10-Q/A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

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  x

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  x    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   x  (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  x

As of October 31, 2014, 52,938,098 shares of common stock were outstanding. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS”. In addition, as of October 31, 2014, 234,271 shares of unvested restricted common stock were outstanding and 26,129,869 shares of ESOP preferred stock, convertible into 20,099,096 shares of common stock, were outstanding. As of October 31, 2014, 73,271,465 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.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

EXPLANATORY NOTE

     1   

PART I. FINANCIAL INFORMATION

  
ITEM 1.   

Condensed Consolidated Financial Statements (Unaudited)

  
  

Condensed Consolidated Balance Sheets as of September 30, 2014 (Restated) and March 31, 2014 (Restated)

     2   
  

Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2014 (Restated) and 2013 (Restated)

     3   
  

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September  30, 2014 (Restated) and 2013 (Restated)

     4   
  

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 (Restated) and 2013 (Restated)

     5   
  

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) and Mezzanine Equity for the six months ended September 30, 2014 (Restated) and 2013 (Restated)

     6   
  

Notes to Condensed Consolidated Financial Statements (Restated)

     7   
ITEM 2.   

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

     34   
ITEM 3.   

Quantitative and Qualitative Disclosures About Market Risk

     49   
ITEM 4.   

Controls and Procedures

     50   
PART II. OTHER INFORMATION       
ITEM 1.    Legal Proceedings      51   
ITEM 1A.    Risk Factors      51   
ITEM 2.    Unregistered Sale of Equity Securities      51   
ITEM 3.    Defaults Upon Senior Securities      52   
ITEM 4.    Mine Safety Disclosures      52   
ITEM 5.    Other Information      52   
ITEM 6.    Exhibits      52   

SIGNATURES

     53   

EXHIBIT INDEX

     54   

 

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Table of Contents

EXPLANATORY NOTE

During the preparation of its Annual Report on Form 10-K for the fiscal year ended March 31, 2015, Advanced Drainage Systems, Inc. identified errors in its historical financial statements related to the accounting for leases, inventory, long-lived assets, ADS Mexicana, income taxes, and other items. 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 our Quarterly Report on Form 10-Q for the three and six months ended September 30, 2014 as originally filed with the Securities and Exchange Commission on November 10, 2014 (the “Original Form 10-Q”): (i) Item 1 of Part I, “Financial Statements,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (iii) Item 3 of Part I, “Quantitative and Qualitative Disclosures About Market Risk”, (iv) Item 4 of Part I, “Controls and Procedures”, (v) Item 1A of Part II “Risk Factors”, and (vi) Item 6 of Part II, “Exhibits”. We have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.01, 31.02, 32.01 and 32.02, respectively, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected, or have been changed; however, for the convenience of the reader, this report on Form 10-Q/A restates in its entirety, as amended, our Original Form 10-Q. 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.

This Form 10-Q/A is being filed concurrently with the Company’s Form 10-K for the year ended March 31, 2015 and Forms 10-Q/A for the periods ended June 30, 2014 and December 31, 2014.

 

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Table of Contents

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)    September 30, 2014     March 31, 2014  

ASSETS

    

Current assets:

    

Cash

   $ 6,581      $ 3,931   

Receivables (less allowance for doubtful accounts of $4,381 and $4,490, respectively)

     246,046        148,271   

Inventories

     232,262        259,891   

Deferred income taxes and other current assets

     13,737        14,465   
  

 

 

   

 

 

 

Total current assets

     498,626        426,558   

Property, plant and equipment, net

     359,742        350,351   

Other assets:

    

Goodwill

     88,000        88,017   

Intangible assets, net

     54,132        59,194   

Other assets

     67,660        65,447   
  

 

 

   

 

 

 

Total assets

   $ 1,068,160      $ 989,567   
  

 

 

   

 

 

 

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT)

    

Current liabilities:

    

Current maturities of debt obligations

   $ 11,148      $ 11,153   

Current maturities of capital lease obligations

     12,225        12,364   

Accounts payable

     115,716        110,972   

Other accrued liabilities

     50,240        43,085   

Accrued income taxes

     19,698        7,980   
  

 

 

   

 

 

 

Total current liabilities

     209,027        185,554   

Long-term debt obligation

     386,435        442,895   

Long-term capital lease obligations

     49,237        34,366   

Deferred tax liabilities

     60,401        66,333   

Other liabilities

     27,319        32,170   
  

 

 

   

 

 

 

Total liabilities

     732,419        761,318   

Commitments and contingencies (see Note 14)

    

Mezzanine equity:

    

Redeemable common stock: $0.01 par value; 0 and 38,320 shares issued and outstanding, respectively

     —          549,119   

Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized; 44,170 shares issued; 26,129 shares outstanding

     326,623        291,720   

Deferred compensation – unearned ESOP shares

     (215,024     (197,888
  

 

 

   

 

 

 

Total mezzanine equity

     111,599        642,951   

Stockholders’ equity (deficit):

    

Common stock: $0.01 par value; 1,000,000 and 148,271 shares authorized; 153,560 and 109,951 shares issued; 52,935 and 9,141 shares outstanding, respectively

     12,393        11,957   

Paid-in capital

     689,980        12,438   

Common stock in treasury, at cost

     (447,674     (448,439

Accumulated other comprehensive loss

     (9,355     (6,830

Retained deficit

     (40,900     (2,412
  

 

 

   

 

 

 

Total ADS stockholders’ equity (deficit)

     204,444        (433,286

Noncontrolling interest in subsidiaries

     19,698        18,584   
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     224,142        (414,702
  

 

 

   

 

 

 

Total liabilities, mezzanine equity and stockholders’ equity (deficit)

   $ 1,068,160      $ 989,567   
  

 

 

   

 

 

 

 

(1) See Note 2. 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
September 30,
    Six Months Ended
September 30,
 
(Amounts in thousands, except per share data)    2014     2013     2014     2013  

Net sales

   $ 366,714      $ 332,727      $ 693,148      $ 625,306   

Cost of goods sold

     296,951        267,139        562,527        503,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     69,763        65,588        130,621        121,938   

Operating expenses:

        

Selling

     20,240        18,635        39,792        35,155   

General and administrative

     13,843        13,655        29,641        26,742   

Loss (gain) on disposal of assets or businesses

     281        204        345        (4,532

Intangible amortization

     2,610        2,620        5,223        5,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     32,789        30,474        55,620        59,333   

Other expense:

        

Interest expense

     5,044        4,721        10,095        9,450   

Other miscellaneous (income) expense, net

     (240     (24     (456     20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,985        25,777        45,981        49,863   

Income tax expense

     8,926        8,928        16,819        18,139   

Equity in net loss of unconsolidated affiliates

     62        192        724        518   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     18,997        16,657        28,438        31,206   

Less net income attributable to noncontrolling interest

     2,153        1,917        3,028        3,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

     16,844        14,740        25,410        27,714   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of Redeemable convertible preferred stock

     7,319        (3,186     (11,054     (4,764

Dividends to Redeemable convertible preferred stockholders

     (37     (214     (75     (430

Dividends paid to unvested restricted stockholders

     —          (8     —          (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders and participating securities

     24,126        11,332        14,281        22,504   

Undistributed income allocated to participating securities

     (2,768     (1,203     (1,702     (2,406
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 21,358      $ 10,129      $ 12,579      $ 20,098   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     51,518        47,250        49,538        47,220   

Diluted

     56,463        47,579        52,198        47,634   

Net income per share:

        

Basic

   $ 0.41      $ 0.21      $ 0.25      $ 0.43   

Diluted

   $ 0.41      $ 0.21      $ 0.25      $ 0.42   

Cash dividends declared per share

   $ —        $ 0.03      $ —        $ 0.06   

 

(1) See Note 2. 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
September 30,
    Six Months Ended
September 30,
 
(Amounts in thousands)    2014     2013     2014     2013  

Net income

   $ 18,997      $ 16,657      $ 28,438      $ 31,206   

Other comprehensive (loss) income:

        

Currency translation, before tax

     (3,591     1,405        (3,432     (3,076

Other, before tax

     —          —          —          5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income, before tax

     (3,591     1,405        (3,432     (3,071
  

 

 

   

 

 

   

 

 

   

 

 

 

Tax attributes of items in other comprehensive (loss) income:

        

Other

     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total tax benefit

     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     15,406        18,062        25,006        28,133   

Less other comprehensive loss attributable to noncontrolling interest, net of tax

     (761     (293     (907     (1,266

Less net income attributable to noncontrolling interest

     2,153        1,917        3,028        3,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to ADS

   $ 14,014      $ 16,438      $ 22,885      $ 25,907   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 2. 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)

 

     Six Months Ended September 30,  
(Amounts in thousands)    2014     2013  

Cash Flows from Operating Activities

   $ 14,906      $ 8,385   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Capital expenditures

     (15,596     (21,561

Proceeds from sale of assets or businesses

     156        6,056   

Investment in unconsolidated affiliate

     (7,566     (5,300

Additions of capitalized software

     (441     (186

Other investing activities

     (525     (533
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,972     (21,524
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Proceeds from Revolving Credit Facility

     174,760        225,400   

Payments on Revolving Credit Facility

     (227,000     (242,300

Proceeds from term loan

     —          100,000   

Payments on term loan

     (2,500     (77,500

Proceeds from Senior Notes

     —          25,000   

Payments of notes, mortgages, and other debt

     (1,665     (963

Payments on capital lease obligation

     (5,467     (5,899

Payments for deferred initial public offering costs

     (4,458     —     

Debt issuance costs

     —          (2,311

Proceeds from initial public offering of common stock, net of underwriter discounts and commissions

     79,131        —     

Cash dividends paid

     (1,007     (4,293

Redemption of Redeemable convertible preferred stock

     —          (3,146

Other financing activities

     152        (183
  

 

 

   

 

 

 

Net cash provided by financing activities

     11,946        13,805   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (230     9   
  

 

 

   

 

 

 

Net change in cash

     2,650        675   

Cash at beginning of period

     3,931        1,361   
  

 

 

   

 

 

 

Cash at end of period

   $ 6,581      $ 2,036   
  

 

 

   

 

 

 

 

(1) See Note 2. Restatement of Previously Issued Financial Statements.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY

(Unaudited)

 

    Common
Stock
    Paid-In
Capital
    Common
Stock in
Treasury
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
(Deficit)
    Total
ADS
Stockholders’
Equity
(Deficit)
    Non-
controlling
Interest

in
Subsidiaries
    Total
Stock-

holders’
Equity
(Deficit)
    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, 2013

    109,979      $ 11,957      $ 41,152        101,191      $  (448,571   $ (856   $ 87,331      $  (308,987   $ 23,265      $  (285,722     38,292      $ 522,276        26,547      $ 282,547        18,461      $  (196,477   $ 608,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative restatement adjustment

    —          —          (1,126     —          —          (225     (8,129     (9,480     (4,721     (14,201     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2013 (As Restated)(1)

    109,979      $ 11,957      $ 40,026        101,191      $ (448,571   $ (1,081   $ 79,202      $ (318,467   $ 18,544      $ (299,923     38,292      $ 522,276        26,547      $ 282,547        18,461      $ (196,477   $ 608,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —          —          —          —          —          —          27,714        27,714        3,492        31,206        —          —          —          —          —          —          —     

Other comprehensive loss

    —          —          —          —          —          (1,807     —          (1,807     (1,266     (3,073     —          —          —          —          —          —          —     

Redeemable convertible preferred stock dividends

    —          —          —          —          —          —          (355     (355     —          (355     —          —          —          —          —          —          —     

Common stock dividend ($0.058 per share)

    —          —          —          —          —          —          (2,724     (2,724     —          (2,724     —          —          —          —          —          —          —     

Dividend paid to noncontrolling interest holder

    —          —          —          —          —          —          —          —          (1,214     (1,214     —          —          —          —          —          —          —     

