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.

2014 Initial Public Offering (“IPO”)

On July 11, 2014, in anticipation of the IPO, we executed a 4.707-for-one split of our common and our preferred stock. The effect of the stock split on outstanding shares and earnings per share has been retroactively applied to all periods presented.

On July 25, 2014, we completed the IPO of our common stock, which resulted in the sale by the Company of 5,289 shares of common stock. We received total proceeds from the IPO of $79,131 after excluding underwriter discounts and commissions of $5,501, based upon the price to the public of $16.00 per share. After deducting other offering expenses, we used the net proceeds to reduce the outstanding indebtedness under the revolving portion of our credit facility. The common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “WMS.”

On August 22, 2014, an additional 600 shares of common stock were sold by certain selling stockholders of the Company as a result of the partial exercise by the underwriters of the over-allotment option granted by the selling stockholders to the underwriters in connection with the IPO. The shares were sold at the public offering price of $16.00 per share. The Company did not receive any proceeds from the sale of such additional shares.

2014 Secondary Public Offering

On December 9, 2014, we completed a secondary public offering of our common stock, which resulted in the sale of 10,000 shares of common stock by a certain selling stockholder of the Company at a public offering price of $21.25. We did not receive any proceeds from the sale of shares by the selling stockholder.

On December 15, 2014, an additional 1,500 shares of common stock were sold by a certain selling stockholder of the Company as a result of the full exercise by the underwriters of the over-allotment option granted by the selling stockholder to the underwriters in connection with the secondary public offering. The shares were sold at the public offering price of $21.25 per share. The Company did not receive any proceeds from the sale of such additional shares.

Basis of Presentation

The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Condensed Consolidated Balance Sheet as of March 31, 2015 was derived from audited financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2015 (“Fiscal 2015 Form 10-K”). In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, in addition to the restatement adjustments described in Note. 15 Restatement of Previously Issued Financial Statements, necessary to present fairly its financial position as of June 30, 2015 and the results of operations for the three months ended June 30, 2015 and 2014 and cash flows for the three months ended June 30, 2015 and 2014. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, filed in Annual Report on Form 10-K/A for the year ended March 31, 2016 (“Fiscal 2016 Form 10-K/A”), filed concurrently with this Form 10-Q/A.

 

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Principles of Consolidation

Our condensed consolidated financial statements include the Company, our wholly-owned subsidiaries, our majority-owned subsidiaries, including ADS Mexicana, S.A. de C.V. (together with its affiliate ADS Corporativo, S.A. de C.V., “ADS Mexicana”) and variable interest entities (“VIEs”) of which we are the primary beneficiary. We use the equity method of accounting for equity investments where we exercise significant influence but do not hold a controlling financial interest. Such investments are recorded in Other assets in our Condensed Consolidated Balance Sheets and the related equity earnings from these investments are included in Equity in net (income) loss of unconsolidated affiliates in our Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.

Recent Accounting Pronouncements

Stock-Based Compensation — In March 2016, the Financial Accounting Standards Board issued an accounting standards update which is intended to simplify certain aspects of the accounting for stock-based compensation. This amendment contains changes to the accounting for excess tax benefits, whereby excess tax benefits will be recognized in the income statement rather than in additional paid-in capital on the balance sheet. The amendment also contains potential changes to the accounting for forfeitures, whereby entities can elect to either continue to apply the current GAAP requirement to estimate forfeitures when determining compensation expense, or to alternatively reverse the compensation expense of forfeited awards when they occur. In addition, the amendment also modifies the net-share settlement liability classification exception for statutory income tax withholdings, whereby the new guidance allows an employer with a statutory income tax withholding obligation to withhold shares with a fair value up to the maximum statutory tax rate in the employee’s applicable jurisdiction. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within those years, and early adoption is permitted. We expect to adopt this standard effective April 1, 2017. We are currently evaluating the impact of this standard on our consolidated financial statements.

With the exception of the pronouncement described above, there have been no new accounting pronouncements issued since the filing of our Annual Report on Form 10-K for the year ended March 31, 2015 (“Fiscal 2015 Form 10-K”) that have significance, or potential significance, to our condensed consolidated financial statements.

 

2.	INVENTORIES

Inventories as of June 30, 2015 and March 31, 2015 consisted of the following:

 

(Amounts in thousands)		June 30, 2015				March 31, 2015
Raw materials		$	52,734			$	50,198
Finished goods			197,588				210,352
Total inventories		$	250,322			$	260,550

We had no work-in-process inventories as of June 30, 2015 and March 31, 2015.

 

3.	GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in carrying amount of goodwill by reportable segment is as follows:

 

(Amounts in thousands)		Domestic				International				Total
Balance at March 31, 2015		$	87,507			$	11,172			$	98,679
Currency translation			—				215				215
Balance at June 30, 2015		$	87,507			$	11,387			$	98,894

 

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Intangible Assets

Intangible assets as of June 30, 2015 and March 31, 2015 consisted of the following:

 

		June 30, 2015												March 31, 2015
(Amounts in thousands)		Gross Intangible				Accumulated Amortization				Net Intangible				Gross Intangible				Accumulated Amortization				Net Intangible
Definite-lived intangible assets
Developed technology		$	40,579			$	(27,358	)		$	13,221			$	40,579			$	(26,405	)		$	14,174
Customer relationships			35,568				(19,501	)			16,067				43,167				(26,113	)			17,054
Patents			6,617				(3,703	)			2,914				6,547				(3,550	)			2,997
Non-compete and other contractual agreements			1,256				(644	)			612				1,365				(691	)			674
Trademarks and tradenames			14,313				(3,317	)			10,996				14,248				(3,051	)			11,197
Total definite-lived intangible assets			98,333				(54,523	)			43,810				105,906				(59,810	)			46,096
Indefinite-lived intangible assets
Trademarks			11,951				—				11,951				11,959				—				11,959
Total intangible assets		$	110,284			$	(54,523	)		$	55,761			$	117,865			$	(59,810	)		$	58,055

 

4.	FAIR VALUE MEASUREMENT

The fair value measurements and disclosure principles of ASC 820 - Fair Value Measurements and Disclosures define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements. These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access as of the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

When applying fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the periods presented. Our fair value estimates take into consideration the credit risk of both the Company and our counterparties.

When active market quotes are not available for financial assets and liabilities, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves, foreign currency rates and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value. Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future cash flows based on internal and external inputs.

Recurring Fair Value Measurements

The assets and liabilities carried at fair value as of June 30, 2015 and March 31, 2015 were as follows:

 

		June 30, 2015
(Amounts in thousands)		Total				Level 1				Level 2				Level 3
Assets:
Derivative assets – diesel fuel contracts		$	373			$	—			$	373			$	—
Total assets at fair value on a recurring basis		$	373			$	—			$	373			$	—
Liabilities:
Derivative liability - interest rate swaps		$	682			$	—			$	682			$	—
Derivative liability - diesel fuel contracts			1,956				—				1,956				—
Derivative liability - propylene swaps			10,205				—				10,205				—
Derivative liability - foreign currency contracts			11				—				11				—
Contingent consideration for acquisitions			2,285				—				—				2,285
Total liabilities at fair value on a recurring basis		$	15,139			$	—			$	12,854			$	2,285

 

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		March 31, 2015
(Amounts in thousands)		Total				Level 1				Level 2				Level 3
Assets:
Derivative assets - currency forward contracts		$	28			$	—			$	28			$	—
Total assets at fair value on a recurring basis		$	28			$	—			$	28			$	—
Liabilities:
Derivative liability - interest rate swaps		$	765			$	—			$	765			$	—
Derivative liability - diesel fuel contracts			2,841				—				2,841				—
Derivative liability - propylene swaps			5,142				—				5,142				—
Contingent consideration for acquisitions			2,444				—				—				2,444
Total liabilities at fair value on a recurring basis		$	11,192			$	—			$	8,748			$	2,444

Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the three months ended June 30, 2015 and 2014 were as follows:

 

(amounts in thousands)		Contingent consideration
Balance at March 31, 2015		$	2,444
Change in fair value			55
Payments of contingent consideration liability			(214	)
Balance at June 30, 2015		$	2,285

 

		Three Months Ended June 30, 2014
(amounts in thousands)		Contingent consideration				Executive stock repurchase agreements				Redeemable common stock				Redeemable convertible preferred stock				Deferred compensation – unearned ESOP shares				Total
Balance at March 31, 2014		$	2,898			$	16,934			$	549,359			$	291,720			$	(197,888	)		$	663,023
Allocation of ESOP shares to participants			—				—				—				—				3,587				3,587
Change in fair value			(18	)			2,059				112,125				57,178				(38,805	)			132,539
Payments of contingent consideration liability			(183	)			—				—				—				—				(183	)
Balance at June 30, 2014		$	2,697			$	18,993			$	661,484			$	348,898			$	(233,106	)		$	798,966

For the three months ended June 30, 2015 and 2014, respectively, there were no transfers in or out of Levels 1, 2, and 3.

Valuation of our Contingent Consideration for Acquisitions

The fair values of the contingent consideration payables for prior period acquisitions were calculated with reference to the estimated future value of the Inserta Tee and FleXstorm businesses, which are based on a discounted cash flow model. The undiscounted value is discounted to the present value using a market discount rate. The categorization of the framework used to price this liability is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.

Valuation of our Redeemable Common Stock and Executive Stock Repurchase Agreements Obligations

Prior to July 2014, the Company had certain shares of common stock outstanding allowing the holder to put its shares to us for cash. This Redeemable common stock was historically recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value were recorded in Retained earnings. Historically, the fair value of a share of common stock was determined by management by applying industry-appropriate multiples to EBITDA and performing a discounted cash flow analysis. Under the industry-appropriate multiples approach, to arrive at concluded multiples, we considered differences between the risk and return characteristics of ADS and the guideline companies. Under the

 

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discounted cash flow analysis, the cash flows expected to be generated by the Company were discounted to their present value equivalent using a rate of return that reflects the relative risk of an investment in ADS, as well as the time value of money. This return was an overall rate based upon the individual rates of return for invested capital (equity and interest-bearing debt). The return, known as the weighted average cost of capital (“WACC”), was calculated by weighting the required returns on interest-bearing debt and common stock in proportion to their estimated percentages in an expected capital structure. The WACC used was 11% as of June 30, 2014. An increase in the WACC would decrease the fair value of the Redeemable common stock. The categorization of the framework used to price this temporary equity was considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.

The redemption feature of our Redeemable common stock allowing the holder to put its shares to us for cash, as discussed in the previous paragraph, was not in effect upon effectiveness of the IPO on July 25, 2014. As a result, the Redeemable common stock was recorded as mezzanine equity at fair value through the effective date of the IPO and was subsequently reclassified at that fair value to stockholders’ equity. See Note 1. Background and Summary of Significant Accounting Policies for more information on the IPO.

The liability associated with the executive stock repurchase agreements was valued on the same basis as the Redeemable common stock, and as such is also considered a Level 3 measurement. The executive stock repurchase agreements were terminated upon the IPO. As a result, this liability was recorded at fair value through the effective date of the IPO and was subsequently reclassified at that fair value to stockholders’ equity.

Valuation of our Redeemable Convertible Preferred Stock

The Trustee of the Company’s ESOP has the ability to put the shares of our Redeemable convertible preferred stock to the Company. Prior to July 2014, our Redeemable convertible preferred stock was recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value were recorded in Retained earnings. Accordingly, we estimated the fair value of the Redeemable Convertible Preferred Stock through estimating the fair value of the Company’s common stock and applying certain adjustments including for the fair value of the total dividends to be received and assuming conversion of the Redeemable convertible preferred stock to common stock at the stated conversion ratio per our Certificate of Incorporation. The categorization of the framework used to price this temporary equity was considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.

Upon the effective date of the IPO, the redemption feature of our Redeemable convertible preferred stock allowing the Trustee of the Company’s ESOP to put shares to us for cash was no longer applicable. However, if our common stock, which our Redeemable convertible preferred stock may convert to, is no longer a “registration-type class of security” (e.g., in the event of a delisting), the option held by the Trustee, which granted it the ability to put the shares of our Redeemable convertible preferred stock to us, would then become applicable. Preferred securities that become redeemable upon a contingent event that is not solely within the control of the Company should be classified outside of equity. As of June 30, 2015, the Company has determined that it is not probable that the redemption feature will become applicable. Since the Redeemable convertible preferred stock is not currently redeemable and it is not probable that the instrument will become redeemable, subsequent adjustment to fair value is not required. As such, the Redeemable convertible preferred stock was recorded to fair value at the effective date of the IPO on July 25, 2014 and will remain in mezzanine equity without further adjustment to carrying value unless it becomes probable that the redemption feature will become applicable. See Note 1. Background and Summary of Significant Accounting Policies for more information on the IPO.

Nonrecurring Fair Value Measurements

Valuation of our Goodwill and Indefinite Lived Intangible Assets

Goodwill and indefinite lived intangible assets are tested for impairment annually as of March 31 or whenever events or changes in circumstances indicate the carrying value may be greater than fair value.

 

5.	RELATED PARTY TRANSACTIONS

ADS Mexicana

ADS conducts business in Mexico and Central America through its joint venture ADS Mexicana. ADS owns 51% of the outstanding stock of ADS Mexicana and consolidates ADS Mexicana for financial reporting purposes. During the three months ended June 30, 2015 and 2014, ADS Mexicana compensated certain owners and former owners of Grupo Altima, the joint venture partner of ADS Mexicana, for consulting services related to the operations of the business. These cash payments totaled $63 and $75 for the three months ended June 30, 2015 and 2014, respectively.

 

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Occasionally, ADS and ADS Mexicana jointly enter into agreements for pipe sales with their related parties which totaled $0 and $1,312 for the three months ended June 30, 2015 and 2014, respectively. Outstanding receivables related to these sales were $865 and $1,005 as of June 30, 2015 and March 31, 2015, respectively.

In April 2015, ADS Mexicana borrowed $3,000 under a revolving credit facility arrangement with Scotia Bank and loaned that amount to ADS, and such loan was repaid in May 2015. In June 2015, ADS Mexicana borrowed $3,854 under the Scotia Bank credit facility and loaned it to an entity owned by a Groupo Altima owner, and such loan was repaid in July 2015. ADS does not guarantee the borrowings from this facility and therefore, does not anticipate any required contributions related to the balance of this credit facility.

We are the guarantor of 100% of ADS Mexicana’s credit facility and our maximum potential payment under this guarantee totals $12,000.

South American Joint Venture

The Tuberias Tigre – ADS Limitada joint venture (“South American Joint Venture”) manufactures and sells HDPE corrugated pipe in the South American market. We are the guarantor for 50% of the South American Joint Venture’s credit facility, and the debt guarantee is shared equally with the joint venture partner. Our maximum potential obligation under this guarantee totals $7,400 as of June 30, 2015. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $19,000. This credit facility allows borrowings in either Chilean pesos or US dollars at a fixed interest rate determined at inception of each draw on the facility. The guarantee of South American Joint Venture’s debt is for the life of the credit facility which matures on February 5, 2017. ADS does not anticipate any required contributions related to the balance of this credit facility. As of June 30, 2015 and March 31, 2015, the outstanding principal balances of the credit facility including letters of credit were $14,700 and $13,600, respectively. The weighted average interest rate as of June 30, 2015 was 3.25% on U.S. dollar denominated loans and 6.32% on Chilean peso denominated loans.

ADS and the South American Joint Venture have entered into shared services arrangements in order to execute the joint venture services. Included within these arrangements are the lease of an office and plant location used to conduct business and operating expenses related to these leased facilities. Occasionally, ADS and South American Joint Venture jointly enter into agreements for pipe sales with their related parties which totaled $699 and $317 for the three months ended June 30, 2015 and 2014, respectively.

BaySaver

Additionally, ADS holds an equity method investment in BaySaver Technologies, LLC (“BaySaver”), which is 55% owned by our wholly-owned subsidiary ADS Ventures, Inc. This equity method investment is a joint venture that was established to produce and distribute water quality filters and separators used in the removal of sediment and pollution from storm water.

ADS and BaySaver have entered into shared services arrangements in order to execute the joint venture services. Included within these arrangements are the lease of a plant and adjacent yard used to conduct business and operating expenses related to the leased facility. Occasionally, ADS and BaySaver jointly enter into agreements for sales of pipe and Allied Products with their related parties in immaterial amounts.

See Note 14. Subsequent Events – Subsequent Event Related to the Acquisition of an Additional Interest in BaySaver for information about the Company’s acquisition of a controlling interest in BaySaver in July 2015.

 

6.

DEBT

Long-term debt as of June 30, 2015 and March 31, 2015 consisted of the following:

 

(Amounts in thousands)		June 30, 2015				March 31, 2015
Bank Term Loans
Revolving Credit Facility — ADS		$	245,400			$	205,100
Term Note			89,375				91,250
Senior Notes payable			100,000				100,000
ADS Mexicana credit facility			3,854				—
Industrial revenue bonds			3,340				3,545
Total			441,969				399,895
Current maturities			(10,215	)			(9,580	)
Long-term debt obligation		$	431,754			$	390,315

 

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ADS Mexicana Scotia Bank Revolving Credit Facility

On December 11, 2014, our joint venture, ADS Mexicana, entered into a credit agreement with Scotia Bank. The credit agreement provides for revolving loans up to a maximum aggregate principal amount of $5,000. The proceeds of the revolving credit facility are primarily used to cover short-term investment and working capital needs. The interest rates of the revolving credit facilities are determined by LIBOR rates, Tasa de Interes Interbancaria de Equilibrio (TIIE) or the Costos de Captacion rates, plus an applicable margin. The applicable interest rate for the outstanding loan was 4.81% as of June 30, 2015. The Scotia Bank revolving credit facility matures on December 11, 2017. The obligations under the revolving credit facility are not guaranteed by ADS. As of June 30, 2015, there was $3,854 outstanding principal drawn on the Scotia Bank revolving credit facility with $1,146 available to be drawn.

 

7.	DERIVATIVE TRANSACTIONS

The Company uses interest rate swaps, commodity options in the form of collars and swaps, and foreign currency forward contracts to manage its various exposures to interest rate, commodity price, and exchange rate fluctuations. For interest rate swaps, the difference between the spot rate and applicable base rate is recorded in interest expense. For collars, commodity swaps and foreign currency forward contracts, contract settlement gains and losses and gains and losses related to the mark-to-market adjustments for changes in fair value of the derivative contracts are recorded in the Condensed Consolidated Statements of Operations as Derivative losses (gains) and other expense (income), net. The Company recognized losses on mark-to-market adjustments for changes in fair value on derivative contracts of $3,761 and $96 for the three months ended June 30, 2015 and 2014, respectively.

A summary of the fair value of derivatives at June 30, 2015 and March 31, 2015 is presented below:

 

		June 30, 2015
		Assets								Liabilities
(Amounts in thousands)		Receivables				Other assets				Other accrued liabilities				Other liabilities
Interest rate swaps		$	—			$	—			$	—			$	(682	)
Foreign exchange forward contracts			—				—				(11	)			—
Diesel fuel option collars and swaps			287				86				(1,370	)			(586	)
Propylene swaps			—				—				(7,595	)			(2,610	)
		March 31, 2015
		Assets								Liabilities
(Amounts in thousands)		Receivables				Other assets				Other accrued liabilities				Other liabilities
Interest rate swaps		$	—			$	—			$	(150	)		$	(615	)
Foreign exchange forward contracts			28				—				—				—
Diesel fuel option collars and swaps			—				—				(1,883	)			(958	)
Propylene swaps			—				—				(4,412	)			(730	)

 

8.	COMMITMENTS AND CONTINGENCIES

Purchase Commitments

We will, from time to time, secure supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts are short term in nature and occur in the ordinary course of business. Under such purchase contracts, we have agreed to purchase resin over the period July 2015 through December 2015 at a committed purchase cost of $26,580.

Litigation

On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all others similarly situated v. Advanced Drainage Systems, Inc., et al. (Case No. 1:15-cv-05955-KPF), was commenced in the U.S. District Court for the Southern District of New York, naming the Company, along with Joseph A. Chlapaty, the Company’s Chief Executive Officer, and Mark B. Sturgeon, the Company’s former Chief Financial Officer, as defendants and alleging violations of the federal securities laws. An amended complaint was filed on April 28, 2016. The amended complaint alleges that the Company made material misrepresentations and/or omissions of material fact in its public disclosures during the period from July 25, 2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. Plaintiffs seek an unspecified amount of monetary damages on behalf of the

 

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putative class and an award of costs and expenses, including counsel fees and expert fees. The Company believes that it has valid and meritorious defenses and will vigorously defend against these allegations, but litigation is subject to many uncertainties and the outcome of this matter is not predictable with assurance. While it is reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but they could be material.

On August 12, 2015, the SEC Division of Enforcement (“Enforcement Division”) informed the Company that it was conducting an informal inquiry with respect to the Company. As part of this inquiry, the Enforcement Division requested the voluntary production of certain documents generally related to the Company’s accounting practices. Subsequent to the initial voluntary production request, the Company received document subpoenas from the Enforcement Division pursuant to a formal order of investigation. The Company has from the outset cooperated with the Enforcement Division’s investigation and intends to continue to do so. While it is reasonably possible that this investigation ultimately could be resolved unfavorably to the Company, the Company is currently unable to estimate the range of possible losses, but they could be material.

We are involved from time to time in various legal proceedings that arise in the ordinary course of our business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. We believe that such litigation, claims, and administrative proceedings will not have a material adverse impact on our financial position or our results of operations. We record a liability when a loss is considered probable, and the amount can be reasonably estimated. In management’s opinion, none of these proceedings are material in relation to our consolidated operations, cash flows, or financial position, and we have adequate accrued liabilities to cover our estimated probable loss exposure.

 

9.	ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in the balance of Accumulated other comprehensive loss (“AOCL”) for the three months ending June 30, which consists entirely of foreign currency translation gains (losses):

 

(Amounts in thousands)		Accumulated Other Comprehensive Loss
Balance at April 1, 2014		$	(6,830	)
Other comprehensive income			305
Balance at June 30, 2014		$	(6,525	)
Balance at April 1, 2015			(15,521	)
Other comprehensive income			1,091
Balance at June 30, 2015		$	(14,430	)

 

10.	INCOME TAXES

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 onetime charges, as well as discrete events. For the three months ended June 30, 2015 and 2014, the Company utilized an effective tax rate of 38.8% and 53.1%, respectively, to calculate its provision for income taxes. These rates are higher than the federal statutory rate of 35% due principally to state and local taxes and non-deductible expenses, partially offset by foreign income taxed at lower rates.

 

11.	NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated by dividing the Net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the Net income (loss) attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period.

Holders of unvested restricted stock have nonforfeitable rights to dividends when declared on common stock, and holders of Redeemable convertible preferred stock participate in dividends on an as-converted basis when declared on common stock. As a result, unvested restricted stock and Redeemable convertible preferred stock meet the definition of participating securities, which requires us to apply the two-class method to compute both basic and diluted net income (loss) per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders.

 

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The dilutive effect of stock options and unvested restricted stock is based on the more dilutive of the treasury stock method or the diluted two-class method. In computing diluted net income (loss) per share, income available to common shareholders used in the basic net income (loss) per share calculation (numerator) is adjusted, subject to sequencing rules, for certain adjustments that would result from the assumed issuance of potential common shares. Diluted net income (loss) per share assumes the Redeemable convertible preferred stock would have been cash settled as we had the choice of settling in cash or shares, and we had demonstrated past practice and intent of cash settlement prior to the effective date of the IPO. Therefore, these shares are excluded from the calculation through the effective date of the IPO. After the effective date of the IPO, Management’s intent is to share settle; therefore, these shares are included in the calculation from July 26, 2014 through June 30, 2015, if dilutive. For purposes of the calculation of diluted net income (loss) per share, stock options and unvested restricted stock are considered to be potential common stock and are only included in the calculations when their effect is dilutive.

Prior to the effective date of the IPO, the Company’s Redeemable common stock was included in the weighted-average number of common shares outstanding for calculating basic and diluted net income (loss) per share.

The following table presents information necessary to calculate net income (loss) per share for the three months ended June 30, 2015 and 2014, as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive:

 

		Three Months Ended June 30,
(Amounts in thousands, except per share data)		2015				2014
NET INCOME (LOSS) PER SHARE—BASIC:
Net income attributable to ADS		$	11,694			$	5,526
Adjustment for:
Change in fair value of Redeemable convertible preferred stock			—				(18,373	)
Dividends to Redeemable convertible preferred stockholders			(371	)			(37	)
Dividends paid to unvested restricted stockholders			(6	)			—
Net income (loss) available to common stockholders and participating securities			11,317				(12,884	)
Undistributed income allocated to participating securities			(969	)			—
Net income (loss) available to common stockholders – Basic			10,348				(12,884	)
Weighted average number of common shares outstanding – Basic			53,623				47,536
Net income (loss) per common share – Basic		$	0.19			$	(0.27	)
NET INCOME (LOSS) PER SHARE—DILUTED:
Net income (loss) available to common stockholders – Basic		$	10,348			$	(12,884	)
Weighted average number of common shares outstanding – Basic			53,623				47,536
Assumed exercise of stock options			1,377				—
Weighted average number of common shares outstanding – Diluted			55,000				47,536
Net income (loss) per common share – Diluted		$	0.19			$	(0.27	)
Potentially dilutive securities excluded as anti-dilutive			6,688				86

 

12.	BUSINESS SEGMENTS INFORMATION

We operate our business in two distinct operating and reportable segments based on the markets we serve: “Domestic” and “International”. The Chief Operating Decision Maker (“CODM”) evaluates segment reporting based on net sales and Segment Adjusted EBITDA (a non-GAAP measure). We calculate Segment Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses.

Domestic

Our Domestic segment manufactures and markets products throughout the United States. We maintain and serve these markets through strong product distribution relationships with many of the largest national and independent waterworks distributors, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the U.S. We also sell through a broad variety of buying groups and co-ops in the United States. Products include Singlewall pipe, N-12 HDPE pipe sold into the Storm sewer and Infrastructure markets, High Performance PP pipe sold into the Storm sewer and sanitary sewer markets, and our broad line of Allied Products including StormTech, Nyloplast, Arc Septic Chambers, Inserta Tee, BaySaver filters and water quality structures, Fittings, and FleXstorm. Our Domestic segment sales are diversified across all regions of the country.