Allocation of ESOP shares to participants for compensation

    —          —          (1,023     —          —          —          —          (1,023     —          (1,023     —          —          —          —          (537     6,049        6,049   

Exercise of common stock options

    —          —          109        (94     417        —          —          526        —          526        —          —          —          —          —          —          —     

Redemption of common shares to exercise stock options

    —          —          204        14        (204     —          —          —          —          —          —          —          —          —          —          —          —     

Stock based compensation

    —          —          462        —          —          —          —          462        —          462        —          —          —          —          —          —          —     

Restricted stock awards

    —          —          850        (104     328        —          —          1,178        —          1,178        —          —          —          —          —          —          —     

Redemption of redeemable convertible preferred stock

    —          —          —          —          —          —          —          —          —          —          —          —          (297     (3,146     —          —          (3,146

Purchase of common stock

    —          —          —          14        (171     —          —          (171     —          (171     —          —          —          —          —          —          —     

Reclassification of common stock to redeemable common stock

    (28     —          (385     —          —          —          —          (385     —          (385     28        385        —          —          —          —          385   

Adjustments to redeemable convertible preferred stock fair value measurement

    —          —          —          —          —          —          (4,764     (4,764     —          (4,764     —          —          —          16,173        —          (11,409     4,764   

Adjustments to redeemable common stock fair value measurement

    —          —          —          —          —          —          (30,528     (30,528     —          (30,528     —          30,528        —          —          —          —          30,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013 (Unaudited, As Restated)(1)

    109,951      $ 11,957      $ 40,243        101,021      $  (448,201   $  (2,888   $ 68,545     $  (330,344   $ 19,556      $  (310,788     38,320      $ 553,189        26,250      $ 295,574        17,924      $  (201,837   $ 646,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2014

    109,951      $ 11,957      $ 22,547        100,810      $  (448,439   $  (5,977   $  —        $  (419,912   $ 22,576      $  (397,336     38,320      $ 549,119        26,129      $ 291,720        17,727      $  (197,888   $ 642,951   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative restatement adjustment

    —          —          (10,109     —          —          (853     (2,412     (13,374     (3,992     (17,366     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2014 (As Restated)(1)

    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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —          —          —          —          —          —          25,410        25,410        3,028        28,438        —          —          —          —          —          —          —     

Other comprehensive loss

    —          —          —          —          —          (2,525     —          (2,525     (907     (3,432     —          —          —          —          —          —          —     

Dividend paid to noncontrolling interest holder

    —          —          —          —          —          —          —          —          (1,007     (1,007     —          —          —          —          —          —          —     

Allocation of ESOP shares to participants for compensation

    —          —          (1,339     —          —          —          —          (1,339     —          (1,339     —          —          —          —          (537     6,713        6,713   

Exercise of common stock options

    —          —          174        (78     349        —          —          523        —          523        —          —          —          —          —          —          —     

Redemption of common shares to exercise stock options

    —          —          93        7        (93     —          —          —          —          —          —          —          —          —          —          —          —     

Stock-based compensation

    —          —          1,778        —          —          —          —          1,778        —          1,778        —          —          —          —          —          —          —     

Restricted stock awards

    —          —          1,489        (114     509        —          —          1,998        —          1,998        —          —          —          —          —          —          —     

Initial Public Offering (IPO)

    5,289        53        72,245        —          —          —          —          72,298        —          72,298        —          —          —          —          —          —          —     

Reclassification of liability classified stock options upon IPO

    —          —          1,522        —          —          —          —          1,522        —          1,522        —          —          —          —          —          —          —     

Adjustments to redeemable convertible preferred stock fair value measurement

    —          —          (13,077     —          —          —          2,023        (11,054     —          (11,054     —          —          —          34,903        —          (23,849     11,054   

Adjustments to redeemable common stock fair value measurement

    —          —          —          —          —          —          (65,921     (65,921     —          (65,921     —          65,921        —          —          —          —          65,921   

Termination of redemption feature upon IPO

    38,320        383        614,657        —          —          —          —          615,040        —          615,040        (38,320     (615,040     —          —          —          —          (615,040
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014 (Unaudited, As Restated)(1)

    153,560      $ 12,393      $ 689,980        100,625      $  (447,674   $  (9,355   $  (40,900   $ 204,444      $ 19,698      $ 224,142        —        $  —          26,129      $ 326,623        17,190      $  (215,024   $ 111,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 2. Restatement of Previously Issued Financial Statements.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Amounts in thousands, except per share data)

 

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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.

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, bringing the total number of shares issued and outstanding as of July 25, 2014 to 52,881. 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 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.

Basis of Presentation

The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Condensed Consolidated Balance Sheet as of March 31, 2014 was derived from audited financial statements. 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 2. Restatement of Previously Issued Financial Statements, necessary to present fairly its financial position as of September 30, 2014 and the results of operations for the three and six months ended September 30, 2014 and 2013 and cash flows for the six months ended September 30, 2014 and 2013. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, filed in our Annual Report on Form 10-K for the year ended March 31, 2015, filed concurrently with this Form 10-Q/A.

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 loss of unconsolidated affiliates in our Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.

Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies and

 

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liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, our allowance for doubtful accounts, inventory, useful lives of our property, plant and equipment and amortizing intangible assets, determination of the proper accounting for leases, accounting for investments, evaluation of goodwill, intangible assets and other long-lived assets for impairment, accounting for stock-based compensation and our ESOP, valuation of our Redeemable common stock and Redeemable convertible preferred stock, determination of allowances for sales returns, rebates and discounts, determination of the valuation allowance, if any, on deferred tax assets, and reserves for uncertain tax positions. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Management believes the accounting estimates are appropriate and reasonably determined; however, due to the inherent uncertainties in making these estimates, actual results could differ from those estimates.

Property, Plant and Equipment and Depreciation Method

Property, plant and equipment are recorded at cost less accumulated depreciation, with the exception of assets acquired through acquisitions, which are initially recorded at fair value. Equipment acquired under capital lease is recorded at the lower of fair market value or the present value of the future minimum lease payments. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets or the lease term, if shorter, as follows:

 

     Years

Buildings

   40

Machinery and equipment

   3 – 15

Leasehold improvements

   Shorter of useful life
or life of lease

Costs of additions and major improvements are capitalized, whereas maintenance and repairs that do not improve or extend the life of the asset are charged to expense as incurred. When assets are retired or disposed, the cost and related accumulated depreciation are removed from the asset accounts and any resulting gain or loss is reflected in Loss (gain) on disposal of assets or businesses in our Condensed Consolidated Statements of Operations. Construction in progress is also recorded at cost and includes capitalized interest, capitalized payroll costs and related costs such as taxes and other fringe benefits. Interest capitalized was $177 and $316 during the three and six months ended September 30, 2014, respectively, and $246, and $410 during the three and six months ended September 30, 2013, respectively.

Leases

Leases are reviewed for capital or operating classification at their inception. The Company uses the lower of the rate implicit in the lease or its incremental borrowing rate in the assessment of lease classification and assumes the initial lease term includes cancellable and renewal periods that are reasonably assured. For leases classified as capital leases at lease inception, we record a capital lease asset and lease financing obligation equal to the lesser of the present value of the minimum lease payments or the fair market value of the leased asset. The capital lease asset is recorded in Property, plant and equipment, net and amortized to its expected residual value at the end of the lease term using the straight-line method, and the lease financing obligation is amortized using the effective interest method over the lease term with the rental payments being allocated to principal and interest. For leases classified as operating leases, we record rent expense over the lease term using the straight-line method.

Recent Accounting Pronouncements Not Yet Adopted

In April 2014, the Financial Accounting Standards Board issued authoritative guidance amending existing requirements for reporting discontinued operations. Under the new guidance, discontinued operations reporting will be limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. Public entities will apply the amended guidance prospectively to all disposals occurring within annual periods beginning on or after December 15, 2014, and interim periods within those years. We will adopt this standard effective April 1, 2015. We are currently evaluating the impact of this amendment on our consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued an accounting standards update which amends the guidance for revenue recognition. This amendment contains principles that will require an entity to recognize revenue to depict the transfer of goods and services to customers at an amount that an entity expects to be entitled to in exchange for goods or services. The amendment sets forth a new revenue recognition model that requires identifying the contract, identifying the performance

 

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obligations and recognizing the revenue upon satisfaction of performance obligations. This amendment is effective for annual periods beginning on or after December 15, 2016, and interim periods within those years, with earlier adoption not permitted. We will adopt this standard effective April 1, 2017. We are currently evaluating the impact of this amendment on our consolidated financial statements.

In August 2014, the Financial Accounting Standards Board issued an accounting standards update which provides guidance for management’s assessment of an entity’s ability to continue as a going concern. The new guidance is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of the consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be effective for annual periods beginning on or after December 15, 2016, and interim periods within those years, with earlier adoption permitted. We will adopt this standard effective April 1, 2017. We are currently evaluating the impact of this new standard on our consolidated financial statements.

 

2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Background

In June of 2015, in connection with the preparation of the Company’s consolidated annual financial statements for the fiscal year ended March 31, 2015, certain errors related to the Company’s accounting treatment for its transportation and equipment leases and inventory methodology were identified. As the Company completed additional accounting review procedures, it identified additional errors related to long-lived assets, ADS Mexicana, and certain other miscellaneous items.

Due to these errors, as further described below, and based upon the recommendation of management, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) determined on August 14, 2015 that the Company’s previously issued financial statements should no longer be relied upon. As a result of the foregoing, the Company has restated its condensed consolidated financial statements as of September 30, 2014 and March 31, 2014 and for the three and six months ended September 30, 2014 and 2013. The restatement also affects periods prior to fiscal year 2014, with the cumulative effect of the errors reflected as an adjustment to the fiscal year 2014 opening stockholders’ equity (deficit) balance.

Accounting Adjustments

The following is a discussion of the significant accounting adjustments that were made to the Company’s historical condensed consolidated financial statements.

Lease Accounting Adjustments

The Company leases real estate and equipment under various lease agreements. Historically, assets leased under the Company’s transportation and equipment leasing program (“Fleet Leases”) have been classified as operating leases. However, based upon a reexamination of the Company’s historic assumptions, estimates and judgments with respect to lease accounting, the Company has determined that a substantial portion of the Fleet Leases should instead be classified as capital leases.

The Company has also reexamined its historic assumptions, estimates and judgments with respect to the accounting for real estate and aircraft leases that were previously classified as operating leases. In many cases, the Company has determined that the leases should instead be classified as capital leases due to the inclusion of contingent penalty amounts in the minimum lease payments used for purposes of the lease classification assessment.

Inventory Accounting Adjustments

The Company identified and corrected certain errors related to its accounting for inventory. The errors primarily related to the Company’s incorrect historical calculation of inventory costing based on the first-in first-out (“FIFO”) method, the inappropriate capitalization of certain inter-plant freight expense and other overhead costs, the misclassification of certain overhead costs between general and administrative expense and cost of goods sold and the misclassification of our financial fuel hedge losses between Cost of goods sold and Other miscellaneous (income) expense, net.

 

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Long-Lived Assets Accounting Adjustments

The Company identified and corrected certain errors related to the accounting for long-lived assets included in Property, plant and equipment, Goodwill, Intangible assets and Other assets in the condensed consolidated balance sheets. These errors primarily related to either the initial capitalization, subsequent depreciation or amortization, or the timing or amount of impairment charges.

ADS Mexicana Accounting Adjustments

In October 2015, the Company became aware of questions related to the proper characterization of certain ADS Mexicana transactions including an aircraft leasing arrangement, a real estate leasing arrangement and several service arrangements that involved ADS Mexicana related parties. Based on the results of a management review and an independent investigation authorized by the Audit Committee, it was determined that the various lease and services arrangements described above, as well as certain additional services arrangements with former related parties identified during the course of the investigation, lacked commercial and economic substance or proper supporting documentation as to the service performed, and therefore were not appropriately reflected in the Company’s consolidated financial statements. These errors have been corrected in the restated condensed consolidated financial statements, with these adjustments primarily impacting Other miscellaneous (income) expense, net, Net income attributable to noncontrolling interest and Noncontrolling interest in subsidiaries.

Management also identified potential accounting errors related to ADS Mexicana’s revenue recognition cut-off practices, which were included in the scope of the independent investigation authorized by the Audit Committee. As a result, the Company identified instances where ADS Mexicana recognized revenue prior to the date of shipment or transfer of title/ownership, which is not in accordance with U.S. GAAP.

The Company also identified and corrected certain other errors related to the accounting for ADS Mexicana. These adjustments related to the increase of the allowance for doubtful accounts, errors related to the inventory costing methodology, and certain other miscellaneous items.

Income Taxes and Other Accounting Adjustments

The Company recorded adjustments to income taxes to reflect the impact of the restatement adjustments, as well as discrete tax adjustments related to transfer pricing. See Note 18. Income Taxes for discussion of the related impact to our effective tax rate. The Company also identified and corrected certain other errors, all of which are insignificant individually and in the aggregate. The nature of the primary items besides income taxes in this category of adjustments is described as follows:

 

    The adjustments to the accrued liability for customer rebates are the result of the Company’s prior methodology not properly capturing all rebates due at period end.

 

    The adjustments related to the Tuberias Tigre – ADS Limitada joint venture (“South American Joint Venture”) were the result of an impairment of equipment in the fiscal year ended March 31, 2014 that was not identified until the time of a subsequent-year statutory audit. As a result, the Company has corrected its equity method accounting to properly reflect the impairment charge.

Impact on Condensed Consolidated Statements of Operations

The net effect of the restatement described above on the Company’s previously reported condensed consolidated statements of operations for the three months ended September 30, 2014 and 2013 is as follows:

 

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Table of Contents
     Three Months Ended September 30, 2014  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands, except
per share data)
     Leases     Inventory     Long-Lived Assets     ADS
Mexciana
    Income Taxes and
Other
   

Net sales

   $ 364,724      $ —        $ —        $ —        $ 1,856      $ 134      $ 366,714   

Cost of goods sold

     282,282        531        11,665        16        1,815        642        296,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     82,442        (531     (11,665     (16     41        (508     69,763   

Operating expenses:

              

Selling

     19,762        281        (24     143        162        (84     20,240   

General and administrative

     18,879        (18     (4,574     75        (477     (42     13,843   

Loss on disposal of assets or businesses

     —          23        —          258        —          —          281   

Intangible amortization

     2,638        —          —          (28     —          —          2,610   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     41,163        (817     (7,067     (464     356        (382     32,789   

Other expense:

              

Interest expense

     4,338        706        —          —          —          —          5,044   

Other miscellaneous income, net

     (7     —          —          (16     (217     —          (240
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     36,832        (1,523     (7,067     (448     573        (382     27,985   

Income tax expense

     14,062        —          —          —          —          (5,136     8,926   

Equity in net loss of unconsolidated affiliates

     2        —          —          —          —          60        62   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     22,768        (1,523     (7,067     (448     573        4,694        18,997   

Less net income attributable to noncontrolling interest

     378        —          —          —          437        1,338        2,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

     22,390        (1,523     (7,067     (448     136        3,356        16,844   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of Redeemable convertible preferred stock

     7,319        —          —          —          —          —          7,319   

Dividends to Redeemable convertible preferred stockholders

     (37     —          —          —          —          —          (37

Dividends paid to unvested restricted stockholders

     —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders and participating securities

     29,672        (1,523     (7,067     (448     136        3,356        24,126   

Undistributed income allocated to participating securities

     (3,404     175        811        51        (16     (385     (2,768
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 26,268      $ (1,348   $ (6,256   $ (397   $ 120      $ 2,971      $ 21,358   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

              

Basic

     51,518                  51,518   

Diluted

     56,463                  56,463   

Net income per share:

              

Basic

   $ 0.51                $ 0.41   

Diluted

   $ 0.51                $ 0.41   
     Three Months Ended September 30, 2013  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands, except
per share data)
     Leases     Inventory     Long-Lived Assets     ADS
Mexicana
    Income Taxes and
Other
   

Net sales

   $ 333,240      $ —        $ —        $ —        $ 452      $ (965   $ 332,727   

Cost of goods sold

     260,021        (623     6,690        (40     377        714        267,139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     73,219        623        (6,690     40        75        (1,679     65,588   

Operating expenses:

              

Selling

     18,166        (127     (87     179        —          504        18,635   

General and administrative

     17,917        (104     (3,948     101        (455     144        13,655   

Loss on disposal of assets or businesses

     —          4        —          200        —          —          204   

Intangible amortization

     2,861        —          —          (241     —          —          2,620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     34,275        850        (2,655     (199     530        (2,327     30,474   

Other expense:

              

Interest expense

     3,866        855        —          —          —          —          4,721   

Other miscellaneous expense (income), net

     287        —          —          (27     (284     —          (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     30,122        (5     (2,655     (172     814        (2,327     25,777   

Income tax expense

     12,242        —          —          —          —          (3,314     8,928   

Equity in net loss of unconsolidated affiliates

     97        —          —          —          —          95        192   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     17,783        (5     (2,655     (172     814        892        16,657   

Less net income attributable to noncontrolling interest

     461        —          —          —          513        943        1,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

     17,322        (5     (2,655     (172     301        (51     14,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of Redeemable convertible preferred stock

     (3,186     —          —          —          —          —          (3,186

Dividends to Redeemable convertible preferred stockholders

     (214     —          —          —          —          —          (214

Dividends paid to unvested restricted stockholders

     (8     —          —          —          —          —          (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders and participating securities

     13,914        (5     (2,655     (172     301        (51     11,332   

Undistributed income allocated to participating securities

     (1,536     1        320        21        (36     27        (1,203
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 12,378      $ (4   $ (2,335   $ (151   $ 265      $ (24   $ 10,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

              

Basic

     47,250                  47,250   

Diluted

     47,579                  47,579   

Net income per share:

              

Basic

   $ 0.26                $ 0.21   

Diluted

   $ 0.26                $ 0.21   

Cash dividends declared per share

   $ 0.03                $ 0.03   

The net effect of the restatement described above on the Company’s previously reported condensed consolidated statements of operations for the six months ended September 30, 2014 and 2013 is as follows:

 

- 11 -


Table of Contents
     Six Months Ended September 30, 2014  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands, except
per share data)
     Leases     Inventory     Long-Lived Assets     ADS
Mexicana
    Income Taxes and
Other
   

Net sales

   $ 693,021      $ —        $ —        $ —        $ 1,850      $ (1,723   $ 693,148   

Cost of goods sold

     538,546        171        21,120        67        2,349        274        562,527   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     154,475        (171     (21,120     (67     (499     (1,997     130,621   

Operating expenses:

              

Selling

     39,008        171        129        370        49        65        39,792   

General and administrative

     39,411        (98     (8,488     198        (1,015     (367     29,641   

Loss on disposal of assets or businesses

     —          74        —          271        —          —          345   

Intangible amortization

     5,279        —          —          (56     —          —          5,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     70,777        (318     (12,761     (850     467        (1,695     55,620   

Other expense:

              

Interest expense

     8,953        1,142        —          —          —          —          10,095   

Other miscellaneous expense (income), net

     7        —          —          (33     (432     2        (456
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     61,817        (1,460     (12,761     (817     899        (1,697     45,981   

Income tax expense

     23,757        —          —          —          —          (6,938     16,819   

Equity in net loss of unconsolidated affiliates

     623        —          —          —          —          101        724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     37,437        (1,460     (12,761     (817     899        5,140        28,438   

Less net income attributable to noncontrolling interest

     806        —          —          —          664        1,558        3,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

     36,631        (1,460     (12,761     (817     235        3,582        25,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of Redeemable convertible preferred stock

     (11,054     —          —          —            —          (11,054

Dividends to Redeemable convertible preferred stockholders

     (75     —          —          —            —          (75

Dividends paid to unvested restricted stockholders

     —          —          —          —            —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders and participating securities

     25,502        (1,460     (12,761     (817     235        3,582        14,281   

Undistributed income allocated to participating securities

     (3,040     174        1,521        97        (28     (426     (1,702
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 22,462      $ (1,286   $ (11,240   $ (720   $ 207      $ 3,156      $ 12,579   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

              

Basic

     49,538                  49,538   

Diluted

     52,198                  52,198   

Net income per share:

              

Basic

   $ 0.45                $ 0.25   

Diluted

   $ 0.45                $ 0.25   
     Six Months Ended September 30, 2013  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands, except
per share data)
     Leases     Inventory     Long-Lived Assets     ADS
Mexicana
    Income Taxes and
Other
   

Net sales

   $ 626,342      $ —        $ —        $ —        $ 991      $ (2,027   $ 625,306   

Cost of goods sold

     487,120        (784     15,038        (497     1,508        983        503,368   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     139,222        784        (15,038     497        (517     (3,010     121,938   

Operating expenses:

              

Selling

     35,843        (272     151        193        (1,456     696        35,155   

General and administrative

     35,576        (186     (7,933     106        (910     89        26,742   

Gain on disposal of assets or businesses

     (4,848     140        —          176        —          —          (4,532

Intangible amortization

     5,722        —          —          (482     —          —          5,240   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     66,929        1,102        (7,256     504        1,849        (3,795     59,333   

Other expense:

              

Interest expense

     7,967        1,483        —          —          —          —          9,450   

Other miscellaneous expense, net

     816        —          —          (50     (746     —          20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     58,146        (381     (7,256     554        2,595        (3,795     49,863   

Income tax expense

     23,308        —          —          —          —          (5,169     18,139   

Equity in net loss of unconsolidated affiliates

     345        —          —          —          —          173        518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     34,493        (381     (7,256     554        2,595        1,201        31,206   

Less net income attributable to noncontrolling interest

     875        —          —          —          1,482        1,135        3,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

     33,618        (381     (7,256     554        1,113        66        27,714   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of Redeemable convertible preferred stock

     (4,764     —          —          —            —          (4,764

Dividends to Redeemable convertible preferred stockholders

     (430     —          —          —            —          (430

Dividends paid to unvested restricted stockholders

     (16     —          —          —            —          (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders and participating securities

     28,408        (381     (7,256     554        1,113        66        22,504   

Undistributed income allocated to participating securities

     (3,124     46        882        (67     (135     (8     (2,406
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 25,284      $ (335   $ (6,374   $ 487      $ 978      $ 58      $ 20,098   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

              

Basic

     47,220                  47,220   

Diluted

     47,634                  47,634   

Net income per share:

              

Basic

   $ 0.54                $ 0.43   

Diluted

   $ 0.53                $ 0.42   

Cash dividends declared per share

   $ 0.06                $ 0.06   

Impact on Condensed Consolidated Statements of Comprehensive Income

The net effect of the restatement described above on the Company’s previously reported condensed consolidated statements of comprehensive income for the three months ended September 30, 2014 and 2013 is as follows:

 

- 12 -


Table of Contents
     Three Months Ended September 30, 2014  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands)      Leases     Inventory     Long-Lived Assets     ADS
Mexicana
    Income Taxes and
Other
   

Net income

   $ 22,768      $ (1,523   $ (7,067   $ (448   $ 573      $ 4,694      $ 18,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     19,198        (1,523     (7,067     (456     560        4,694        15,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less other comprehensive loss attributable to noncontrolling interest, net of tax

     (759     —          —          —          (2     —          (761

Less net income attributable to noncontrolling interest

     378        —          —          —          437        1,338        2,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to ADS