 

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International

Our International segment manufactures and markets products in regions outside of the United States, with a growth strategy focused on our owned facilities in Canada and through our joint ventures, with local partners in Mexico, Central America and South America. Our joint venture strategy provides us with local and regional access to new markets such as Brazil, Chile, Argentina, Peru and Colombia. Our Mexican joint venture through ADS Mexicana primarily serves the Mexican markets, while our joint venture through the South American Joint Venture is our primary channel to serve the South American markets. Our product line includes Singlewall pipe, N-12 HDPE pipe, and High Performance PP pipe. The Canadian market also sells our broad line of Allied Products, while sales in Latin America are currently concentrated in fittings and Nyloplast.

The following table sets forth reportable segment information with respect to the amount of net sales contributed by each class of similar products of our consolidated gross profit for the three ended June 30, 2015 and 2014, respectively:

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014
Domestic
Pipe		$	220,533			$	216,036
Allied Products			77,631				73,589
Total domestic			298,164				289,625
International
Pipe			42,376				29,931
Allied Products			8,584				6,878
Total international			50,960				36,809
Total net sales		$	349,124			$	326,434

The following sets forth certain additional financial information attributable to our reportable segments for the three months ended June 30, 2015, and 2014, respectively:

 

		Three months ended June 30,
(Amounts in thousands)		2015				2014
Net sales
Domestic		$	298,164			$	289,625
International			50,960				36,809
Total		$	349,124			$	326,434
Gross profit
Domestic		$	61,689			$	54,416
International			12,788				6,889
Total		$	74,477			$	61,305
Segment Adjusted EBITDA
Domestic		$	40,967			$	41,741
International			11,482				4,235
Total		$	52,449			$	45,976
Interest expense
Domestic		$	4,037			$	5,042
International			249				9
Total		$	4,286			$	5,051
Depreciation and amortization
Domestic		$	15,163			$	14,658
International			2,222				1,368
Total		$	17,385			$	16,026
Equity in net income (loss) of unconsolidated affiliates
Domestic		$	336			$	153

 

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		Three months ended June 30,
(Amounts in thousands)		2015				2014
International			18				(815	)
Total		$	354			$	(662	)
Capital expenditures
Domestic		$	8,844			$	6,919
International			1,751				513
Total		$	10,595			$	7,432

The following sets forth certain additional financial information attributable to our reporting segments as of June 30, 2015 and March 31, 2015, respectively:

 

		June 30, 2015				March 31, 2015
Investment in unconsolidated affiliates
Domestic		$	7,798			$	7,957
International			16,931				17,081
Total		$	24,729			$	25,038
Total identifiable assets
Domestic		$	1,003,517			$	938,996
International			178,557				168,320
Eliminations			(65,893	)			(69,192	)
Total		$	1,116,181			$	1,038,124

Reconciliation of Segment Adjusted EBITDA to Consolidated Net Income

 

		Three Months Ended June 30,
		2015								2014
(Amounts in thousands)		Domestic				International				Domestic				International
Reconciliation of Segment Adjusted EBITDA:
Net income		$	5,580			$	7,202			$	4,705			$	1,696
Depreciation and amortization			15,163				2,222				14,658				1,368
Interest expense, net			4,037				249				5,042				9
Income tax expense			6,825				1,054				7,531				479
Segment EBITDA			31,605				10,727				31,936				3,552
Derivative fair value adjustments			3,721				40				96				—
Foreign currency transaction losses			—				317				—				130
Loss (gain) on disposal of assets or businesses			1,052				(186	)			60				4
Unconsolidated affiliates interest, tax, depreciation and amortization(a)			286				584				249				549
Contingent consideration remeasurement			55				—				(18	)			—
Stock-based compensation expense			1,041				—				4,165				—
ESOP deferred compensation			3,125				—				2,687				—
Expense related to executive termination payments			82				—				82				—
Expense related to executive stock repurchase agreements			—				—				1,769				—
Transaction costs(b)			—				—				715				—
Segment Adjusted EBITDA		$	40,967			$	11,482			$	41,741			$	4,235

 

(a)	Includes our proportional share of interest, income taxes, depreciation and amortization related to our South American Joint Venture, our BaySaver joint venture and our Tigre-ADS USA joint venture, which are accounted for under the equity method of accounting.

(b)	Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with the IPO.

 

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13.	SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended June 30, 2015 and 2014, the Company acquired Property, plant and equipment under capital lease and incurred lease obligations of $16,718 and $14,662, respectively.

 

14.	SUBSEQUENT EVENTS

Subsequent Event Related to the Acquisition of an Additional Interest in BaySaver

On July 17, 2015, ADS Ventures, Inc. (“ADS/V”), a wholly-owned subsidiary of the Company, acquired an additional 10% of the issued and outstanding membership interests in BaySaver, increasing the Company’s total ownership interest in BaySaver to 65%, for a purchase price of $3,200, plus contingent consideration with an initial estimated fair value of $750. Concurrent with our purchase of the additional membership investment, the BaySaver joint venture agreement was amended to modify the voting rights from an equal vote for each member to a vote based upon the ownership interest. We have accounted for this transaction as a business combination with BaySaver being consolidated into our financial statements after July 17, 2015.

As we had accounted for our investment in BaySaver prior to the purchase of the additional 10% membership interest under the equity method of accounting, we accounted for this transaction as a step acquisition and recognized a loss of $490 on remeasurement to fair value of our previously held investment. The fair value of our BaySaver investment immediately before the July 17, 2015 acquisition was measured based on a combination of the discounted cash flow and guideline public company valuation methods and involves significant unobservable inputs (Level 3). These inputs include projected sales, margin, required rate of return and tax rate for the discounted cash flow method, as well as implied pricing multiples, and guideline public company group for the guideline public company method.

The purchase price was determined as follows:

 

(Amounts in thousands)
Acquisition-date fair value of our prior equity interest		$	4,220
Acquisition-date fair value of noncontrolling interest			6,330
Cash paid at acquisition date			3,200
Fair value of contingent consideration			750
Total purchase price		$	14,500

The preliminary purchase price has been allocated to the estimated fair values of acquired tangible and intangible assets, assumed liabilities and goodwill. The preliminary fair value of identifiable intangible assets has been determined primarily using the income approach, which involves significant unobservable inputs (Level 3 inputs). These inputs include projected sales, margin, required rate of return and tax rate, as well as an estimated royalty rate in the cases of the developed technology and trade name and trademark intangibles. The developed technology and trade name and trademark intangibles are valued using a relief-from-royalty method.

Redeemable noncontrolling interest in subsidiaries will be classified as mezzanine equity in our Condensed Consolidated Balance Sheets due to a put option held by the joint venture partner, which may be exercised on or after April 1, 2017. The Redeemable noncontrolling interest in subsidiaries balance will be accreted to the redemption value using the effective interest method until April 1, 2017.

The excess of the preliminary purchase price over the fair value of the net assets acquired of $2,495 was allocated to goodwill, assigned to the Domestic segment, and consists primarily of the acquired workforce and sales and cost synergies the two companies anticipate realizing as a combined company. None of the goodwill is deductible for tax purposes.

Certain estimated values for the acquisition, including intangible assets, goodwill and deferred taxes are not yet finalized. The preliminary purchase price allocation is as follows:

 

(Amounts in thousands)
Cash		$	12
Other current assets			2,262
Property, plant and equipment			164
Goodwill			2,495
Intangible assets			10,800
Other assets			152
Current liabilities			(1,385	)
Total purchase price		$	14,500

 

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The acquired identifiable intangible assets represent customer relationships of $5,400, developed technology of $4,000 and trade name and trademark of $1,400, each of which have an estimated 10-year useful life. Transaction costs were immaterial.

Subsequent Events Related to the Bank Term Loans and Senior Notes

Our long-term debt primarily consists of amounts outstanding under a Revolving Credit Facility with borrowing capacity of $325,000 for ADS, Inc., a Revolving Credit Facility for ADS-Mexicana with borrowing capacity of $12,000, and a $100,000 term note (collectively, the “Bank Term Loans”), and the $100,000 of outstanding senior promissory notes (“Senior Notes”). The amendments and consents described below that occurred between July 2015 and February 2016 related to the delay in the filing of the Fiscal 2015 Form 10-K, and the restatement of the Company’s previously issued financial statements (the “Restatement”) as reflected in the Fiscal 2015 Form 10-K, which was filed with the SEC on March 29, 2016.

In July 2015, the Company obtained consents from the requisite holders of its Bank Term Loans and its Senior Notes to waive certain actual and potential covenant violations. Specifically, the covenant violations were the result of the fact that the Company had not delivered its fiscal 2015 audited financial statements within 90 days of March 31, 2015, and did not expect to be able to file its first quarter fiscal 2016 quarterly financial statements within 45 days of June 30, 2015. The consents extended the time for delivery of the fiscal 2015 audited financial statements and the first quarter fiscal 2016 quarterly financial statements to September 30, 2015, whereby an event of default was waived as long as those financial statements were delivered within the thirty day grace period after September 30, 2015.

In August 2015, the Company entered into amended agreements related to the Bank Term Loans and Senior Notes in connection with the Company’s determination that a substantial portion of its transportation and equipment leases should be treated as capital leases rather than as operating leases. The material terms of each amended agreement modify certain definitions applicable to the Company’s affirmative and negative financial covenants, including the minimum fixed charge coverage ratio, the maximum leverage ratio, and the limits on indebtedness, to accommodate the Company’s treatment of its transportation and equipment leases as capital leases rather than operating leases, along with corresponding changes to the provisions outlining the application of GAAP in the definition of accounting terms used in various financial covenants. The amendments also waive any potential event of default that may exist under any of the respective agreements as a result of changes to the Company’s financial statements related to lease accounting, and do not require the Company to deliver restated financial statements or compliance certificates for any annual or quarterly period prior to the fiscal year ended March 31, 2015.

In October 2015, the Company obtained additional consents from the requisite holders of its Bank Term Loans and its Senior Notes to further extend the time for delivery of its fiscal 2015 audited financial statements and the first quarter fiscal 2016 quarterly financial statements, as well as to extend the time for delivery of its second quarter fiscal 2016 quarterly financial statements. The consents extended the time for delivery of the fiscal 2015 audited financial statements and the first quarter fiscal 2016 quarterly financial statements to November 30, 2015, as well as extended the time for delivery of the second quarter fiscal 2016 quarterly financial statements to December 31, 2015, whereby an event of default was waived as long as those financial statements were delivered within the thirty day grace period after those dates.

In December 2015, the Company entered into additional amended agreements related to the Bank Term Loans and Senior Notes that further extend the time for delivery of its fiscal 2015 audited financial statements and the first and second quarter fiscal 2016 quarterly financial statements. The December 2015 amended agreements extended the time for delivery of the fiscal 2015 audited financial statements and the first and second quarter fiscal 2016 quarterly financial statements to January 31, 2016, whereby an event of default was waived as long as those financial statements were delivered within the thirty day grace period after that date. The December 2015 amended agreements also modify certain definitions applicable to the Company’s affirmative and negative financial covenants, including with respect to the treatment of the costs related to the Company’s restatement for purposes of the calculation of the minimum fixed charge coverage ratio and the maximum leverage ratio. As part of the December 2015 amended agreements, the lenders also consented to the Company’s payment of a $0.05 per share common stock dividend in December 2015.

In February 2016, the Company entered into additional amended agreements related to the Bank Term Loans and Senior Notes that further extend the time for delivery of its fiscal 2015 audited financial statements and the first and second quarter fiscal year 2016 quarterly financial statements, as well as to extend the time for delivery of its third quarter fiscal year 2016 quarterly financial statements. The February 2016 amended agreements extended the time for delivery of the fiscal year 2015 audited financial statements and the first, second and third quarter fiscal 2016 quarterly financial statements to April 1, 2016, whereby an event of default was waived as long as those financial statements were delivered by that date without regard to any grace period. As part of the February 2016 amended agreements, the lenders also consented to the Company’s payment of the previously declared annual dividend of $0.0195 per share to be paid on shares of preferred stock in March 2016.

 

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Subsequent Event Related to the ADS Mexicana Scotia Bank Revolving Credit Facility

On May 27, 2016, ADS Mexicana obtained a waiver on a covenant from Scotia Bank relating to ADS Mexicana failing to notify Scotia Bank of changes in legal organizational structure and payment of dividends.

 

15.	RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Revisions Reported in the Fiscal Year 2016 Form 10-K

Prior to the filing of the our Annual Report on Form 10-K for the year ended March 31, 2016 (“Fiscal 2016 Form 10-K”), the Company identified certain out of period adjustments related to immaterial errors in its previously issued condensed consolidated financial statements for the fiscal years ended March 31, 2015 and prior, as well as the previously issued unaudited condensed consolidated financial statements for the quarters ended June 30, September 30, and December 31, 2015 and 2014. The prior period errors related primarily to the Company’s accounting for inventory, specifically relating to the capitalization of production variances into inventory, as well as miscellaneous immaterial errors related to property, plant and equipment and the associated impact on income taxes. While these prior period errors did not, individually or in the aggregate, result in a material misstatement of the Company’s previously issued consolidated financial statements, correcting these prior period errors in fiscal year 2016 would have been material to the fiscal year 2016 consolidated financial statements. Accordingly, management revised its previously reported consolidated financial statements in the Fiscal 2016 Form 10-K.

The column in the tables below labeled “Effect of Revision” reflects the impact of these adjustments.

Stock-Based Compensation Restatement

Subsequent to the issuance of the Fiscal 2016 Form 10-K, the Company identified errors in its historical consolidated financial statements related to the accounting for stock-based compensation for awards made to employees along with its accounting for certain executive stock repurchase agreements and executive termination payments, as described below.

Due to these errors, and based upon the recommendation of management, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) determined that the Company’s previously issued financial statements should no longer be relied upon. As a result, the Company has restated its condensed consolidated financial statements as of June 30, 2015 and March 31, 2015 and for the three months ended June 30, 2015 and 2014. The restatement also affects periods prior to fiscal year 2015, with the cumulative effect of the errors reflected as an adjustment to the fiscal year 2015 opening stockholders’ equity (deficit) balance.

The column in the tables below labeled “Stock-Based Compensation Restatement” reflects the impact of these adjustments. The column in the tables below labeled “As Previously Reported” reflects the financial information reported as part of the Original Form 10-Q.

The following sections provide additional information relating to the accounting adjustments that were made to the Company’s historical condensed consolidated financial statements. These adjustments had no net impact on cash flows from operating activities, cash flows from investing activities or cash flows from financing activities in our condensed consolidated statements of cash flows for the three months ended June 30, 2015 and 2014. For the three months ended June 30, 2015 and 2014, the impact of the adjustments on the condensed consolidated statements of comprehensive income was limited to the change in net income.

 

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Accounting Adjustments – Stock-Based Compensation

The Company has several programs for stock-based payments to employees, including stock options and restricted stock awards. Historically, the Company has classified stock-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 our stock-based award agreements and related administrative procedures, the Company concluded that these awards should have been accounted for as liability-classified instead of equity-classified. Specifically, the Company determined that certain tax withholding provisions were added to stock option agreements beginning in fiscal 2009 that permit the employee to satisfy the tax liability associated with the exercise of the stock options through the withholding of shares that exceeds the minimum tax withholding required by law. In addition, prior to the Company’s initial public offering in fiscal 2015, the Company had periodically repurchased shares within six months of the exercise date with respect to stock option exercises and within six months of the vesting date with respect to restricted stock. As such, the Company has concluded that for all periods presented that it should account for its stock options as liability-classified awards for purposes of calculating stock-based compensation expense, and restricted stock granted to employees should be accounted for as liability-classified awards prior to the Company’s initial public offering in fiscal 2015.

The errors in stock-based compensation award classification have been corrected in the restated condensed consolidated financial statements, whereby the fair value of the liability-classified awards has been remeasured at each relevant reporting date with the corresponding impact of the remeasurement resulting in an increase or a decrease in the amount of stock-based compensation expense included in General and administrative expenses, Selling expenses and Cost of goods sold in the Condensed Consolidated Statements of Operations. In addition, the carrying value of all liability-classified awards has been reclassified from Paid-in capital to Current portion of liability-classified stock-based awards and Other liabilities in the Condensed Consolidated Balance Sheets, and dividends paid on liability-classified awards have been reclassified from Retained earnings (deficit) to stock-based compensation expense.

Accounting Adjustments – Executive Stock Repurchase Agreements

In fiscal 2007, the Company entered into stock repurchase agreements with certain executives, whereby the Company was required to repurchase shares of the Company’s common stock held by the executive at the current fair market value upon the executive’s death or certain events of termination, as defined. The amount of shares required to be repurchased by the Company from the executive and which the executive or the executive’s heir or estate was obligated to sell to the Company, was limited to the anticipated proceeds from life insurance policies held by the Company (referred to as a mandatorily redeemable obligation). In the case where shares were not repurchased due to the fair value of the shares exceeding the life insurance proceeds, the executive or the executive’s heir or estate had a put right up to a set dollar amount allowing the common stock to be put to the Company at the current fair market value (referred to as an executive’s put right). The stock repurchase agreements included termination clauses such that they would automatically terminate if a change in control event or an IPO occurred prior to the executive’s death. While the Company did not historically take into account the impact of these stock repurchase agreements on the accounting for the shares subject to the stock repurchase agreements, the Company has now determined that it is necessary to account for the contingent obligation to repurchase those shares.

As such, the errors in measurement and classification of these amounts have been corrected in the restated condensed consolidated financial statements. Specifically, prior to the termination of the stock repurchase agreements upon the IPO in July 2014, the Company has reclassified all shares subject to the mandatorily redeemable obligation as liabilities and all shares subject to an executive’s put rights as Redeemable common stock in mezzanine equity. For those shares classified as liabilities, changes in the fair value of the shares have been recognized as compensation expense included in General and administrative expenses in the Condensed Consolidated Statements of Operations, and dividends paid on those awards have been reclassified from Retained earnings (deficit) to stock-based compensation expense. For the shares classified as Redeemable common stock, changes in the fair value of the shares were recorded as adjustments to Retained earnings (deficit) and Paid-in capital. After the termination of the stock repurchase agreements upon the IPO in July 2014, the Company has reclassified the carrying amount of the shares to Paid-in capital in the Condensed Consolidated Balance Sheets. There were no redemptions under the stock repurchase agreements.

Accounting Adjustments – Executive Termination Payments

ADS has employment agreements with certain executives that include potential payments to be made to those executives upon termination. The terms of the termination payments vary by executive, but are generally based on current base salary and bonus levels at the time of termination. The contractual termination payments vest upon either (1) certain contingent occurrences terminating employment such as death, disability, layoff, the executive voluntarily quitting due to a breach of covenants by the Company or for other “good reason” or (2) the executive reaching a certain age while still working for the Company, as defined in the individual employee agreement. While the Company did not historically accrue a liability in advance for these executive termination payments, the Company has now determined that it is necessary to account for the contingent obligation to make these payments.

 

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As such, the associated errors have been corrected in the restated condensed consolidated financial statements. Specifically, the Company has accrued a liability from the effective date of the executive’s employment agreement to the date the executive reaches the required retirement age while working for the Company, which is considered the service period for this obligation. The liability is estimated based on each executive’s current base salary and bonus levels. The associated expense has been recognized as compensation expense included in General and administrative expenses in the Condensed Consolidated Statements of Operations.

Accounting Adjustments – Income Taxes

The Company recorded adjustments to income taxes to reflect the impact of the restatement adjustments.

Impact on Condensed Consolidated Statements of Operations

The effect of the revision and the restatement described above on the Company’s previously reported Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014 is as follows:

 

		Three Months Ended June 30, 2015
(Amounts in thousands, except per share data)		As Previously Reported				Effect of Revision				Stock-Based Compensation Restatement				As Restated
Net sales		$	349,124			$	—			$	—			$	349,124
Cost of goods sold			276,538				(1,891	)			—				274,647
Gross profit			72,586				1,891				—				74,477
Operating expenses:											—
Selling			21,227				—				—				21,227
General and administrative			18,286				—				399	(a)			18,685
Loss on disposal of assets or businesses			866				—				—				866
Intangible amortization			2,526				—				—				2,526
Income from operations			29,681				1,891				(399	)			31,173
Other expense:
Interest expense			4,286				—				—				4,286
Derivative losses and other expense, net			6,580				—				—				6,580
Income before income taxes			18,815				1,891				(399	)			20,307
Income tax expense			7,371				777				(269	)			7,879
Equity in net loss of unconsolidated affiliates			(354	)			—				—				(354	)
Net income			11,798				1,114				(130	)			12,782
Less net income attributable to noncontrolling interest			1,088				—				—				1,088
Net income attributable to ADS			10,710				1,114				(130	)			11,694
Dividends to Redeemable convertible preferred stockholders			(371	)			—				—				(371	)
Dividends paid to unvested restricted stockholders			(6	)			—				—				(6	)
Net income available to common stockholders and participating securities			10,333				1,114				(130	)			11,317
Undistributed income allocated to participating securities			(858	)			(124	)			13				(969	)
Net income available to common stockholders		$	9,475			$	990			$	(117	)		$	10,348
Weighted average common shares outstanding:
Basic			53,623				—				—				53,623
Diluted			54,055				720				225				55,000
Net income per share:
Basic		$	0.18				0.02				(0.01	)		$	0.19
Diluted		$	0.18				0.01				—			$	0.19
Cash dividends declared per share		$	0.05				—				—			$	0.05

 

(a)	This amount consists of $317 and $82 related to the adjustments for stock-based compensation and the executive termination payments, respectively

 

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		Three Months Ended June 30, 2014
(Amounts in thousands, except per share data)		As Previously Reported				Effect of Revision				Stock-Based Compensation Restatement				As Restated
Net sales		$	326,434			$	—			$	—			$	326,434
Cost of goods sold			265,576				(847	)			400	(a)			265,129
Gross profit			60,858				847				(400	)			61,305
Operating expenses:
Selling			19,552				—				200	(a)			19,752
General and administrative			15,798				—				3,170	(b)			18,968
Loss on disposal of assets or businesses			64				—				—				64
Intangible amortization			2,613				—				—				2,613
Income from operations			22,831				847				(3,770	)			19,908
Other expense:
Interest expense			5,051				—				—				5,051
Derivative gains and other income, net			(216	)			—				—				(216	)
Income before income taxes			17,996				847				(3,770	)			15,073
Income tax expense			7,893				371				(254	)			8,010
Equity in net loss of unconsolidated affiliates			662				—				—				662
Net income			9,441				476				(3,516	)			6,401
Less net income attributable to noncontrolling interest			875				—				—				875
Net income attributable to ADS			8,566				476				(3,516	)			5,526
Change in fair value of Redeemable convertible preferred stock			(18,373	)			—				—				(18,373	)
Dividends to Redeemable convertible preferred stockholders			(37	)			—				—				(37	)
Net loss available to common stockholders and participating securities			(9,844	)			476				(3,516	)			(12,884	)
Net loss available to common stockholders		$	(9,844	)		$	476			$	(3,516	)		$	(12,884	)
Weighted average common shares outstanding:
Basic			47,536				—				—				47,536
Diluted			47,536				—				—				47,536
Net loss per share:
Basic		$	(0.21	)			0.01				(0.07	)		$	(0.27	)
Diluted		$	(0.21	)			0.01				(0.07	)		$	(0.27	)
Cash dividends declared per share		$	—				—				—			$	—

 

(a)	This entire amount relates to the adjustments for stock-based compensation.

(b)	This amount consists of $1,319, $1,769, and $82 related to the adjustments for stock-based compensation, the executive stock repurchase agreements, and the executive termination payments, respectively.

Impact on Condensed Consolidated Balance Sheets

The effect of the revision and restatement described above on the Company’s previously reported Condensed Consolidated Balance Sheets as of June 30, 2015 and March 31, 2015 is as follows:

 

		June 30, 2015
(Amounts in thousands)		As Previously Reported				Effect of Revision				Stock-Based Compensation Restatement				As Restated
ASSETS
Cash		$	4,847			$	—			$	—			$	4,847
Receivables, net			229,684				—				—				229,684
Inventories			258,977				(8,655	)			—				250,322
Deferred income taxes and other current assets			20,858				3,532				3,439				27,829
Property, plant and equipment, net			389,283				—				—				389,283

 

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		June 30, 2015
(Amounts in thousands)		As Previously Reported				Effect of Revision				Stock-Based Compensation Restatement				As Restated
Goodwill			98,894				—				—				98,894
Intangible assets, net			55,761				—				—				55,761
Other assets			59,561				—				—				59,561
Total assets		$	1,117,865			$	(5,123	)		$	3,439			$	1,116,181
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current maturities of debt obligations		$	10,215			$	—			$	—			$	10,215
Current maturities of capital lease obligations			17,661				—				—				17,661
Accounts payable			109,163				—				—				109,163
Current portion of liability-classified stock-based awards			—				—				16,320				16,320
Other accrued liabilities			61,821				—				—				61,821
Accrued income taxes			8,672				788				835				10,295
Long-term debt obligation			431,754				—				—				431,754
Long-term capital lease obligation			56,515				—				—				56,515
Deferred tax liabilities			64,225				(492	)			(2,621	)			61,112
Other liabilities			30,165				(44	)			11,048				41,169
Total liabilities			790,191				252				25,582				816,025
Mezzanine equity			106,968				—				—				106,968
Common stock			12,393				—				—				12,393
Paid-in capital			705,179				—				23,467				728,646
Common stock in treasury, at cost			(443,660	)			—				—				(443,660	)
Accumulated other comprehensive loss			(14,430	)			—				—				(14,430	)
Retained deficit			(54,933	)			(5,375	)			(45,610	)			(105,918	)
Noncontrolling interest in subsidiaries			16,157				—				—				16,157
Total liabilities, mezzanine equity and stockholders’ equity		$	1,117,865			$	(5,123	)		$	3,439			$	1,116,181

 

		March 31, 2015
(Amounts in thousands)		As Previously Reported				Effect of Revision				Stock-Based Compensation Restatement				As Restated
ASSETS
Cash		$	3,623			$	—			$	—			$	3,623
Receivables, net			154,294				—				—				154,294
Inventories			269,842				(9,292	)			—				260,550
Deferred income taxes and other current assets			18,972				3,532				3,439				25,943
Property, plant and equipment, net			377,067				(1,254	)			—				375,813
Goodwill			98,679				—				—				98,679
Intangible assets, net			58,055				—				—				58,055
Other assets			61,167				—				—				61,167
Total assets		$	1,041,699			$	(7,014	)		$	3,439			$	1,038,124
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current maturities of debt obligations		$	9,580			$	—			$	—			$	9,580
Current maturities of capital lease obligations			15,731				—				—				15,731
Accounts payable			111,893				—				—				111,893
Current portion of liability-classified stock-based awards			—				—				17,611				17,611
Other accrued liabilities			54,349				—				—				54,349
Accrued income taxes			6,041				11				247				6,299
Long-term debt obligation			390,315				—				—				390,315
Long-term capital lease obligation			45,503				—				—				45,503