   $ 19,579      $ (1,523   $ (7,067   $ (456   $ 125      $ 3,356      $ 14,014   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended September 30, 2013  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands)      Leases     Inventory     Long-Lived Assets     ADS
Mexicana
    Income Taxes and
Other
   

Net income

   $ 17,783      $ (5   $ (2,655   $ (172   $ 814      $ 892      $ 16,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     19,193        (5     (2,655     (174     810        893        18,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less other comprehensive loss attributable to noncontrolling interest, net of tax

     (297     —          —          —          3        1        (293

Less net income attributable to noncontrolling interest

     461        —          —          —          513        943        1,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to ADS

   $ 19,029      $ (5   $ (2,655   $ (174   $ 294      $ (51   $ 16,438   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The net effect of the restatement described above on the Company’s previously reported condensed consolidated statements of comprehensive income for the six months ended September 30, 2014 and 2013 is as follows:

 

     Six Months Ended September 30, 2014  
     As Previously
Reported
    Adjustments      As Restated  
(Amounts in thousands)      Leases     Inventory     Long-Lived Assets     ADS
Mexicana
     Income Taxes and
Other
    

Net income

   $ 37,437      $ (1,460   $ (12,761   $ (817   $ 899       $ 5,140       $ 28,438   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income

     34,019        (1,460     (12,761     (832     900         5,140         25,006   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Less other comprehensive loss attributable to noncontrolling interest, net of tax

     (912     —          —          —          5         —           (907

Less net income attributable to noncontrolling interest

     806        —          —          —          664         1,558         3,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income attributable to ADS

   $ 34,125      $ (1,460   $ (12,761   $ (832   $ 231       $ 3,582       $ 22,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
     Six Months Ended September 30, 2013  
     As Previously
Reported
    Adjustments      As Restated  
(Amounts in thousands)      Leases     Inventory     Long-Lived Assets     ADS
Mexicana
     Income Taxes and
Other
    

Net income

   $ 34,493      $ (381   $ (7,256   $ 554      $ 2,595       $ 1,201       $ 31,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income

     31,440        (381     (7,256     550        2,577         1,203         28,133   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Less other comprehensive loss attributable to noncontrolling interest, net of tax

     (1,270     —          —          —          2         2         (1,266

Less net income attributable to noncontrolling interest

     875        —          —          —          1,482         1,135         3,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income attributable to ADS

   $ 31,835      $ (381   $ (7,256   $ 550      $ 1,093       $ 66       $ 25,907   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Impact on Condensed Consolidated Balance Sheets

The net effect of the restatement described above on the Company’s previously reported condensed consolidated balance sheets as of September 30, 2014 and March 31, 2014 is as follows:

 

- 13 -


Table of Contents
     September 30, 2014  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands)      Leases     Inventory     Long-Lived
Assets
    ADS
Mexicana
    Income Taxes
and

Other
   

ASSETS

              

Cash

   $ 6,581      $ —        $ —        $ —        $ —        $ —        $ 6,581   

Receivables, net

     248,120        —          —          —          (1,545     (529     246,046   

Inventories

     247,368        (275     (17,158     (65     1,093        1,299        232,262   

Deferred income taxes and other current assets

     12,848        —          —          325        —          564        13,737   

Property, plant and equipment, net

     288,170        76,327        —          (4,833     —          78        359,742   

Goodwill

     86,280        —          —          1,805        —          (85     88,000   

Intangible assets, net

     60,266        —          —          (6,134     —          —          54,132   

Other assets

     68,591        (9     —          (7,413     —          6,491        67,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,018,224      $ 76,043      $ (17,158   $ (16,315   $ (452   $ 7,818      $ 1,068,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT)

              

Current maturities of debt obligations

   $ 11,148      $ —        $ —        $ —        $ —        $ —        $ 11,148   

Current maturities of capital lease obligations

     —          12,225        —          —          —          —          12,225   

Accounts payable

     113,530        —          577        —          —          1,609        115,716   

Other accrued liabilities

     43,508        516        —          —          —          6,216        50,240   

Accrued income taxes

     22,360        —          —          —          —          (2,662     19,698   

Long-term debt obligation

     386,435        —          —          —          —          —          386,435   

Long-term capital lease obligation

     —          49,237        —          —          —          —          49,237   

Deferred tax liabilities

     64,398        —          —          —          —          (3,997     60,401   

Other liabilities

     14,263        65        —          —          —          12,991        27,319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     655,642        62,043        577        —          —          14,157        732,419   

Mezzanine equity

     109,277        —          —          —          —          2,322        111,599   

Common stock

     12,393        —          —          —          —          —          12,393   

Paid-in capital

     675,183        —          —          —          —          14,797        689,980   

Common stock in treasury, at cost

     (447,674     —          —          —          —          —          (447,674

Accumulated other comprehensive loss

     (8,483     —          —          (25     (545     (302     (9,355

Retained earnings (deficit)

     —          14,000        (17,735     (16,290     126        (21,001     (40,900

Noncontrolling interest in subsidiaries

     21,886        —          —          —          (33     (2,155     19,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and stockholders’ equity (deficit)

   $ 1,018,224      $ 76,043      $ (17,158   $ (16,315   $ (452   $ 7,818      $ 1,068,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     March 31, 2014  
     As Previously
Reported
    Adjustments     As Restated  
(Amounts in thousands)      Leases     Inventory     Long-Lived
Assets
    ADS
Mexicana
    Income Taxes
and

Other
   

ASSETS

              

Cash

   $ 3,931      $ —        $ —        $ —        $ —        $ —        $ 3,931   

Receivables, net

     150,713        —          —          —          (3,404     962        148,271   

Inventories

     260,300        (86     (4,270     (130     2,475        1,602        259,891   

Deferred income taxes and other current assets

     13,555        —          —          343        —          567        14,465   

Property, plant and equipment, net

     292,082        62,903        —          (4,663     —          29        350,351   

Goodwill

     86,297        —          —          1,805        —          (85     88,017   

Intangible assets, net

     66,184        —          —          (6,991     —          1        59,194   

Other assets

     64,533        (15     —          (5,759     —          6,688        65,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 937,595      $ 62,802      $ (4,270   $ (15,395   $ (929   $ 9,764      $ 989,567   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT

              

Current maturities of debt obligations

   $ 11,153      $ —        $ —        $ —        $ —        $ —        $ 11,153   

Current maturities of capital lease obligations

     —          12,364        —          —          —          —          12,364   

Accounts payable

     108,111        —          704        88        —          2,069        110,972   

Other accrued liabilities

     37,956        530        —          —          —          4,599        43,085   

Accrued income taxes

     7,372        —          —          —          —          608        7,980   

Long-term debt obligation

     442,895        —          —          —          —          —          442,895   

Long-term capital lease obligation

     —          34,366        —          —          —          —          34,366   

Deferred tax liabilities

     69,169        —          —          —          —          (2,836     66,333   

Other liabilities

     15,324        82        —          —          —          16,764        32,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     691,980        47,342        704        88        —          21,204        761,318   

Mezzanine equity

     642,951        —          —          —          —          —          642,951   

Common stock

     11,957        —          —          —          —          —          11,957   

Paid-in capital

     22,547        —          —          —          —          (10,109     12,438   

Common stock in treasury, at cost

     (448,439     —          —          —          —          —          (448,439

Accumulated other comprehensive loss

     (5,977     —          —          (9     (541     (303     (6,830

Retained earnings (deficit)

     —          15,460        (4,974     (15,474     (108     2,684        (2,412

Noncontrolling interest in subsidiaries

     22,576        —          —          —          (280     (3,712     18,584   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and stockholders’ deficit

   $ 937,595      $ 62,802      $ (4,270   $ (15,395   $ (929   $ 9,764      $ 989,567   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Cumulative Effect of Prior Period Adjustments

The following table presents the impact of 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, 2013:

 

(Amounts in thousands)    Common
Stock
     Paid in
Capital
    Common
stock in
treasury
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total ADS
Stockholders’
Equity
(Deficit)
    Non-controlling
interest in
subsidiaries
    Total
Stockholders’
Equity
(Deficit)
 

Stockholders’ equity (deficit), April 1, 2013 (as previously reported)

   $ 11,957       $ 41,152      $ (448,571   $ (856   $ 87,331      $ (308,987   $ 23,265      $ (285,722

Adjustments from:

     —           —          —          —          —          —          —          —     

Lease Accounting, before income tax effect

     —           —          —          —          17,883        17,883        —          17,883   

Inventory, before income tax effect

     —           —          —          —          (3,490     (3,490     —          (3,490

Long-Lived Assets, before income tax effect

     —           —          —          1        (15,780     (15,779     —          (15,779

ADS Mexicana, before income tax effect

     —           —          —          (496     (586     (1,082     (649     (1,731

All other non-income tax adjustments

     —           (1,126     —          270        (14     (870     (4,072     (4,942

Income tax adjustments

     —           —          —          —          (6,142     (6,142     —          (6,142
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     —           (1,126     —          (225     (8,129     (9,480     (4,721     (14,201
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit), April 1, 2013 (As Restated)

   $ 11,957       $ 40,026      $ (448,571   $ (1,081   $ 79,202      $ (318,467   $ 18,544      $ (299,923
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impact on Condensed Consolidated Statements of Cash Flows

The net effect of the restatement on the Company’s previously reported condensed consolidated statements of cash flows for the six months ended September 30, 2014 and 2013 is as follows:

 

     For the Six Months Ended September 30, 2014  
(Amounts in thousands)    As Previously
Reported
     Adjustments      As Restated  

Net cash provided by operating activities

   $ 10,807       $ 4,099       $ 14,906   

Net cash used in investing activities

     (25,742      1,770         (23,972

Net cash provided by financing activities

     17,836         (5,890      11,946   
     For the Six Months Ended September 30, 2013  
(Amounts in thousands)    As Previously
Reported
     Adjustments      As Restated  

Net cash provided by operating activities

   $ 3,283       $ 5,102       $ 8,385   

Net cash used in investing activities

     (23,036      1,512         (21,524

Net cash provided by financing activities

     20,428         (6,623      13,805   

 

3. DISPOSAL OF ASSETS OR BUSINESSES

On June 28, 2013, we entered into an Asset Purchase Agreement (the “NDS Agreement”) to sell substantially all of the assets used in connection with our Draintech product line to National Diversified Sales, Inc. (“NDS”) in exchange for cash. The NDS Agreement defined the purchase price to consist of a cash payment of $5,877. The net book value for the related assets, consisting of inventory and property and equipment, was $1,029, bringing the net gain recognized to $4,848. The sale transaction closed on June 28, 2013. The Company determined that this sale did not qualify for discontinued operations reporting.

 

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net as of September 30, 2014 and March 31, 2014 consisted of the following:

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  

Land, buildings and improvements

   $ 161,415       $ 158,588   

Machinery and equipment

     664,574         640,529   

Construction in Progress

     15,597         11,003   
  

 

 

    

 

 

 

Total cost

     841,586         810,120   

Less accumulated depreciation

     (481,844      (459,769
  

 

 

    

 

 

 

Property, plant and equipment - net

   $ 359,742       $ 350,351   
  

 

 

    

 

 

 

 

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Table of Contents

The following table sets forth depreciation expense for the three and six months ended September 30, 2014 and 2013, respectively:

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013      2014      2013  

Depreciation expense

   $ 12,533       $ 12,107       $ 24,790       $ 24,188   

 

5. INVENTORIES

Inventories as of September 30, 2014 and March 31, 2014 consisted of the following:

 

(Amounts in thousands)    September 30,
2014
     March 31,
2014
 

Raw materials

   $ 56,859       $ 51,785   

Finished goods

     175,403         208,106   
  

 

 

    

 

 

 

Total inventory

   $ 232,262       $ 259,891   
  

 

 

    

 

 

 

We had no work-in-process inventories as of September 30, 2014 and March 31, 2014.

 

6. LEASES

Capital Leases

The Company leases certain buildings and transportation equipment including its fleet of trucks and trailers, under capital lease agreements.