 

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		March 31, 2015
(Amounts in thousands)		As Previously Reported				Effect of Revision				Stock-Based Compensation Restatement				As Restated
Deferred tax liabilities			65,088				(492	)			(1,764	)			62,832
Other liabilities			28,602				(44	)			10,307				38,865
Total liabilities			727,102				(525	)			26,401				752,978
Mezzanine equity			108,021				—				—				108,021
Common stock			12,393				—				—				12,393
Paid-in capital			700,977				—				22,518				723,495
Common stock in treasury, at cost			(445,065	)			—				—				(445,065	)
Accumulated other comprehensive loss			(15,521	)			—				—				(15,521	)
Retained deficit			(62,621	)			(6,489	)			(45,480	)			(114,590	)
Noncontrolling interest in subsidiaries			16,413				—				—				16,413
Total liabilities, mezzanine equity and stockholders’ equity		$	1,041,699			$	(7,014	)		$	3,439			$	1,038,124

Cumulative Effect of Prior Period Adjustments

The following table presents the impact of the revision and the restatement described above to the Company’s beginning stockholders’ equity (deficit) balances, cumulatively to reflect adjustments booked to all periods prior to April 1, 2014:

 

(Amounts in thousands)		Common Stock				Paid-In Capital				Common Stock in Treasury				Accumulated Other Comprehensive Loss				Retained Deficit				Total ADS Stockholders’ Deficit				Non-controlling Interest in Subsidiaries				Total Stockholders’ Equity (Deficit)
Stockholders’ equity (deficit), April 1, 2014 (As Previously Reported)		$	11,957			$	12,438			$	(448,439	)		$	(6,830	)		$	(2,412	)		$	(433,286	)		$	18,584			$	(414,702	)
Effect of Revision			—				—				—				—				(6,549	)			(6,549	)			—				(6,549	)
Stock-Based Compensation Restatement			—				(4,069	)			—				—				(27,719	)			(31,788	)			—				(31,788	)
Stockholders’ equity (deficit), April 1, 2014 (As Restated)		$	11,957			$	8,369			$	(448,439	)		$	(6,830	)		$	(36,680	)		$	(471,623	)		$	18,584			$	(453,039	)

Additional Subsequent Events

Subsequent Events Related to the Bank Term Loans and Senior Notes

In July 2016, the Company obtained additional consents from the lenders of the Bank Term Loans and Senior Notes. These consents had the effect of extending the time for delivery of our fiscal 2016 audited financial statements to August 31, 2016, and first quarter fiscal 2017 quarterly financial information to October 15, 2016, whereby an event of default was waived as long as those items are delivered within a 15 day grace period after those dates. In addition, the consents also permitted the Company’s payment of quarterly dividends of $0.06 per share on common shares in each of June and September 2016, as well as the annual dividend of $0.0195 per share to be paid on shares of preferred stock in March 2017.

In October 2016, the Company obtained additional consents from the lenders of the Bank Term Loans and Senior Notes. These consents had the effect of extending the time for delivery of our first quarter fiscal 2017 quarterly financial information to November 30, 2016 and our second quarter fiscal 2017 quarterly financial information to December 31, 2016, whereby an event of default was waived as long as those items are delivered within a 30 day grace period after those dates. In addition, the consents also permitted the Company’s payment of a quarterly dividend of $0.06 per share on common shares in December 2016, as well as the annual dividend of $0.0195 per share to be paid on shares of preferred stock in March 2017.

In December 2016, the Company obtained additional consents from the lenders of the Bank Term Loans and Senior Notes. These consents had the effect of extending the time for delivery of our first quarter fiscal 2017 quarterly financial information to January 31, 2017.

Subsequent Event Related to the ADS Mexicana Revolving Credit Facility

During the period from November 3, 2014 to November 11, 2015, our joint venture, ADS Mexicana, made intercompany revolving loans to ADS, Inc. The maximum aggregate amount of the intercompany loans outstanding at any time was $6,900. Since November 11, 2015, there have been no other intercompany loans made, and no balance remains outstanding.

According to the terms of the ADS Mexicana Revolving Credit Facility, ADS Mexicana was not permitted to make such loans, triggering an Event of Default. ADS Mexicana had an obligation to report such Event of Default and the Company had not previously disclosed the related restriction on its ability to enter into such loans. These events together were characterized as a Specified Default. On December 13, 2016, ADS Mexicana obtained a covenant waiver on the ADS Mexicana Revolving Credit Facility for the Specified Default from the lenders.

 

16.	STOCK-BASED COMPENSATION

ADS has several programs for stock-based payments to employees and directors, including stock options and restricted stock. Equity-classified stock option and restricted stock awards are measured based on the grant-date estimated fair value of each award. Liability-classified stock option and restricted stock awards are re-measured at fair value at each relevant reporting date, and the pro-rata vested portion of the award is recognized as a liability. Prior to the IPO, liability-classified stock options were re-measured at fair value each period until the earlier of six months after the stock options were exercised or the IPO date, and liability-classified restricted stock was re-measured at fair value each period until six months after the restricted stock fully vested or the IPO date. Subsequent to the IPO, liability-classified stock options are re-measured at fair value each period until they are exercised.

The Company accounts for all stock options granted to employees as liability-classified awards. Prior to the Company’s IPO in July 2014, the Company also accounted for all restricted stock granted to employees as liability-classified awards. However, since the IPO, the Company also accounted for all restricted stock granted to employees as equity-classified awards. The Company accounts for all restricted stock granted to directors as equity-classified awards.

The Company recognized stock-based compensation expense (benefit) in the following line items on the Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014:

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014
Component of income before income taxes:
Cost of goods sold		$	—			$	400
Selling expenses			—				200
General and administrative expenses			1,041				3,565
Total stock-based compensation expense		$	1,041			$	4,165

Stock Options

Our 2000 stock option plan (“2000 Plan”) provides for the issuance of statutory and non-statutory stock options to management based upon the discretion of the Board of Directors. The plan generally provides for grants with the exercise price equal to fair value on the date of grant, which vest in three equal annual amounts beginning in year five and expire after approximately 10 years from issuance.

 

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Our 2013 stock option plan (“2013 Plan”) provides for the issuance of non-statutory common stock options to management subject to the Board’s discretion. The plan generally provides for grants with the exercise price equal to fair value on the date of grant. The grants generally vest in five equal annual amounts beginning in year one and expire after approximately 10 years from issuance. Options issued to the Chief Executive Officer vest equally over four years and expire after approximately 10 years from issuance.

The Company determines the fair value of the options based on the Black-Scholes option pricing model. This methodology requires significant inputs including the price of our common stock, risk-free interest rate, dividend yield and expiration date. During the three months ended June 30, 2015 and 2014, we recognized total stock-based compensation expense (benefit) under both stock option plans of $777 and $3,515, respectively.

We estimate the fair value of stock options using a Black-Scholes option-pricing model, with assumptions as summarized in the following table. For the periods prior to our IPO in fiscal 2015, the price of our common stock, as a private company, was based on an estimate of its fair value.

 

		Three Months Ended June 30,
		2015		2014
Common stock price		$26.73 - $33.03		$14.33 - $17.21
Expected stock price volatility		27.7% - 50.0%		27.0% - 52.7%
Risk-free interest rate		0.1% - 2.2%		0.1% - 2.2%
Weighted-average expected option life (years)		0.4 – 6.9		0.4 – 7.0
Dividend yield		0.7%		0.7%

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2016 refers to fiscal 2016, which is the period from April 1, 2015 to March 31, 2016.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements included in our Fiscal 2016 Form 10-K/A (filed concurrently with this Amendment No. 1 to our Form 10-Q) which includes our restated consolidated financial statements for the years ended March 31, 2016 and 2015. 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, our BaySaver joint venture, and our Tigre-ADS USA joint venture.

Overview

We are the leading manufacturer of high performance thermoplastic corrugated pipe, providing a comprehensive suite of water management products and superior drainage solutions for use in the construction and infrastructure marketplace. Our innovative products are used across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, our overall product breadth and scale and our manufacturing excellence. In North America, our national footprint combined with our strong local presence and broad product offering makes us the leader in an otherwise highly fragmented sector comprised of many smaller competitors. We believe the markets we serve in the United States represent approximately $10.5 billion of annual revenue opportunity. In addition, we believe the increasing acceptance of thermoplastic pipe products in international markets represents an attractive growth opportunity.

Our products are generally lighter, more durable, more cost effective and easier to install than comparable alternatives made with traditional materials. Following our entrance into the non-residential construction market with the introduction of N-12 corrugated polyethylene pipe in the late 1980s, our pipe has been displacing traditional materials, such as reinforced concrete, corrugated steel and PVC, across an ever expanding range of end markets. This has allowed us to consistently gain share and achieve above market growth throughout economic cycles. We expect to continue to drive conversion to our products from traditional products 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 corrugated high density polyethylene (or “HDPE”) pipe, polypropylene (or “PP”) pipe and related water management products. Building on our core drainage businesses, we have aggressively pursued attractive ancillary product categories such as storm and septic chambers, PVC drainage structures, fittings and filters, and water quality filters and separators. We refer to these ancillary product categories as Allied Products. Given the scope of our overall sales and distribution platform, we have been able to drive growth within our Allied Products and believe there are significant growth opportunities going forward.

Restatement of Previously Issued Financial Statements

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision and restatement adjustments made to the previously reported Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014 and the Condensed Consolidated Balance Sheets as of June 30, 2015 and March 31, 2015. For additional information and a detailed discussion of the revision and the restatement, see “Note 15. Restatement of Previously Issued Financial Statements” included in “Part I. Financial Information,” of this Form 10-Q/A.

 

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Recent Developments

2014 Initial Public Offering (“IPO”)

On July 11, 2014, in anticipation of the IPO, we executed a 4.707-for-one split of our common and our preferred stock. The effect of the stock split on outstanding shares and earnings per share has been retroactively applied to all periods presented.

On July 25, 2014, we completed the IPO of our common stock, which resulted in the sale by the Company of 5,289,474 shares of common stock. We received total proceeds from the IPO of $79.1 million after excluding underwriter discounts and commissions of $5.5 million, based upon the price to the public of $16.00 per share. After deducting other offering expenses of $6.9 million, we used the net proceeds of $72.2 million to reduce the outstanding indebtedness under the revolving portion of our credit facility. The common stock is listed on the NYSE under the symbol “WMS.”

On August 22, 2014, an additional 600,000 shares of common stock were sold by certain selling stockholders of the Company as a result of the partial exercise by the underwriters of the over-allotment option granted by the selling stockholders to the underwriters in connection with the IPO. The shares were sold at the public offering price of $16.00 per share. The Company did not receive any proceeds from the sale of such additional shares.

2014 Secondary Public Offering (“Secondary Public Offering”)

On December 9, 2014, we completed a Secondary Public Offering of our common stock, which resulted in the sale of 10,000,000 shares of common stock by a certain selling stockholder of the Company at a public offering price of $21.25 per share. We did not receive any proceeds from the sale of shares by the selling stockholder.

On December 15, 2014, an additional 1,500,000 shares of common stock were sold by a certain selling stockholder of the Company as a result of the full exercise by the underwriters of the over-allotment option granted by the selling stockholder to the underwriters in connection with the Secondary Public Offering. The shares were sold at the public offering price of $21.25 per share. The Company did not receive any proceeds from the sale of such additional shares.

Acquisition of Ideal Pipe

On January 30, 2015, Hancor of Canada, Inc., a wholly-owned subsidiary of the Company, acquired all issued and outstanding shares of Ideal Drain Tile Limited and Wave Plastics Inc., the sole partners of Ideal Pipe (together “Ideal Pipe”) for a contractual purchase price of $55.7 million Canadian dollars, financed through our existing line of credit facility. Ideal Pipe designs, manufactures and markets high performance thermoplastic corrugated pipe and related water management products used across a broad range of Canadian end markets and applications, including nonresidential, residential, agriculture, and infrastructure applications. The acquisition further strengthens our positions in Canada by increasing our size and scale in the market, as well as enhancing our manufacturing, marketing and distribution capabilities. The results of operations of Ideal Pipe are included in our Consolidated Statements of Operations after January 30, 2015.

Results of Operations

Three Months Ended June 30, 2015 Compared With Three Months Ended June 30, 2014

The following table summarizes certain financial information relating to our operating results that have been derived from our condensed consolidated financial statements for the three months ended June 30, 2015 and 2014. Also included is certain information relating to the operating results as a percentage of net sales. We believe this presentation is useful to investors in comparing historical results.