Leased assets accounted for as capital leases and included in Property, plant and equipment, net consisted of the following:

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  

Buildings and improvements

   $ 7,163       $ 7,716   

Machinery and equipment

     165,899         145,980   
  

 

 

    

 

 

 

Total cost

     173,062         153,696   

Less accumulated amortization

     (95,858      (89,599
  

 

 

    

 

 

 

Leased assets in Property, plant and equipment, net

   $ 77,204       $ 64,097   
  

 

 

    

 

 

 

The following is a schedule by year of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2014:

 

(Amounts in thousands)       

September 30, 2015

   $ 15,157   

September 30, 2016

     15,115   

September 30, 2017

     13,181   

September 30, 2018

     9,913   

September 30, 2019

     7,517   

Thereafter

     9,407   
  

 

 

 

Total minimum lease payments(a)

     70,290   

Less: amount representing interest(b)

     8,828   
  

 

 

 

Present value of net minimum lease payments

   $ 61,462   
  

 

 

 

Lease obligation – Current

   $ 12,225   

Lease obligation – Long-term

     49,237   
  

 

 

 

Total lease obligation

   $ 61,462   
  

 

 

 

 

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Table of Contents
  (a) Excludes contingent rentals which may be paid. Contingent rentals amounted to $375 and $10 for the six months ended September 30, 2014 and 2013, respectively.
  (b) Amount necessary to reduce minimum lease payments to present value calculated at the lower of the rate implicit in the lease or the Company’s incremental borrowing rate at lease inception.

During the three months ended September 30, 2014 and 2013, the Company acquired equipment under capital lease and incurred lease obligations of $5,496 and $5,053, respectively, and during the six months ended September 30, 2014 and 2013, the Company acquired equipment under capital lease and incurred lease obligations of $20,158 and $16,373, respectively.

Certain leases contain residual value guarantees that create a contingent obligation on the part of the Company to compensate the lessor if the leased asset cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The calculation is based on the original cost of the transportation equipment, less lease payments made, compared to a percentage of the transportation equipment’s fair market value at the time of sale. All leased units covered by this guarantee have been classified as capital leases and a corresponding capital lease obligation was recorded. Therefore, no further contingent obligation is needed.

Operating leases

We lease certain real estate and office equipment under various cancelable and non-cancelable operating lease agreements that expire at various dates through fiscal year 2037.

Total rent expense was $645 and $928 for the three months ended September 30, 2014 and 2013, respectively, and $1,625 and $2,231 for the six months ended September 30, 2014 and 2013, respectively.

Future minimum rental commitments under operating leases as of September 30, 2014, are summarized below (amounts in thousands):

 

     Twelve Months Ended September 30,      Thereafter  
     2015      2016      2017      2018      2019     

Future operating lease payments

   $ 2,842       $ 2,245       $ 1,224       $ 638       $ 416       $ 2,245   

 

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

 

(Amounts in thousands)    Domestic      International      Total  

Balance at March 31, 2014

   $ 87,507       $ 510       $ 88,017   

Currency translation

     —           (17      (17
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 87,507       $ 493       $ 88,000   
  

 

 

    

 

 

    

 

 

 

Intangible Assets

Intangible assets as of September 30, 2014 and March 31, 2014 consisted of the following:

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  
     Gross
Intangible
     Accumulated
Amortization
    Net
Intangible
     Gross
Intangible
     Accumulated
Amortization
    Net
Intangible
 

Definite-lived intangible assets

               

Developed technology

   $ 40,579       $ (24,497   $ 16,082       $ 40,579       $ (22,588   $ 17,991   

Customer relationships

     38,252         (24,244     14,008         38,252         (21,793     16,459   

Patents

     6,338         (3,235     3,103         6,175         (2,921     3,254   

Non-compete and other contractual agreements

     1,088         (667     421         1,088         (491     597   

Trademarks and tradenames

     11,157         (2,627     8,530         11,157         (2,254     8,903   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total definite-lived intangible assets

     97,414         (55,270     42,144         97,251         (50,047     47,204   

Indefinite-lived intangible assets

               

Trademarks

     11,988         —          11,988         11,990         —          11,990   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 109,402       $  (55,270   $ 54,132       $ 109,241       $  (50,047   $ 59,194   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

- 17 -


Table of Contents
8. 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 September 30, 2014 and March 31, 2014 were as follows:

 

     September 30, 2014  
(Amounts in thousands)    Total     Level 1      Level 2      Level 3  

Liabilities:

          

Derivative liability - interest rate swaps

   $ 639      $ —         $ 639       $ —     

Derivative liability - diesel fuel contracts

     8        —           8         —     

Derivative liability - propylene swaps

     491        —           491         —     

Contingent consideration for acquisitions

     2,526        —           —           2,526   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities at fair value on a recurring basis

   $ 3,664      $ —         $ 1,138       $ 2,526   
  

 

 

   

 

 

    

 

 

    

 

 

 
     March 31, 2014  
(Amounts in thousands)    Total     Level 1      Level 2      Level 3  

Assets:

          

Derivative assets - propylene swaps

   $ 27      $ —         $ 27       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Total assets at fair value on a recurring basis

   $ 27      $ —         $ 27       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities & Mezzanine Equity:

          

Derivative liability - interest rate swaps

   $ 1,001      $ —         $ 1,001       $ —     

Contingent consideration for acquisitions

     2,898        —           —           2,898   

Redeemable common stock

     549,119        —           —           549,119   

Redeemable convertible preferred stock

     291,720        —           —           291,720   

Deferred compensation - unearned ESOP shares

     (197,888     —           —           (197,888
  

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities & mezzanine equity at fair value on a recurring basis

   $ 646,850      $ —         $ 1,001       $ 645,849   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

- 18 -


Table of Contents

Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the three and six months ended September 30, 2014 and 2013 were as follows:

 

     Three Months Ended September 30, 2014  
(amounts in thousands)    Contingent
consideration
    Redeemable
common stock
    Redeemable
convertible
preferred stock
    Deferred compensation
- unearned ESOP
shares
    Total  

Balance at June 30, 2014

   $ 2,697      $ 659,431      $ 348,898      $  (233,106   $ 777,920   

Allocation of ESOP shares to participants

     —          —          —        $ 804      $ 804   

Change in fair value

     20        (44,391     (22,275     14,956        (51,690

Payments of contingent consideration liability

     (191     —          —          —          (191

Transfer from Level 3

     —          (615,040     (326,623     217,346        (724,317
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 2,526      $ —        $ —        $ —        $ 2,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended September 30, 2013  
(amounts in thousands)    Contingent
consideration
    Redeemable
common stock
    Redeemable
convertible
preferred stock
    Deferred compensation
- unearned ESOP
shares
    Total  

Balance at June 30, 2013

   $ 2,571      $ 532,836      $ 286,828      $ (197,310   $ 624,925   

Allocation of ESOP shares to participants

     —          —          —          3,122        3,122   

Change in fair value

     40        20,353        10,835        (7,649     23,579   

Payments of contingent consideration liability

     (144     —          —          —          (144

Redemption of Redeemable convertible preferred stock

     —          —          (2,089     —          (2,089
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 2,467      $ 553,189      $ 295,574      $  (201,837   $ 649,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended September 30, 2014  
(amounts in thousands)    Contingent
consideration
    Redeemable
common stock
    Redeemable
convertible
preferred stock
    Deferred compensation
- unearned ESOP
shares
    Total  

Balance at March 31, 2014

   $ 2,898      $ 549,119      $ 291,720      $ (197,888   $ 645,849   

Allocation of ESOP shares to participants

     —          —          —        $ 4,391      $ 4,391   

Change in fair value

     2        65,921        34,903        (23,849     76,977   

Payments of contingent consideration liability

     (374     —          —          —          (374

Transfer from Level 3

     —          (615,040     (326,623     217,346        (724,317
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 2,526      $ —        $ —        $ —        $ 2,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended September 30, 2013  
(amounts in thousands)    Contingent
consideration
    Redeemable
common stock
    Redeemable
convertible
preferred stock
    Deferred compensation
- unearned ESOP
shares
    Total  

Balance at March 31, 2013

   $ 2,679      $ 522,276      $ 282,547      $ (196,477   $ 611,025   

Allocation of ESOP shares to participants

     —          —          —          6,049        6,049   

Change in fair value

     129        30,528        16,173        (11,409     35,421   

Payments of contingent consideration liability

     (341     —          —          —          (341

Redemption of Redeemable convertible preferred stock

     —          —          (3,146     —          (3,146

Transfer to Level 3

     —          385        —          —          385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 2,467      $ 553,189      $ 295,574      $  (201,837   $ 649,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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For the six months ended September 30, 2014 our Redeemable common stock transferred out of Level 3, as these securities started actively trading on the NYSE during the second quarter of fiscal 2015. In addition, our Redeemable convertible preferred stock and Deferred compensation – unearned ESOP were reclassified from a recurring Level 3 fair value measurement to a non-recurring Level 3 fair value measurement as a result of the IPO. See Note 1. Significant Accounting Policies for further information on the IPO. There were no further transfers in or out of Levels 1, 2 and 3 for the fiscal year ended March 31, 2014 and the six months ended September 30, 2014.

Valuation of our Contingent Consideration for Acquisitions

The fair values of the contingent consideration payables 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 at 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

The Company has 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 discounted cash flow analysis, the cash flows expected to be generated by the Company are 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 is 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”), is 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 March 31, 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 is 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.

Nonrecurring Fair Value Measurements

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. Our Redeemable convertible preferred stock is recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value are 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 is 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

 

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solely within the control of the Company should be classified outside of permanent equity. As of September 30, 2014, 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 2014 Initial Public Offering and Note 16. Redeemable Convertible Preferred Stock for further information on the Redeemable convertible preferred stock.

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.

 

9. ADS MEXICANA

We participate in joint ventures from time to time for the purpose of expanding upon our growth of manufacturing and selling HDPE corrugated pipe in emerging markets. We invested in ADS Mexicana for the purpose of expanding upon our growth of manufacturing and selling ADS licensed HDPE corrugated pipe and related products in the Mexican and Central American markets via the joint venture partner’s local presence and expertise throughout the region. In April 2013, ADS Worldwide acquired an additional 1% equity interest in its consolidated subsidiary ADS Mexicana stock for $520, increasing the Company’s ownership percentage to 51% from 50%. We have executed a Technology, Patents and Trademarks Sub-License Agreement and a Distribution Agreement with ADS Mexicana that provides ADS Mexicana with the rights to manufacture and sell ADS licensed products in Mexico and Central America. We have concluded that we hold a variable interest in and are the primary beneficiary of ADS Mexicana based on our power to direct the most significant activities of ADS Mexicana and our obligation to absorb losses and our right to receive benefits that could be significant to ADS Mexicana. As the primary beneficiary, we are required to consolidate the assets and liabilities of ADS Mexicana. The equity owned by our joint venture partner is shown as Noncontrolling interest in subsidiaries in our Condensed Consolidated Balance Sheets and our joint venture partner’s portion of net income is shown as Net income attributable to noncontrolling interest in our Condensed Consolidated Statements of Operations.

The table below includes the assets and liabilities of ADS Mexicana that are consolidated as of September 30, 2014 and March 31, 2014. The balances exclude intercompany transactions that are eliminated upon consolidation.

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  

Assets

     

Current assets

   $ 34,534       $ 32,877   

Property, plant and equipment, net

     20,542         21,633   

Other noncurrent assets

     3,013         3,378   
  

 

 

    

 

 

 

Total assets

   $ 58,089       $ 57,888   
  

 

 

    

 

 

 

Liabilities

     

Current liabilities

   $ 11,019       $ 11,595   

Noncurrent liabilities

     6,539         7,020   
  

 

 

    

 

 

 

Total liabilities

   $ 17,558       $ 18,615   
  

 

 

    

 

 

 

 

10. INVESTMENT IN UNCONSOLIDATED AFFILIATES

We participate in three unconsolidated joint ventures, South American Joint Venture, which is 50%-owned by our wholly-owned subsidiary ADS Chile; BaySaver Technologies, LLC (“BaySaver”), which is 55% owned by our wholly-owned subsidiary ADS Ventures, Inc; and Tigre-ADS USA, Inc. (“Tigre-ADS USA”), which is 49% owned by our wholly-owned subsidiary ADS Ventures, Inc. In each case, the Company has concluded that it is appropriate to account for these investments using the equity method, whereby our share of the income or loss of the joint venture is reported in the Condensed Consolidated Statements of Operations under Equity in net (income) loss of unconsolidated affiliates and our investment in the joint venture is included in Other assets in the Condensed Consolidated Balance Sheets.

 

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South American Joint Venture

Our investment in this unconsolidated joint venture was formed for the purpose of expanding upon our growth of manufacturing and selling HDPE corrugated pipe in the South American market via the joint venture partner’s local presence and expertise throughout the region. We are not required to consolidate South American Joint Venture under ASC 810-10 as we are not the primary beneficiary, although we do hold a significant variable interest through our equity investment and debt guarantee. The results of South American Joint Venture are accounted for in the condensed consolidated financial statements using the equity method of accounting. Our share of the loss of this joint venture is reported in the Condensed Consolidated Statements of Operations under Equity in net loss of unconsolidated affiliates. Our investment in this joint venture is included in Other assets in the Condensed Consolidated Balance Sheets which includes additional capital contributions of $4,000 and $2,875 made during the six months ended September 30, 2014 and the fiscal year ended March 31, 2014, respectively. Summarized financial data as of September 30 and March 31, 2014 for the South American Joint Venture is as follows:

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  

Investment in South American Joint Venture

   $ 19,782       $ 18,422   

Receivable from South American Joint Venture

     4,660         8,313   

BaySaver

On July 15, 2013, ADS Ventures, Inc., a wholly-owned subsidiary of the Company, BaySaver Technologies, Inc. (“BTI”) and Mid Atlantic Storm Water Research Center, Inc. entered into an LLC agreement to form a new joint venture, BaySaver. The joint venture was established to design, engineer, manufacture, market and sell water quality filters and separators used in the removal of sediment and pollution from storm water anywhere in the world except New Zealand, Australia and South Africa. The Company contributed $3,500 in cash, $1,285 in inventory, and other intangible assets with no carrying value, in exchange for a 55% equity interest and a 50% voting interest in BaySaver. We are not required to consolidate BaySaver under ASC 810-10 as we are not the primary beneficiary, although we do hold a significant variable interest in BaySaver through our equity investment. The Company accounts for its investment in BaySaver under the equity method of accounting. In connection with this investment, the Company acquired a call option to purchase the remaining 45% interest in BaySaver. Also, in connection with the investment, the Company granted a put option enabling the other equity holders to sell their remaining shares in BaySaver to the Company upon the passage of time or the occurrence of certain events. Our share of the income of this joint venture is reported in the Condensed Consolidated Statements of Operations under Equity in net loss of unconsolidated affiliates. Our investment in this joint venture is included in Other assets in the Condensed Consolidated Balance Sheets.

Summarized financial data as of September 30 and March 31, 2014 for the BaySaver joint venture is as follows:

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  

Investment in BaySaver

   $ 5,217       $ 5,202   

Receivable from BaySaver

     216         6   

Our share of the income of this joint venture is decreased by amortization expense relating to the basis difference between our cost basis in the investment and the basis reflected at the joint venture level. This basis difference is being recorded over the lives of the underlying assets which gave rise to the basis difference, which is 10 years. The unamortized basis difference as of September 30, 2014 is $1,739.

Tigre-ADS USA

On April 7, 2014, ADS Ventures, Inc., a wholly-owned subsidiary of the Company, and Tigre S.A. – Tubos e Conexoes entered into a stock purchase agreement to form a new joint venture, Tigre-ADS USA Inc. The new joint venture was established to manufacture and sell PVC fittings for waterworks, plumbing, and HVAC applications primarily in the United States and Canadian markets. The Company acquired 49% of the outstanding shares of capital stock of Tigre USA, Inc. for $3,566. The new joint venture represents a continuation of the existing activities of Tigre USA through its Janesville, Wisconsin manufacturing facility. We are not required to consolidate Tigre-ADS USA under ASC 810-10 as we are not the primary beneficiary, although we do hold a significant variable interest in Tigre-ADS USA through our equity investment. The Company accounts for its investment in Tigre-ADS USA under the equity method of accounting. Our share of the loss of this joint venture is reported in the Condensed Consolidated Statements of Operations under Equity in net loss of unconsolidated affiliates. Our investment in this joint venture is included in Other assets in the Condensed Consolidated Balance Sheets.

 

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Summarized financial data as of September 30, 2014 for the Tigre-ADS USA joint venture is as follows:

 

(Amounts in thousands)    As reported
on Balance
Sheet
 

Investment in Tigre-ADS USA

   $ 3,406   

Receivable from Tigre-ADS USA

     22   

 

11. 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 its interest in ADS Mexicana for financial reporting purposes. During the three and six months ended September 30, 2014 and 2013, ADS Mexicana compensated certain owners and former owners of Grupa Altima, the JV partner of ADS Mexicana, for consulting services related to the operations of the business and a noncompete arrangement, respectively. These cash payments totaled $94 and $169 for the three and six months ended September 30, 2014, respectively, and $68 and $99 for the three and six months ended September 30, 2013, respectively.

Occasionally, ADS and ADS Mexicana jointly enter into agreements for pipe sales with their related parties which totaled $1,027 and $2,339 for the three and six months ended September 30, 2014, respectively, and $1,908 and $3,776 for the three and six months ended September 30, 2013, respectively. Outstanding receivables related to these sales were $2,052 and $2,480 as of September 30, 2014 and March 31, 2014, respectively.

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

Our 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 $7,000 as of September 30, 2014. The maximum borrowings permitted under the South American Joint Venture’s credit facility is $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 September 30, 2014 and March 31, 2014, the outstanding principal balance of the credit facility including letters of credit was $12.3 million and $11.1 million, respectively. The weighted average interest rate as of September 30, 2014 was 3.53% on U.S. dollar denominated loans and 6.76% 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 in immaterial amounts.

BaySaver

Additionally, ADS holds an equity method investment in BaySaver of approximately 55% which 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. BaySaver may at times provide short-term financing to ADS to enhance liquidity. As of September 30, 2014, BaySaver held an unsecured, interest-free, note receivable from ADS in the amount of $1,000 which was fully paid subsequent to quarter end.

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.

 

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12. DEBT

Long-term debt as of September 30 and March 31, 2014 consisted of the following:

 

(Amounts in thousands)    September 30, 2014      March 31, 2014  

Bank Term Loans

     

Revolving Credit Facility — ADS

   $ 193,800       $ 248,100   

Revolving Credit Facility — ADS Mexicana

     2,000         —     

Term note

     95,000         97,500   

Senior Notes payable

     100,000         100,000   

Mortgage notes payable

     2,833         3,733   

Industrial revenue bonds

     3,950         4,715   
  

 

 

    

 

 

 

Total

     397,583         454,048   

Current maturities

     (11,148      (11,153
  

 

 

    

 

 

 

Long-term debt obligation

   $ 386,435       $ 442,895   
  

 

 

    

 

 

 

Bank Term Loans

The Bank Term Loans include 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 (“the Revolving Credit Facilities”) and a $100,000 term note (“Term note”). The Revolving Credit Facilities expire and the Term note is due in June 2018. The Revolving Credit Facilities and the Term note have a variable interest rate that depends upon the Company’s “pricing ratio” as defined in the agreements for the Revolving Credit Facilities. The interest rate is derived from the London InterBank Offered Rate (“LIBOR”) or alternate base rate (“Prime Rate”) at the Company’s option. The average rate at September 30, 2014 was 2.603%. Any letters of credit outstanding reduce the availability on the revolver. The Company had outstanding letters of credit at September 30, 2014 in the amount of $8,005. The amount available for borrowing for ADS was $123,195, plus $10,000 available under a separate revolving credit facility with our subsidiary, ADS Mexicana, at September 30, 2014.

Per the terms of the agreements for the Revolving Credit Facilities, ADS is not required to hedge its interest exposure using interest rate swaps; however, it is currently the objective of ADS to manage its exposure to variable rate debt. On October 7, 2010, ADS executed two Spot Interest Rate Swaps on the 90-Day LIBOR interest rate. One swap is related to the $100,000 Term note which was part of the previous credit agreement. This swap is at a fixed rate of 1.105% for a period of four years, and expired on September 1, 2014. The second swap on the Revolving Credit Facility had a value of $50,000 at a fixed rate of 0.890% for a period of three years, and expired on September 1, 2013.

On July 18, 2013, ADS executed two Forward Interest Rate Swaps on the 30-Day LIBOR interest rate. One swap was for $50,000 on the Revolving Credit Facility starting on September 3, 2013 at a fixed rate of 0.86% for a period of three years, expiring on September 1, 2016. The second swap executed on July 18, 2013 was for $50,000 on the Revolving Credit Facility starting on September 2, 2014 at a fixed rate of 1.08% for a period of two years, expiring on September 1, 2016.

Senior Notes Payable

In December 2009, we signed an agreement with Prudential Investment Management, Inc. for the issuance of senior promissory notes (“Senior Notes”), for an aggregate amount of up to $100,000. During fiscal 2010, we issued $75,000 of Senior Notes with interest fixed at 5.6% and payable quarterly. The rate is subject to an additional 200 basis point excess leverage fee if our calculated leverage ratio exceeds 3 to 1 at the end of a fiscal quarter. A principal payment of $25,000 is due in each of fiscal years 2017, 2018, and 2019.

In July 2013, ADS issued an additional $25,000 of Senior Notes. Interest for the additional $25,000 is payable quarterly and is fixed at 4.05%. The rate is subject to an additional 200 basis point excess leverage fee if calculated leverage ratio exceeds 3 to 1 at the end of a fiscal quarter. A principal payment of $25,000 is due in September of the fiscal year 2020.

The carrying and fair values of the Company’s Senior Notes were $100,000 and $103,303, respectively, as of September 30, 2014 and $100,000 and $104,511, respectively, at March 31, 2014. The fair value of the Senior Notes was determined based on the interest rate and terms of such borrowings to the rates and terms of similar debt available for the period. The categorization of the framework used to evaluate this debt is considered Level 2. See Note 8. Fair Value Measurement to these financial statements.

 

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Mortgage Notes Payable

One mortgage note payable with a fixed rate of 5.1% (Hilliard, Ohio) requires monthly installments through fiscal year 2015. In September 2014, a second mortgage with a variable interest rate was paid off (New Miami, Ohio). Land and building with a net book value of approximately $4,971 at September 30, 2014 collateralize the mortgage note.

Industrial Revenue Bonds

Between 1996 and 2007, ADS issued industrial revenue bonds for the construction of four production facilities. Two of the bonds were retired during fiscal 2011 year and one of the bonds was retired in July of fiscal year 2015. The remaining bond has a variable interest rate based on Securities Industry and Financial Markets Association (SIFMA) municipal swap index rate which is computed weekly. The rate on this bond at September 30, 2014 was 3.84%, including a letter of credit fee of 3.75%. Land and buildings with a net book value of approximately $10,116 at September 30, 2014 collateralize the bond. This bond is not considered an auction rate security.