 

(Amounts in thousands, except per share data)		Three Months Ended June 30, 2015				% of Net Sales				Three Months Ended June 30, 2014				% of Net Sales				% Variances
		(As Restated)(a)								(As Restated)(a)
Consolidated Statements of Operations data:
Net sales		$	349,124				100.0	%		$	326,434				100.0	%			7.0	%
Cost of goods sold			274,647				78.7	%			265,129				81.2	%			3.6	%
Gross profit			74,477				21.3	%			61,305				18.8	%			21.5	%
Selling expenses			21,227				6.1	%			19,752				6.1	%			7.5	%
General and administrative expenses			18,685				5.4	%			18,968				5.8	%			(1.5	%)
Loss on disposal of assets or businesses			866				0.2	%			64				—					*
Intangible amortization			2,526				0.7	%			2,613				0.8	%			(3.3	%)
Income from operations			31,173				8.9	%			19,908				6.1	%			56.6	%

 

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(Amounts in thousands, except per share data)		Three Months Ended June 30, 2015				% of Net Sales				Three Months Ended June 30, 2014				% of Net Sales				% Variances
		(As Restated)(a)								(As Restated)(a)
Interest expense			4,286				1.2	%			5,051				1.5	%			(15.1	%)
Derivative losses (gains) and other expense (income), net			6,580				1.9	%			(216	)			(0.1	%)				*
Income before income taxes			20,307				5.8	%			15,073				4.6	%			34.7	%
Income tax expense			7,879				2.3	%			8,010				2.5	%			(1.6	%)
Equity in net (income) loss of unconsolidated affiliates			(354	)			(0.1	%)			662				0.2	%			(153.5	%)
Net income			12,782				3.7	%			6,401				2.0	%			99.7	%
Less net income attributable to noncontrolling interest			1,088				0.3	%			875				0.3	%			24.3	%
Net income attributable to ADS		$	11,694				3.3	%		$	5,526				1.7	%			111.6	%
Other financial data:
Adjusted EBITDA(b)		$	52,449				15.0	%		$	45,976				14.1	%			14.1	%
System-Wide Net Sales(b)		$	371,133				106.3	%		$	346,224				106.1	%			7.2	%
Adjusted Earnings Per Fully Converted Share(b)		$	0.20				—			$	0.12				—				66.8	%

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

(b)	See section entitled “Non-GAAP Financial Measures” for further information.

*	not meaningful

Net sales

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014				% Variance
		(As Restated)(a)				(As Restated)(a)
Domestic
Pipe		$	220,533			$	216,036				2.1	%
Allied Products			77,631				73,589				5.5	%
Total domestic			298,164				289,625				2.9	%
International
Pipe			42,376				29,931				41.6	%
Allied Products			8,584				6,878				24.8	%
Total international			50,960				36,809				38.4	%
Total net sales		$	349,124			$	326,434				7.0	%

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

Net sales totaled $349.1 million in the three months ended June 30, 2015, increasing $22.7 million, or 7.0%, over the comparable period in fiscal year 2015.

Domestic net sales increased $8.5 million, or 2.9%, in the three months ended June 30, 2015, as compared to the prior fiscal year period. The growth was achieved by volume gains in both our Pipe and Allied Products, which increased $4.5 million and $4.0 million, respectively, in the three months ended June 30, 2015. Pipe sales were up $4.5 million, or 2.1%, as modest gains were achieved in the non-residential and residential markets, which offset small declines in the infrastructure and agriculture markets. Pipe selling prices increased 2.0% compared to the prior fiscal year. Allied Product sales increased $4.0 million, or 5.5%, due to favorable sales volume sold primarily into the non-residential, residential and infrastructure markets.

International net sales increased $14.2 million, or 38.4%, in the three months ended June 30, 2015 over the comparable fiscal year 2015 period. The significant increase was primarily attributed to the impact of the acquisition of Ideal Pipe in Canada which closed in the fourth quarter of fiscal year 2015. Incremental sales revenues from Ideal Pipe during the three months ended June 30,

 

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2015 amounted to approximately $12.2 million. The balance of the international sales growth is primarily related to increased sales in Mexico, which was driven by a 23.1% increase in pipe volume. In addition, the Canadian dollar was approximately 11% weaker against the U.S. dollar in the three month period ended June 30, 2015, compared to the three month period ended June 30, 2014, which had a negative impact on Net sales for Canada of $3.6 million during the three month period ended June 30, 2015.

System-Wide Net Sales were $371.1 million in the first three months of fiscal year 2016, an increase of $24.9 million, or 7.2%, over System-Wide Net Sales of $346.2 million in the first three months of fiscal year 2015. Net sales at our South American Joint Venture were $14.3 million and $14.0 million for the three months ended June 30, 2015 and 2014, respectively, up only 2.1% as the Brazilian economy continues to lag behind others in the region. Net sales at our BaySaver and Tigre-ADS USA joint ventures provided incremental sales during the first quarter resulting in a combined increase of $1.9 million in net sales for the three months ended June 30, 2015 as compared to the prior fiscal year period.

Cost of goods sold and Gross profit

Cost of goods sold increased $9.5 million or 3.6% to $274.6 million for the three months ended June 30, 2015 compared to $265.1 million for the three months ended June 30, 2014.

Gross profit for the three months ended June 30, 2015 increased $13.2 million to $74.5 million, a 21.5% increase over the $61.3 million for the comparable fiscal year 2015 period. Gross profit as a percentage of net sales was 21.3% for the three months ended June 30, 2015 as compared to 18.8% for the comparable fiscal year 2015 period.

Domestic gross profit increased $7.3 million, or 13.4%, to $61.7 million for the three months ended June 30, 2015 as compared to $54.4 million for the comparable fiscal year 2015 period. In addition to the impact of the 2.9% increase in domestic net sales over the comparable fiscal year 2015 period, the increase in domestic gross profit was also impacted by a decline in freight costs due to lower diesel fuel prices which dropped approximately 29.0% over the comparable fiscal year 2015 period. Growth in sales of higher margin Allied Products also contributed to the overall increase in gross profit.

International gross profit increased $5.9 million, or 85.5% from $6.9 million to $12.8 million in the first quarter of fiscal year 2016 compared to the same period in fiscal year 2015, largely due to the incremental impact of the gross profit for Ideal Pipe in Canada, which contributed approximately $3.3 million of the total increase in international gross profit. The remaining increase is primarily attributed to additional ADS operations in Canada and Mexico during the first quarter of fiscal year 2016.

Selling expenses

Selling expenses consist of field selling and customer service expenditures for personnel engaged in sales and sales support functions. Field selling and customer service expenditures primarily consists of personnel costs (salaries, benefits, and variable sales commissions), travel and entertainment expenses, marketing, promotion, and advertising expenses, as well as bad debt provisions.

Selling expenses for the three months ended June 30, 2015 increased $1.4 million, or 7.5%, over the comparable fiscal year 2015 period, slightly higher than the 7.0% increase in net sales over the same period. The increase was primarily the result of increases in variable selling expenses due to higher sales volume and investments in additional sales coverage and growth initiatives. As a percentage of net sales, selling expenses remained consistent at 6.1%.

General and administrative expenses

General and administrative expenses consists of personnel costs (salaries, benefits, and other personnel-related expenses, including stock-based compensation), recruitment and relocation expenses, accounting and legal fees, corporate business travel expenses, rent and utilities for the administrative offices, director fees, investor relations, membership fees, office supplies, insurance and other miscellaneous expenses.

General and administrative expenses for the three months ended June 30, 2015 decreased $0.3 million, or 1.5%, over the comparable fiscal year 2015 period. The decrease was primarily the result of a $2.5 million decrease in stock-based compensation expense. In addition, there was $2.0 million of expense associated with the executive stock repurchase agreements in the fiscal 2015 period, whereas there was no such amount in the fiscal 2016 period. These decreases were partially offset by increases in professional fees, corporate overhead expenses and salary and compensation expense of $1.0 million, $0.9 million and $0.9 million, respectively, as well as the impact of including $0.7 million of Ideal Pipe costs in the fiscal year 2016 period.

 

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Loss on disposal of assets or businesses

Loss on disposal of equipment for the three months ended June 30, 2015 was $0.9 million compared to $0.1 million for the comparable fiscal year 2015 period.

Intangible amortization

Intangible amortization remained relatively flat at $2.5 million and $2.6 million for the three months ended June 30, 2015 and 2014, respectively, as a result of intangible assets of $7.8 million becoming fully amortized during fiscal 2015 offset by the impact of the acquisition of Ideal Pipe intangible assets in the fourth quarter of fiscal year 2015.

Interest expense

Interest expense for the three months ended June 30, 2015 decreased $0.8 million, or 15.1%, over the comparable fiscal year 2015 period. Our average overall debt outstanding was down by approximately $36.9 million or 7.0% for the quarter ending June 30, 2015 compared to the average balance outstanding for the quarter ending June 30, 2014 which resulted in lower interest costs. The average debt balance for the quarter ending June 30, 2014 was higher by $52.5 million primarily due to the large special dividend paid during the last quarter of fiscal year 2014 which carried into fiscal year 2015 and was offset by $15.6 million higher average capital lease obligations for the quarter ending June 30, 2015 compared to the quarter ending June 30, 2014.

Derivative losses (gains) and other expense (income), net

For the three months ended June 30, 2015, we incurred derivative losses and other expense, net of $6.6 million compared to income, net of $0.2 million in the comparable fiscal year 2015 period. During the quarter ended June 30, 2015, the Company absorbed losses from cash settlements of derivative hedges for propylene raw material and diesel fuel amounting to $2.7 million. Another $3.8 million of expense was recognized in connection with mark-to-market adjustments related to the various hedge programs. Net hedging losses for the comparable prior period amounted to only $0.1 million.

Income tax expense

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 June 30, 2015 and 2014, the Company recorded income tax provisions of $7.9 million and $8.0 million, respectively, which represent effective tax rates of 38.8% and 53.1%, respectively. These rates are higher than the federal statutory rate of 35% due principally to state and local income taxes and non-deductible expenses, partially offset by foreign income taxed at lower rates.

Equity in net (income) loss of unconsolidated affiliates

Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to the three unconsolidated joint ventures in which we have significant influence, but not control, over operations. For the three months ended June 30, 2015, the Company recognized income of $0.4 million compared to a net loss of $0.7 million over the comparable fiscal year 2015 period. Most of the positive change was due to stronger performance from the South American joint venture, which had roughly break-even results (less than $0.1 million of income) in the three months ended June 30, 2015, rather than $0.8 million of loss in the comparable fiscal year 2015 period. The remainder of the variance is related to the performance of our domestic joint ventures.

Net income attributable to noncontrolling interest

The net income attributable to noncontrolling interest represents the share of ADS Mexicana net income attributable to the minority interest holders. Net income attributable to noncontrolling interest for the three months ended June 30, 2015 increased $0.2 million to income of $1.1 million compared to income of $0.9 million for the comparable fiscal year 2015 period.

Net income attributable to ADS and Net income (loss) per share

First quarter net income attributable to ADS for fiscal year 2016 of approximately $11.7 million increased from fiscal year 2015 first quarter’s net income attributable to ADS of $5.5 million, as influenced by the factors noted above. Net earnings per share for the first quarter fiscal year 2016 was $0.19 per basic and diluted share, as compared to net loss of $(0.27) per basic and diluted share recorded in the comparable fiscal year 2015 period. The income available to common shareholders for the three months ended June 30, 2014 was reduced by $18.4 million or $0.39 per share for common stockholders relating to the fair value appreciation of Redeemable convertible preferred stock classified in mezzanine equity.

 

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Adjusted EBITDA^(a)

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014				% Variance
		(As Restated)(b)				(As Restated)(b)
Domestic		$	40,967			$	41,741				(1.9	%)
International			11,482				4,235				171.1	%
Total adjusted EBITDA		$	52,449			$	45,976				14.1	%
As a percentage of net sales			15.0	%			14.1	%

 

(a)	See section entitled “Non-GAAP Financial Measures” for further information.

(b)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

Non-GAAP Financial Measures

In addition to financial results reported in accordance with GAAP, we have provided the following non-GAAP financial measures: Adjusted EBITDA, System-Wide Net Sales and Adjusted Earnings Per Fully Converted Share. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. However, these measures are not intended to be a substitute for those reported in accordance with GAAP. These measures may be different from non-GAAP financial measures used by other companies, even when similar terms are used to identify such measures.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that is comprised of net income before interest, income taxes, depreciation and amortization, stock-based compensation, non-cash charges and certain other expenses. Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measure. Adjusted EBITDA is a key metric used by management and our board of directors to assess our financial performance and evaluate the effectiveness of our business strategies. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.

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 June 30,
(Amounts in thousands)		2015				2014
		(As Restated)(a)				(As Restated)(a)
Net income		$	12,782			$	6,401
Depreciation and amortization			17,385				16,026
Interest expense			4,286				5,051
Income tax expense			7,879				8,010
EBITDA			42,332				35,488
Derivative fair value adjustments			3,761				96
Foreign currency transaction losses			317				130
Loss on disposal of assets or businesses			866				64
Unconsolidated affiliates interest, tax, depreciation and amortization (b)			870				798
Contingent consideration remeasurement			55				(18	)
Stock-based compensation expense			1,041				4,165
ESOP deferred stock-based compensation			3,125				2,687
Expense related to executive termination payments			82				82
Expense related to executive stock repurchase agreements			—				1,769
Transaction costs(c)			—				715
Adjusted EBITDA		$	52,449			$	45,976

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

(b)	Includes our proportional share of interest, income taxes, depreciation and amortization related to our South American Joint Venture, our BaySaver joint venture and our Tigre-ADS USA joint venture, which are accounted for under the equity method of accounting.

(c)	Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with the IPO.

 

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The following table presents a reconciliation of Segment Adjusted EBITDA to Net Income for each of the periods indicated:

 

		Three Months Ended June 30,
		2015								2014
(Amounts in thousands)		Domestic				International				Domestic				International
		(As Restated)(a)				(As Restated)(a)				(As Restated)(a)				(As Restated)(a)
Net income		$	5,580			$	7,202			$	4,705			$	1,696
Depreciation and amortization			15,163				2,222				14,658				1,368
Interest expense			4,037				249				5,042				9
Income tax expense			6,825				1,054				7,531				479
Segment EBITDA			31,605				10,727				31,936				3,552
Derivative fair value adjustments			3,721				40				96				—
Foreign currency transaction losses			—				317				—				130
Loss (gain) on sale of assets or businesses			1,052				(186	)			60				4
Unconsolidated affiliates interest, tax, depreciation and amortization(b)			286				584				249				549
Contingent consideration remeasurement			55				—				(18	)			—
Stock-based compensation expense			1,041				—				4,165				—
ESOP deferred stock-based compensation			3,125				—				2,687				—
Expense related to executive termination payments			82				—				82
Expense related to executive stock repurchase agreements			—				—				1,769
Transaction costs(c)			—				—				715				—
Segment Adjusted EBITDA		$	40,967			$	11,482			$	41,741			$	4,235

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

(b)	Includes our proportional share of interest, income taxes, depreciation and amortization related to our South American Joint Venture, our BaySaver joint venture and our Tigre-ADS USA joint venture, which are accounted for under the equity method of accounting.

(c)	Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with the IPO.

System-Wide Net Sales. System-Wide Net Sales is a non-GAAP measure which equals the sum of the net sales of our domestic and international segments plus all net sales from our unconsolidated joint ventures. We participate in three unconsolidated joint ventures, the South American Joint Venture; BaySaver ; and Tigre-ADS USA, Inc. (“Tigre-ADS USA”), which is 49% owned by our wholly-owned subsidiary ADS Ventures, Inc. We use this metric to measure the overall performance of our business across all of our geographies and markets we serve.

Our South American Joint Venture is managed as an integral part of our international segment and our BaySaver and Tigre-ADS USA joint ventures are managed as an integral part of our domestic segment. However, they are not consolidated under GAAP. System-Wide Net Sales is prepared as if our South American Joint Venture, our BaySaver joint venture, and our Tigre-ADS USA joint venture were accounted for as consolidated subsidiaries.

The reconciliation of our System-Wide Net Sales to Net sales is as follows:

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014
		(As Restated)(a)				(As Restated)(a)
Net sales		$	349,124			$	326,434
Net sales associated with our unconsolidated affiliates
South American Joint Venture(a)			14,277				13,920
BaySaver joint venture(b)			3,126				2,337
Tigre-ADS USA joint venture(c)			4,606				3,533
System-Wide Net Sales		$	371,133			$	346,224

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

(b)	On July 31, 2009, we entered into an arrangement to form our South American Joint Venture.

(c)	On July 15, 2013, we entered into an arrangement to form our BaySaver joint venture.

(d)	On April 7, 2014, we entered into an arrangement to form our Tigre-ADS USA joint venture.

 

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Adjusted Earnings Per Fully Converted Share (Non-GAAP). Adjusted Earnings Per Fully Converted Share (Non-GAAP) is a non-GAAP, supplemental measure of financial performance that is not required by, or presented in accordance with GAAP. We calculate Adjusted Earnings Per Fully Converted Share (Non-GAAP) by adjusting our Net income (loss) per share—Basic, Net income (loss) available to common stockholders - Basic and Weighted average common shares outstanding – Basic amounts for the conversion of all shares of Redeemable convertible preferred stock into ADS common stock at the conversion ratio of one Redeemable convertible preferred share for every 0.7692 share of common stock as of the beginning of each period presented.

To effect this adjustment with respect to Net income available to common stockholders – Basic, we have (1) removed the adjustment for the change in fair value of Redeemable convertible preferred stock classified as mezzanine equity, (2) made a corresponding adjustment to the amount allocated to participating securities under the two-class earnings per share computation method, and (3) added back ESOP deferred compensation attributable to the shares of 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.

We have also made adjustments to Weighted average common shares outstanding – Basic to assume, (1) share conversion of the Redeemable convertible preferred stock to ADS common stock and (2) add shares of outstanding unvested restricted stock.

Adjusted Earnings Per Fully Converted Share (Non-GAAP) is included in this report because it is a key metric used by management and our board of directors to assess our financial performance. Adjusted Earnings Per Fully Converted Share (Non-GAAP) is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

The following table presents a reconciliation of Adjusted Net Income (Non-GAAP), Weighted Average Common Shares Outstanding – Fully Converted (Non-GAAP) and Adjusted Earnings Per Fully Converted Share (Non-GAAP) to Net income (loss) available to common stockholders – Basic, Weighted average common shares outstanding - Basic, and Net income (loss) per share – Basic, the most comparable GAAP measures, respectively, for each of the periods indicated.

 

		Three Months Ended June 30,
(Amounts in thousands, except per share data)		2015				2014
		(As Restated)(a)				(As Restated)(a)
Net income (loss) available to common stockholders - Basic		$	10,348			$	(12,884	)
Add: Adjustments to net income (loss) available to common stockholders - Basic			1,346				18,410
Adjusted net income attributable to ADS (Non-GAAP)			11,694				5,526
Add: Fair value of ESOP compensation related to Redeemable convertible preferred stock			3,125				2,687
Adjusted net income (Non-GAAP)		$	14,819			$	8,213
Weighted Average Common Shares Outstanding – Basic			53,623				47,536
Add: Unvested restricted shares			148				263
Redeemable convertible preferred shares			19,693				20,099
Weighted Average Common Shares Outstanding – Fully Converted (Non-GAAP)			73,464				67,898
Net income per share - Basic		$	0.19			$	(0.27	)
Adjusted Earnings Per Fully Converted Share (Non-GAAP)		$	0.20			$	0.12

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

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 operation primarily through equity issuance, internally generated cash flow and debt financings. 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.

 

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As of June 30, 2015, we had $4.8 million in cash that was held by our foreign subsidiaries. Our intent is to reinvest our earnings in foreign subsidiaries. In the event that foreign earnings are repatriated, these amounts will be subject to income tax liabilities in the appropriate tax jurisdiction.

Working Capital and Cash Flows

During the three months ended June 30, 2015, our net increase in cash amounted to $1.2 million compared to a net increase of $0.8 million for the three months ended June 30, 2014. During the three months ended June 30, 2015, our source of funds was primarily driven by operating earnings, seasonal borrowings on our Revolving Credit facility and proceeds from notes, mortgages, and other debt. For the same period ending June 30, 2015, our use of cash was primarily driven by increased accounts receivable balances and capital expenditures. During the three months ended June 30, 2014, our source of funds was primarily driven by operating earnings and seasonal borrowings on our Revolving Credit facility. For the same period ending June 30, 2014, our use of cash was primarily driven by increased accounts receivable balances and capital expenditures.

As of June 30, 2015, we had $77.1 million in liquidity, including $4.8 million of cash and $72.3 million in borrowings available under our Revolving Credit Facility, described below. We believe that our cash on hand, together with the availability of borrowings under our Revolving Credit Facility and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled interest payments on our indebtedness and dividend payment requirement for our convertible preferred stock for at least the next twelve months.

As of June 30, 2015, we had total consolidated indebtedness of approximately $442.0 million. We repaid a portion of our outstanding indebtedness in fiscal year 2015 with the net proceeds from our initial public offering which closed on July 25, 2014.

The following table sets forth the major sources and uses of cash for each of the periods presented:

 

		Three Months Ended June 30,
(Amounts in thousands)		2015				2014
		(As Restated)(a)				(As Restated)(a)
Statement of Cash Flows data:
Net cash used in operating activities		$	(18,142	)		$	(18,542	)
Net cash used in investing activities			(15,561	)			(15,656	)
Net cash from financing activities			34,745				35,073

 

(a)	See “Note 15. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

Working Capital

Net working capital increased to $287.2 million as of June 30, 2015, from $228.9 million as of March 31, 2015, primarily due to the increases in accounts receivable of $75.4 million resulting from sales increases. This change was offset partially by a decrease of $10.2 million in inventory and an increase of $8.7 million in accounts payable, accrued expenses, and accrued income taxes.

Operating Cash Flows

Cash flow from operating activities for the three months ended June 30, 2015 was a use of $18.1 million as compared with cash used by operating activities of $18.5 million for the three months ended June 30, 2014. Cash flow from operating activities during the three months ended June 30, 2015 was impacted by higher growth in accounts receivable compared to the prior year driven by sales revenues increasing $22.7 million or 7.0% versus the three months ended June 30, 2014.

Investing Cash Flows

During the three months ended June 30, 2015, cash used for investing activities was $15.6 million, primarily due to capital expenditures in support of operations and additions of capitalized software. During the three months ended June 30, 2014, cash used for investing activities was $15.7 million, primarily due to capital expenditures in support of operations and an investment in a domestic joint venture operation.

 

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Financing Cash Flows

During the three months ended June 30, 2015, cash provided from financing activities was $34.7 million, utilizing borrowings on our Revolving Credit facility to support our typical seasonal demand increase following the winter months and proceeds from notes, mortgages, and other debt. During the three months ended June 30, 2014, cash provided from financing activities was $35.1 million, utilizing borrowings on our Revolving Credit Facility to support our typical seasonal demand increase.

Capital Expenditures

Capital expenditures totaled $10.6 million, and $7.4 million for the three months ended June 30, 2015 and June 30, 2014, respectively. Our capital expenditures for the three months ended June 30, 2015 were used primarily to support facility expansions, equipment replacements and our recycled resin initiatives.

We currently anticipate that we will make capital expenditures of approximately $45 million in fiscal year 2016. Such capital expenditures are expected to be financed using funds generated by operations. As of June 30, 2015, there were no material contractual obligations or commitments related to these planned capital expenditures.

Financing Transactions

Bank Term Loans

On September 24, 2010, we entered into a credit agreement with PNC Bank, National Association, or PNC, as administrative agent, and lender parties thereto. The credit agreement, as amended and restated on June 12, 2013 and subsequently further amended, provides for our Bank Term Loans consisting of (i) the Revolving Credit Facility providing for revolving loans and letters of credit of up to a maximum aggregate principal amount of $325 million, (ii) the Term Loan Facility providing for the Term Loans in an aggregate original principal amount of $100 million, and (iii) the ADS Mexicana Revolving Credit Facility, described below. The Bank Term Loans also permit us to add additional commitments to the Revolving Credit Facility or the Term Loan Facility not to exceed $50 million in the aggregate. The proceeds of the Revolving Credit Facility are primarily used to provide for our ongoing working capital and capital expenditure needs, to finance acquisitions and distributions, and for our other general corporate purposes. The proceeds of the Term Loan Facility were primarily used for our general corporate purposes. The interest rates on the Bank Term Loans are determined by certain base rates or LIBOR rates, plus an applicable margin. The obligations under the Bank Term Loans are guaranteed by certain of our subsidiaries and secured by substantially all of our personal property assets. On December 20, 2013, we amended the Revolving Credit Facility to, among other terms, make certain amendments in order to permit the payment of a cash dividend. As a result of the restatements and delays in the filing of the various fiscal 2016 and 2015 Form 10-K and 10-Q filings, the Revolving Credit Facility was amended several times to extend the reporting deadlines for financial statements and debt covenant calculations. For further information about the Bank Term Loans, see “Note 12. Debt” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2016 Form 10-K/A (filed concurrently with this Form 10-Q/A) and “Note 14. Subsequent Events” to this Form 10-Q/A. As of June 30, 2015, the outstanding principal drawn on the Revolving Credit Facility was $245.4 million, with $72.3 million available to be drawn on the U.S. facility. As of June 30, 2015, the outstanding principal balance of the Term Loan was $89.4 million.

ADS Mexicana Revolving Credit Facility

On September 24, 2010, our joint venture ADS Mexicana entered into a credit agreement with PNC, as administrative agent, and lender parties thereto. The credit agreement, as amended and restated on June 12, 2013 and subsequently further amended, provides for revolving loans and letters of credit of up to a maximum aggregate principal amount of $12 million. The proceeds of the Revolving Credit Facility are primarily used to cover working capital needs. The interest rates of the revolving credit facilities are determined by certain base rates or LIBOR rates, plus an applicable margin. The obligations under the Revolving Credit Facility are guaranteed by us and certain of our subsidiaries and secured by substantially all of our assets. According to the terms of the ADS Mexicana Revolving Credit Facility, ADS Mexicana is not permitted to make loans to ADS, Inc. As a result of the restatements and delays in the filing of the various fiscal 2016 and 2015 Form 10-K and 10-Q filings, the ADS Mexicana Revolving Credit Facility was amended several times to extend the reporting deadlines for financial statements and debt covenant calculations. For further information about the ADS Mexicana Revolving Credit Facility, see “Note 12. Debt” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2016 Form 10-K/A (filed concurrently with this Form 10-Q/A) and “Note 14. Subsequent Events” to this Form 10-Q/A. As of June 30, 2015, there was no outstanding principal drawn on the ADS Mexicana Revolving Credit Facility and the entire $12.0 million was available to be drawn.

Senior Notes

On December 11, 2009, we entered into a private shelf agreement with Prudential Investment Management Inc., or Prudential, which agreement, as amended and restated on September 24, 2010 and subsequently further amended, provides for the issuance by us of senior secured promissory notes to Prudential or its affiliates from time to time in the aggregate principal amount up to $100 million. Pursuant to the private shelf agreement, on September 27, 2010, we issued $75 million in aggregate principal amount of the

 

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5.60% Senior Series A Notes due September 24, 2018 to repurchase outstanding shares of common stock from certain of our stockholders and to repurchase outstanding shares of convertible preferred stock from the ESOP. On July 24, 2013, we issued $25 million in aggregate principal amount of the 4.05% Senior Series B Notes due September 24, 2019 for our general corporate purposes. The Senior Notes are guaranteed by certain of our subsidiaries and secured by substantially all of our assets. On December 20, 2013, we amended the private shelf agreement to, among other terms, make certain amendments in order to permit the payment of a cash dividend. As a result of the restatements and delays in the filing of the various fiscal 2016 and 2015 Form 10-K and 10-Q filings, the private shelf agreement was amended several times to extend the reporting deadlines for financial statements and debt covenant calculations. For further information about the Senior Notes, see “Note 12. Debt” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2016 Form 10-K/A (filed concurrently with this Form 10-Q/A) and “Note 14. Subsequent Events” to this Form 10-Q/A. At June 30, 2015 the outstanding principal balance on these notes was $100.0 million.