Debt Covenants and Dividend Restrictions

The Bank Term Loans and the Senior Notes require, among other provisions, that we (1) maintain a 1.25 to 1 minimum fixed charge coverage ratio; (2) maintain a maximum leverage ratio of 4 to 1; and (3) establish certain limits on permitted transactions, principally related to indebtedness, capital distributions, loans and investments, and acquisitions and dispositions of assets. Capital distributions, including dividends, are prohibited if we are not in compliance with our debt covenants. In any fiscal year, if we are in compliance with all debt covenants and the pro-forma leverage ratio exceeds 3 to 1, capital distributions are permitted up to a limit of $50,000.

 

13. 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 forward contracts, contract settlement gains and losses are recorded in the Condensed Consolidated Statements of Operations in Cost of goods sold. 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 Other miscellaneous expense (income), net. The Company recognized (losses) on mark-to-market adjustments for changes in fair value on derivative contracts of $(67) and $(319) for the three months ended September 30, 2014 and 2013, respectively, and $(163) and $(238) for the six months ended September 30, 2014 and 2013, respectively.

A summary of the fair values for the various derivatives at September 30, 2014 and March 31, 2014 is presented below:

 

     September 30, 2014      March 31, 2014  
(Amounts in thousands)    Asset      Liability      Asset      Liability  

Interest rate swaps

   $ —         $ (639    $ —         $ (1,001

Diesel fuel option collars

     —           (8      —           —     

Propylene swaps

     —           (491      27         —     

 

14. 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 30,000 pounds of resin over the period October 2014 through December 2014 at a committed purchase cost of $20,153.

Litigation

We have been named as a defendant in various litigation matters. Management intends to defend these outstanding claims. We believe we have adequate accrued loss contingencies and that current or threatened litigation matters will not have a material adverse impact on our condensed consolidated results of operations or condensed consolidated financial condition. In management’s opinion, none of these proceedings will materially affect our consolidated operations, cash flows, or financial position, and we have recorded adequate accrued liabilities to cover our estimated probable loss exposure.

 

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15. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in balances of each component of Accumulated other comprehensive loss (“AOCL”) for the period ending September 30:

 

(Amounts in thousands)    Currency
Translation
     Other      Accumulated
Other
Comprehensive Loss
 

Balance at April 1, 2013

   $ (1,085    $ 4       $ (1,081
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     (1,810      5         (1,805

Income tax expense (benefit)

     —           (2      (2
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2013

   $  (2,895    $ 7       $  (2,888
  

 

 

    

 

 

    

 

 

 

Balance at April 1, 2014

     (6,838      8         (6,830
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     (2,525      —           (2,525
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $  (9,363    $ 8       $  (9,355
  

 

 

    

 

 

    

 

 

 

 

16. 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. The redeemable convertible preferred stock has a required cumulative 2.5% dividend and is convertible at a rate of 0.7692 shares of common stock for each share of Redeemable convertible preferred stock. We guarantee the value of the redeemable convertible preferred stock at $0.78 per share. The put option requirements of the Internal Revenue Code apply in the event that the Company’s common stock is not a registration type class of security. Therefore, the holders of convertible preferred stock have a put right to require us to repurchase such shares in the event that our common stock is not listed for trading or otherwise quoted on the NYSE, AMEX, NASDAQ, or any other market more senior than the OTC Bulletin Board.

Given that the event may trigger redemption of the convertible preferred stock (the listing or quotation on a market more senior than the OTCBB), is not solely within our control, this results in the classification of our convertible preferred stock recorded in the mezzanine section of our Condensed Consolidated Balance Sheets as of September 30, 2014.

In accordance with ASC 480-10-S99, as of September 30, 2014, we did not adjust the carrying value of the convertible preferred stock to its redemption value or recognize any changes in fair value as we did not consider it probable that the convertible preferred stock would become redeemable.

 

17. STOCK-BASED COMPENSATION

Deferred Compensation — Unearned ESOP Shares

The fair value of Redeemable convertible preferred stock held by the ESOP trust, but not yet earned by the ESOP participants or used for dividends, is reported as Deferred compensation — unearned ESOP shares within the mezzanine equity section of our Condensed Consolidated Balance Sheets.

Compensation expense and related dividends paid with ESOP shares are recognized based upon the average annual fair value of the shares allocated. The shares allocated are for services rendered throughout the period and, therefore, a simple average is used to calculate average annual fair value. Deferred compensation – unearned ESOP shares are relieved at the fair value, with any difference between the average fair value and the fair value shares when allocated being added to Additional paid in capital. The fair value of the shares allocated was $12.50 and $11.26 per share of Redeemable convertible preferred stock at September 30, 2014 and 2013, respectively, resulting in an average fair value per share of $12.34 and $10.92 for the six months ended September 30, 2014 and 2013, respectively. We recognized compensation expense of $2,687 and $2,506 for the three months ended September 30, 2014 and 2013, respectively, and $5,374 and $5,026 for the six months ended September 30, 2014 and 2013, respectively, related to allocation of ESOP shares to participants for compensation.

Stock Options

Our 2000 stock option plan (“2000 Plan”) provides for the issuance of incentive common stock options and nonstatutory common 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 10 years from issuance.

 

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In August 2013, a new stock option plan (“2013 Plan”) was approved by the Board of Directors and, as amended, provides for the issuance of up to 3,323 nonstatutory 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 vest in five equal annual amounts beginning in year one and expire after 10 years from issuance. Options issued to the Chief Executive Officer vest equally over four years and expire after 10 years from issuance.

For both stock option plans, management determines the fair value of the options based on the Black-Scholes option pricing model. This methodology requires significant inputs including the fair value of our common stock, which is determined with the assistance of an independent appraisal performed by a reputable valuation firm. We recognized total stock-based compensation expense under both plans of $1,042 and $387 for the three months ended September 30, 2014 and 2013, respectively, and $2,379 and $462 for the six months ended September 30, 2014 and 2013, respectively, which was included with General and administrative expenses in our Condensed Consolidated Statements of Operations. As of September 30, 2014 and 2013, there was a total of $5,307 and $9,319, respectively, of unrecognized compensation expense related to unvested stock option awards that will be recognized as an expense as the awards vest over the remaining service period. We had approximately 1,097 and 1,412 shares available for granting under the 2000 and 2013 plans, respectively, as of September 30, 2014.

We estimate the fair value of stock options granted after April 1, 2006, using a Black-Scholes option-pricing model, with assumptions as follows:

 

     September 30,  
     2014     2013  

Expected stock price volatility

     40     44

Risk-free interest rate

     2.1     2.3

Weighted-average expected option life (years)

     8        8   

Dividend yield

     0.86     0.84

In May 2014, the Board of Directors approved the increase of shares available for granting under the 2013 plan to 1,412 shares.

2000 Plan

The stock option transactions as of the six months ended September 30 are summarized as follows:

 

     2014      2013  
     Number
of Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Number
of Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
 

Outstanding at beginning of period

     913       $ 9.48         4.1         1,333       $ 8.10         4.0   

Issued

     78         15.74            15         13.64      

Exercised

     78         7.36            94         7.77      

Forfeited

            —              17         10.77      
  

 

 

          

 

 

       

Outstanding at end of period

     913         10.20         4.3         1,237         8.19         3.7   
  

 

 

          

 

 

       

Exercisable and vested at end of period

     835         9.67         3.8         846         6.80         2.1   
  

 

 

          

 

 

       

Unvested at end of period

     78         15.74         9.9         391         11.16         7.1   
  

 

 

          

 

 

       

Vested and expected to vest at end of period

     901       $ 10.12         7.7         1,167       $ 8.03         3.5   
  

 

 

          

 

 

       

As a result of the 2014 Initial Public Offering (See Note 1. Background and Summary of Significant Accounting Policies), all unvested stock options from prior issuances immediately vest. A new grant of 78 shares was issued in August 2014 at a fair market value of $15.74 per share. Vesting on this issuance will be recognized as expense as the awards vest over the remaining service period.

The following table summarizes information about the nonvested stock option grants as of the six months ended September 30, 2014:

 

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     Number
of Shares
     Weighted
Average Grant
Date Fair Value
 

Unvested at beginning of period

     428       $ 5.82   

Granted

     78         6.76   

Vested

     428         5.82   

Forfeited

     —           —     
  

 

 

    

Unvested at end of period

     78       $ 6.76   
  

 

 

    

2013 Plan

The stock option transactions as of the six months ended September 30, 2014 for the 2013 Stock Option Plan are summarized as follows:

 

     September 30, 2014      September 30, 2013  
     Number
of
Shares
     Weighted
Average

Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Number
of
Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
 

Outstanding at beginning of period

     1,911       $ 13.64         9.4         —         $ —           —     

Issued – equity classified

     —           —              1,440         13.64         —     

Issued – liability classified

     —           —              518         13.64         —     

Exercised

     —           —              —           13.64         —     

Forfeited – equity classified

     —           —              47         13.64         —     
  

 

 

          

 

 

       

Outstanding at end of period

     1,911         13.64         8.9         1,911         13.64         9.9   
  

 

 

          

 

 

       

Exercisable and vested at end of period

     408         13.64         8.9         —           —           —     
  

 

 

          

 

 

       

Unvested at end of period

     1,503         13.64         8.9         1,911         13.64         9.9   
  

 

 

          

 

 

       

Vested and expected to vest at end of period

     1,881         13.64         8.9         1,704         13.64         9.9   
  

 

 

          

 

 

       

Fair value of options granted during the period

     —         $ —               $ 6.22         —     
  

 

 

             

 

 

    

The following table summarizes information about the nonvested stock option grants as of September 30, 2014:

 

     Number
of Shares
     Weighted
Average Grant
Date Fair Value
 

Unvested at beginning of period

     1,911       $ 6.22   

Granted

            —     

Vested

     408         13.64   

Forfeited

            —     
  

 

 

    

Unvested at end of period

     1,503       $ 3.64   
  

 

 

    

Restricted Stock

On September 16, 2008, the Board of Directors adopted the restricted stock plan, which provides for the issuance of restricted stock awards to certain key employees. The restricted stock generally vest ratably over a five-year period from the original restricted stock grant date, contingent on the employee’s continuous employment by ADS. In certain instances, however, a portion of the grants vested immediately or for accounting purposes were deemed to have vested immediately, including the grants to the Chief Executive Officer, which do not have a substantial risk of forfeiture as a result of different vesting provisions. Under the restricted stock plan, vested shares are considered issued and outstanding. Employees with restricted stock have the right to dividends on the shares awarded (vested and unvested) in addition to voting rights on non-forfeited shares. The Company recognized compensation expense of $639 and $593 for the three months ended September 30, 2014 and 2013, respectively, and $1,548 and $1,178 for the six months ended September 30, 2014 and 2013, respectively, relating to the issuance of these shares; of this amount, $0 and $385 relates to the restricted shares that vested immediately during the six months ended September 30, 2014 and 2013, respectively. We had approximately 333 shares available for granting under this plan as of September 30, 2014.

The following table summarizes information about the unvested restricted stock grants as of September 30, 2014:

 

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     Number
of
Shares
     Weighted
Average
Grant Date
Fair Value
 

Unvested at beginning of period

     311       $ 12.40   

Granted

            —     

Vested

     118         12.06   

Forfeited

     3         10.66   
  

 

 

    

Unvested at end of period

     190       $ 12.60   
  

 

 

    

We expect most, if not all, restricted stock grants to vest.

As of September 30, 2014, there was approximately $2,306 of unrecognized compensation expense related to the restricted stock that will be recognized over the remaining service period.

Non-Employee Director Compensation Plan

On June 18, 2014, the Company amended its then-existing Stockholder’s Agreement to authorize shares of stock to be granted to non-employee members of its Board of Directors. The number of shares authorized amounted to 282. The shares typically vest one year from the date of issuance. Under this stock plan, the vested shares granted are considered issued and outstanding. Non-Employee directors with this stock have the right to dividends on the shares awarded (vested and unvested) in addition to voting rights. On September 6, 2014, a total of 48 shares were granted to seven directors at a fair market value of $18.88 per share. These shares will vest on February 27, 2015. The Company recognized compensation expense of $450 and $0 for the three months ended September 30, 2014 and 2013, respectively, and $450 and $0 for the six months ended September 30, 2014 and 2013, respectively, relating to the issuance of these shares. We had approximately 234 shares available for granting under this plan as of September 30, 2014.