Covenant Compliance

Our outstanding debt agreements and instruments contain various restrictive financial covenants including, but not limited to, limitations on additional indebtedness and capital distributions, including dividend payments. The two primary debt covenants include a Leverage Ratio and a Fixed Charge Ratio. For any relevant period of determination, The Leverage Ratio is calculated by dividing Total Consolidated Indebtedness (funded debt plus guarantees) by Consolidated EBITDA. The current upper limit is 4.0 times. The Fixed Charge Ratio is calculated by dividing the sum of Consolidated EBITDA minus Capital Expenditures minus cash Income Taxes paid, by the sum of Fixed Charges. Fixed Charges include cash Interest expense, scheduled principal payments on Indebtedness, and ESOP Capital Distributions in excess of $10 million in a given fiscal year. The current minimum ratio is 1.25 times. For further information, see “Note 12. Debt” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2015 Form 10-K. We were in compliance with our debt covenants as of June 30, 2015, with the exception of the determination in December 2016 that certain intercompany loans between ADS Mexicana and ADS, Inc. had occurred between November 2014 and November 2015 that triggered an event of default according to the terms of the ADS Mexicana Revolving Credit Facility. On December 13, 2016, ADS Mexicana obtained a covenant waiver from the lenders.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, with the exception of the guarantee of 50% of certain debt of our unconsolidated South American Joint Venture, as further discussed in “Note 5. Related Party Transactions” to the Condensed Consolidated Financial Statements. As of June 30, 2015, our South American Joint Venture had approximately $14.7 million of outstanding debt. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity, or capital resources.

Critical Accounting Policies and Estimates

There have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2016 Form 10-K/A (filed concurrently with this Form 10-Q/A) which includes our restated consolidated financial statements for the fiscal years ended March 31, 2016 and prior.

Forward-Looking Statements

This Quarterly Report on 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 report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects and growth strategies and the industries in which we operate and including, without limitation, statements relating to our future performance.

 

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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 and liquidity, and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our consolidated results of operations, financial condition and liquidity, and industry development are consistent with the forward-looking statements contained in this report, 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 the risks and uncertainties discussed in this report under the headings “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:

 

•

fluctuations in the price and availability of resins and other raw materials and our ability to pass any increased costs of raw materials on to our customers in a timely manner;

 

•

volatility in general business and economic conditions in the markets in which we operate, including without limitation, factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence;

 

•

cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending;

 

•

the risks of increasing competition in our existing and future markets, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials;

 

•

our ability to continue to convert current demand for concrete, steel and PVC pipe products into demand for our high performance thermoplastic corrugated pipe and Allied Products;

 

•

the effect of weather or seasonality;

 

•

the loss of any of our significant customers;

 

•

the risks of doing business internationally;

 

•

the risks of conducting a portion of our operations through joint ventures;

 

•

our ability to expand into new geographic or product markets;

 

•

our ability to achieve the acquisition component of our growth strategy;

 

•

the risk associated with manufacturing processes;

 

•

our ability to manage our assets;

 

•

the risks associated with our product warranties;

 

•

our ability to manage our supply purchasing and customer credit policies;

 

•

the risks associated with our self-insured programs;

 

•

our ability to control labor costs and to attract, train and retain highly-qualified employees and key personnel;

 

•

our ability to protect our intellectual property rights;

 

•

changes in laws and regulations, including environmental laws and regulations;

 

•

our ability to project product mix;

 

•

the risks associated with our current levels of indebtedness;

 

•

our ability to meet future capital requirements and fund our liquidity needs;

 

•

the risk that additional information may arise that would require the Company to make additional adjustments or revisions or to restate further the financial statements and other financial data for certain prior periods and any future periods;

 

•

any further delay in the filing of any filings with the SEC;

 

•

the review of potential weaknesses or deficiencies in the 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.

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.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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.

Interest Rate Risk

We are subject to interest rate risk associated with our bank debt. Changes in interest rates impact the fair value of our fixed-rate debt, but there is no impact to earnings and cash flow. Alternatively, changes in interest rates do not affect the fair value of our variable-rate debt, but they do affect future earnings and cash flow. The Revolving Credit Facility, the Term Loan Facility, and our industrial development revenue bond, or IDRB, notes bear variable interest rates. The Revolving Credit Facility and Term Loan Facility bear interest either at LIBOR or the Prime Rate, at our option, plus applicable pricing margins. The IDRB notes bear interest at weekly commercial paper rates, plus applicable pricing margins. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $2.3 million based on our borrowings as of June 30, 2015. Assuming the Revolving Credit Facility is fully drawn, each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately $3.1 million per year. To mitigate the impact of interest rate volatility, we had two interest rate swaps in effect as of June 30, 2015. The first swap is a $50.0 million notional value, non-amortizing swap, at a fixed LIBOR rate of 0.86% which expires on September 1, 2016. A second $50.0 million notional value swap took effect on September 2, 2014 and expires on September 1, 2016. The rate is at a fixed LIBOR of 1.08%.

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of accounts receivable. We provide our products to customers based on an evaluation of the customers’ financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. We monitor the exposure for credit losses and maintain allowances for anticipated losses. Concentrations of credit risk with respect to our accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion among many different geographies.

Raw Material and Commodity Price Risk

Our primary raw materials used in the production of our products are polyethylene resin for HDPE pipe and polypropylene resin for PP pipe. As these resins are hydrocarbon-based materials, changes in the price of feedstocks, such as crude oil and natural gas, as well as changes in the market supply and demand may cause the cost of these resins to fluctuate significantly. Raw materials account for the majority of our cost of goods sold. Given the significance of these costs and the inherent volatility in supplier pricing, our ability to reflect these changes in the cost of resins in our product selling prices in an efficient manner, passing the increase on to our customers, contributes to the management of our overall supply price risk and the potential impact on our results of operations.

We manage supply risk with financial and physical hedge contracts for the HDPE and PP resins used in the manufacture of our Pipe and Allied Products, as well as for the diesel fuel used by our in-house fleet of delivery trucks. Our physical hedge contracts for HDPE resins are typically at a fixed price and volume over time. We use, to a limited extent, financial derivatives for PP resin in the form of fixed price swaps based on propylene monomer. For diesel fuel, we have utilized option contracts in the form of collars with put and call options.

We have supply contracts that typically include supply periods of greater than one year. Except for physical-hedged resin contracts, we generally do not enter into long-term purchase orders for the delivery of raw materials. Our orders with suppliers are flexible and do not normally contain minimum purchase volumes or fixed prices. Accordingly, our suppliers may change their selling prices or other relevant terms on a monthly basis, exposing us to pricing risk. Our use of pricing and forecasting tools, centralized procurement, additional sources of supply and incorporation of vertical integration for recycled material have increased our focus on efficiency and resulted in lower overall supply costs.

Inflation Risk

Our cost of goods sold is subject to inflationary pressures and price fluctuations of the raw materials we use, primarily high density polyethylene and polypropylene resins. Historically, we have generally been able over time to recover the effects of inflation and price fluctuations through sales price increases and production efficiencies related to technological enhancements and improvements. However, we cannot reasonably estimate our ability to successfully recover any price increases.

 

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Foreign Currency Exchange Rate Risk

We have operations in countries outside of the United States, all of which use the respective local foreign currency as their functional currency. Each of these operations may enter into contractual arrangements with customers or vendors that are denominated in currencies other than its respective functional currency. Consequently, our results of operations may be affected by exposure to changes in foreign currency exchange rates and economic conditions in the regions in which we sell or distribute our products. Exposure to variability in foreign currency exchange rates from these transactions is managed, to the extent possible, by natural hedges which result from purchases and sales occurring in the same foreign currency within a similar period of time, thereby offsetting each other to varying degrees.

In addition to the foreign currency transaction-related gains and losses that are reflected within the results of operations, we are subject to foreign currency translation risk, as the financial statements for our foreign subsidiaries are measured and recorded in the respective subsidiary’s functional currency and translated into U.S. dollars for consolidated financial reporting purposes. The resulting translation adjustments are recorded net of tax impact in the Condensed Consolidated Statement of Comprehensive Income.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that 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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“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 Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (the “Fiscal 2015 Form 10-K”) we concluded that our internal control over financial reporting was not effective based upon certain material weaknesses identified as of March 31, 2015. Although we are not required to comply with the internal control reporting requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal quarter ended June 30, 2015 (the “Evaluation Date”) due to the transition period established by rules of the SEC for newly-public companies, our internal control over financial reporting is an integral part of our disclosure controls and procedures. Our CEO and CFO have concluded that those material weaknesses previously identified in the Fiscal 2015 Form 10-K were still present as of the Evaluation Date. In addition, after the filing of the Fiscal 2016 Form 10-K, an additional material weakness was identified as part of the Stock-Based Compensation Restatement. See “Item 9A — Controls and Procedures” in our Fiscal 2016 Form 10-K/A for further discussion of the material weaknesses. Based on those material weaknesses, and the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of the Evaluation Date.

Changes in Internal Control over Financial Reporting

Our remediation efforts were ongoing during the three months ended June 30, 2015, and, other than those remediation efforts described in “Remediation Process” in Item 9A of our Fiscal 2016 Form 10-K/A, there were no changes in our 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 June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all others similarly situated v. Advanced Drainage Systems, Inc., et al. (Case No. 1:15-cv-05955-KPF), was commenced in the U.S. District Court for the Southern District of New York, naming the Company, along with Joseph A. Chlapaty, the Company’s Chief Executive Officer, and Mark B. Sturgeon, the Company’s former Chief Financial Officer, as defendants and alleging violations of the federal securities laws. The complaint alleges that the Company made material misrepresentations and/or omissions of material fact in its public disclosures during the period from September 5, 2014 through July 14, 2015, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. Plaintiffs seek an unspecified amount of monetary damages on behalf of the putative class and an award of costs and expenses, including counsel fees and expert fees. The Company believes that it has valid and meritorious defenses and will vigorously defend against these allegations, but litigation is subject to many uncertainties and the outcome of this matter is not predictable with assurance. While it is reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but they could be material.

On August 12, 2015, the SEC Division of Enforcement (“Enforcement Division”) informed the Company that it was conducting an informal inquiry with respect to the Company. As part of this inquiry, the Enforcement Division requested the voluntary production of certain documents generally related to the Company’s accounting practices. Subsequent to the initial voluntary production request, the Company received document subpoenas from the Enforcement Division pursuant to a formal order of investigation. The Company has from the outset cooperated with the Enforcement Division’s investigation and intends to continue to do so. While it is reasonably possible that this investigation ultimately could be resolved unfavorably to the Company, the Company is currently unable to estimate the range of possible losses, but they could be material.

We are involved from time to time in various legal proceedings that arise in the ordinary course of our business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. We believe that such litigation, claims, and administrative proceedings will not have a material adverse impact on our financial position or our results of operations. We record a liability when a loss is considered probable, and the amount can be reasonably estimated. In management’s opinion, none of these proceedings are material in relation to our consolidated operations, cash flows, or financial position, and we have adequate accrued liabilities to cover our estimated probable loss exposure.

 

Item 1A.

Risk Factors

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 2016 Form 10-K/A, which is being filed concurrently with this Form 10-Q/A. These factors are further supplemented by those discussed in “Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2016 Form 10-K/A 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/A.

 

Item 2.

Unregistered Sale of Equity Securities

Not applicable.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

None.

 

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Item 6.

Exhibits

The exhibits listed in the Exhibit Index are incorporated herein by reference.

 

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SIGNATURES

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: January 10, 2017

 

 

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EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
31.1		Certification of President and Chief Executive Officer of Advanced Drainage Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Executive Vice President and Chief Financial Officer of Advanced Drainage Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive data files pursuant to Rule 405 of Regulation S-T.

 

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Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Joseph A. Chlapaty, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q/A (this “Report”) of the registrant, Advanced Drainage Systems, Inc.;

 

2.	Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

 

3.	Based on my knowledge, the financial statements and other financial information included in this Report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;

 

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

 

b.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

 

c.

Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 10, 2017

 

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Scott A. Cottrill, certify that:

 

1.	I have reviewed this Quarterly Report on Form 10-Q/A (this “Report”) of the registrant, Advanced Drainage Systems, Inc.;

 

2.	Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

 

3.	Based on my knowledge, the financial statements and other financial information included in this Report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;

 

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

 

b.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

 

c.

Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 10, 2017

 

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as the principal executive officer of Advanced Drainage Systems, Inc. (the “Company”), that, to the best of his knowledge, the Quarterly Report on Form 10-Q/A of the Company for the quarter ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.

January 10, 2017

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as the principal financial officer of Advanced Drainage Systems, Inc. (the “Company”), that, to the best of his knowledge, the Quarterly Report on Form 10-Q/A of the Company for the quarter ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.

January 10, 2017

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.