The following table summarizes information about the unvested Non-Employee Director compensation stock grants as of September 30, 2014:

 

     Number
of
Shares
     Weighted
Average Grant
Date Fair Value
 

Unvested at beginning of period

     —         $ —     

Granted

     48         18.88   

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

Unvested at end of period

     48       $ —     
  

 

 

    

We expect all the stock grants to vest.

As of September 30, 2014, there was approximately $450 of unrecognized compensation expense related to the restricted stock that will be recognized over the remaining service period.

 

18. 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, as well as discrete events. For the six months ended September 30, 2014 and 2013, the Company utilized an effective tax rate of 36.6% and 36.4%, 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, partially offset by foreign income taxed at lower rates.

 

19. NET INCOME PER SHARE

Basic net income per share is calculated by dividing the Net income 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 per share is computed by dividing the Net income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period.

 

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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 per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders.

The 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 per share, income available to common shareholders used in the basic net income 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 per share assumes the Redeemable convertible preferred stock would be cash settled through the effective date of the IPO on July 25, 2014, as we have the choice of settling in cash or shares and we have demonstrated past practice and intent of cash settlement. 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 September 30, 2014, if dilutive. For purposes of the calculation of diluted net income 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.

The Company’s Redeemable common stock is included in the weighted-average number of common shares outstanding for calculating basic and diluted net income per share.

The following table presents information necessary to calculate net income per share for the three and six months ended September 30, 2013 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
September 30,
    Six Months Ended
September 30,
 
(Amounts in thousands, except per share data)    2014     2013     2014     2013  

Net income per share - Basic

        

Net income attributable to ADS

   $ 16,844      $ 14,740      $ 25,410      $ 27,714   

Adjustment for:

        

Change in fair value of redeemable convertible preferred stock

     7,319        (3,186     (11,054     (4,764

Dividends to redeemable convertible preferred stock

     (37     (214     (75     (430

Dividends paid to unvested restricted stockholders

     —          (8     —          (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders and participating securities

     24,126        11,332        14,281        22,504   

Undistributed income allocated to participating securities

     (2,768     (1,203     (1,702     (2,406
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders - Basic

     21,358        10,129        12,579        20,098   

Weighted average number of common shares outstanding - Basic

     51,518        47,250        49,538        47,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share - Basic

   $ 0.41      $ 0.21      $ 0.25      $ 0.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share - Diluted

        

Net income available to common stockholders - Basic

   $ 21,358      $ 10,129      $ 12,579      $ 20,098   

Undistributed income allocated to participating securities

     1,952        —          601        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders - Diluted

     23,310        10,129        13,180        20,098   

Weighted average number of common shares outstanding - Basic

     51,518        47,250        49,538        47,220   

Assumed exercise of preferred stock

     4,714        —          2,382        —     

Assumed exercise of stock options

     231        329        278        414   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding - Diluted

     56,463        47,579        52,198        47,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share - Diluted

   $ 0.41      $ 0.21      $ 0.25      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Potentially dilutive securities excluded as anti-dilutive

     22        38        57        63   

 

20. 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

 

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distributors across the U.S. We also sell through a broad variety of buying groups and co-ops in the United States. Products include single wall 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.

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 best-in-class 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. We have been serving the Canadian market through Hancor of Canada since 2003. Our Mexican joint venture through ADS Mexicana primarily serves the Mexican markets, while our joint venture through Tigre ADS is our primary channel to serve the South American markets. Our product line includes single wall 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 and six months ended September 30, 2014 and 2013, respectively:

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013      2014      2013  

Domestic

           

Pipe

   $ 241,713       $ 223,099       $ 457,749       $ 411,179   

Allied Products

     78,063         72,008         151,652         138,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total domestic

     319,776         295,107         609,401         549,634   
  

 

 

    

 

 

    

 

 

    

 

 

 

International

           

Pipe

     38,218         30,496         68,149         60,600   

Allied Products

     8,720         7,124         15,598         15,072   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total international

     46,938         37,620         83,747         75,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 366,714       $ 332,727       $ 693,148       $ 625,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following sets forth certain additional financial information attributable to our reportable segments for the three and six months ended September 30, 2014, and 2013, respectively:

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013      2014      2013  

Net sales

           

Domestic

   $ 319,776       $ 295,107       $ 609,401       $ 549,634   

International

     46,938         37,620         83,747         75,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 366,714       $ 332,727       $ 693,148       $ 625,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

           

Domestic

   $ 65,574         58,073         119,641         107,804   

International

     4,189         7,515         10,980         14,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 69,763       $ 65,588       $ 130,621       $ 121,938   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment Adjusted EBITDA

           

Domestic

   $ 53,904         45,290         94,896         83,426   

International

     1,296         5,228         5,432         10,568   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,200       $ 50,518       $ 100,328       $ 93,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense, net

           

Domestic

   $ 5,020         4,667         10,062         9,360   

International

     24         54         33         90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,044       $ 4,721       $ 10,095       $ 9,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization

           

Domestic

   $ 14,937         14,550         29,595         28,993   

International

     1,437         1,335         2,805         2,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,374       $ 15,885       $ 32,400       $ 31,710   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013      2014      2013  

Equity in net income (loss) of unconsolidated affiliates

           

Domestic

   $ 251         114         404         114   

International

     (313      (306      (1,128      (632
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (62    $  (192    $ (724    $ (518
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures

           

Domestic

   $ 7,869         6,926         14,788         17,864   

International

     295         1,493         808         3,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,164       $ 8,419       $ 15,596       $ 21,561   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following sets forth certain additional financial information attributable to our reporting segments as of September 30, 2014, and March 31, 2014, respectively:

 

     September 30,
2014
     March 31,
2014
 

Investment in unconsolidated affiliates

     

Domestic

   $ 8,623       $ 5,202   

International

     19,782         18,422   
  

 

 

    

 

 

 

Total

   $ 28,405       $ 23,624   
  

 

 

    

 

 

 

Total identifiable assets

     

Domestic

   $ 962,465       $ 889,263   

International

     121,153         113,612   

Eliminations

     (15,458      (13,308
  

 

 

    

 

 

 

Total

   $ 1,068,160       $ 989,567   
  

 

 

    

 

 

 

Reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net Income

 

     Three Months Ended September 30,  
     2014     2013  
(Amounts in thousands)    Domestic      International     Domestic      International  

Net income

   $ 17,603       $ 1,394      $ 12,263       $ 4,394   

Depreciation and amortization

     14,937         1,437        14,550         1,335   

Interest expense

     5,020         24        4,667         54   

Income tax expense

     10,897         (1,971     9,778         (850
  

 

 

    

 

 

   

 

 

    

 

 

 

Segment EBITDA

     48,457         884        41,258         4,933   

Derivative fair value adjustment

     67         —          319         —     

Foreign currency transaction losses

     —           (205     —           (181

Loss on disposal of assets or businesses

     251         30        186         18   

Unconsolidated affiliates interest, tax, depreciation and amortization (a)

     291         587        1         458   

Contingent consideration remeasurement

     20         —          40         —     

Stock-based compensation

     2,131         —          980         —     

ESOP deferred compensation

     2,687         —          2,506         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Segment Adjusted EBITDA

   $ 53,904       $ 1,296      $ 45,290       $ 5,228   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(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.

 

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Reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net Income

 

     Six Months Ended September 30,  
     2014     2013  
(Amounts in thousands)    Domestic      International     Domestic     International  

Net income

   $ 25,446       $ 2,992      $ 24,097      $ 7,109   

Depreciation and amortization

     29,595         2,805        28,993        2,717   

Interest expense

     10,062         33        9,360        90   

Income tax expense

     18,311         (1,492     18,369        (230
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment EBITDA

     83,414         4,338        80,819        9,686   

Derivative fair value adjustment

     163         —          238        —     

Foreign currency transaction losses

     —           (75     —          (87

Loss (gain) on disposal of assets or businesses

     311         34        (4,546     14   

Unconsolidated affiliates interest, tax, depreciation and amortization (a)

     540         1,135        2        955   

Contingent consideration remeasurement

     2         —          129        —     

Stock-based compensation

     4,377         —          1,640        —     

ESOP deferred compensation

     5,374         —          5,026        —     

Transaction costs(b)

     715         —          118        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment Adjusted EBITDA

   $ 94,896       $ 5,432      $ 83,426      $ 10,568   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(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 our debt refinancing and completion of the IPO.

 

21. SUBSEQUENT EVENTS

We evaluated subsequent events through November 10, 2014, the date these condensed consolidated financial statements were originally available to be issued.

 

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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, 2015 refers to fiscal 2015, which is the period from April 1, 2014 to March 31, 2015.

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 report and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2015 (filed concurrently with this Amendment No. 1 to our Form 10-Q) which includes our restated consolidated financial statements for the year ended March 31, 2014. 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 $10.1 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.

Recent Developments

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.

 

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On July 25, 2014, we completed the IPO of our common stock, which resulted in the sale by the Company of 5,289,000 shares, bringing the total number of shares issued and outstanding as of July 25, 2014 to 52,881,000. 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, 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 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 to the underwriters as part of the Company’s IPO. The sale of additional shares resulted from a 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.

Restatement of Previously Issued Financial Statements

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement adjustments made to the previously reported Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2014 and the Condensed Consolidated Balance Sheets as of September 30, 2014 and March 31, 2014. For additional information and a detailed discussion of the restatement, see “Note 2. Restatement of Previously Issued Financial Statements” included in “Part I. Financial Information,” of this Form 10-Q/A.

Results of Operations

Three Months Ended September 30, 2014 Compared With Three Months Ended September 30, 2013

The following tables summarize certain financial information relating to our operating results that have been derived from our condensed consolidated financial statements for the three months ended September 30, 2014 and 2013. 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)    Three Months
Ended
September 30,
2014
    % of
Net Sales
    Three Months
Ended
September 30,
2013
    % of
Net Sales
    %
Variance
 
     (As Restated)(a)           (As Restated)(a)              

Consolidated Statements of Operations data:

          

Net sales

   $ 366,714        100.0   $ 332,727        100.0     10.2

Cost of goods sold

     296,951        81.0     267,139        80.3     11.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     69,763        19.0     65,588        19.7     6.4

Selling expenses

     20,240        5.5     18,635        5.6     8.6

General and administrative expenses

     13,843        3.8     13,655        4.1     1.4

Loss on sale of assets or businesses

     281        0.1     204        0.1     37.7

Intangible amortization

     2,610        0.7     2,620        0.8     (0.4 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     32,789        8.9     30,474        9.2     7.6

Interest expense

     5,044        1.4     4,721        1.4     6.8

Other miscellaneous income, net

     (240     (0.1 %)      (24     —       900.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,985        7.6     25,777        7.7     8.6

Income tax expense

     8,926        2.4     8,928        2.7     —  

Equity in net loss of unconsolidated affiliates

     62        —       192        0.1     (67.7 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     18,997        5.2     16,657        5.0     14.0

Less net income attributable to the non-controlling interest

     2,153        0.6     1,917        0.6     12.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

   $ 16,844        4.6   $ 14,740        4.4     14.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial data:

          

Adjusted EBITDA (b)

   $ 55,200        15.1   $ 50,518        15.2     9.3

System-Wide Net Sales (b)

   $ 390,610        106.5   $ 351,886        105.8     11.0

Adjusted Earnings Per Fully Converted Share (b)

   $ 0.27        —        $ 0.25        —          7.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(a) See” Note 2. Restatement of Previously Issued Financial Statements” to our consolidated financial statements.
(b) See section entitled “Non-GAAP Financial Measures” for further information.

Net sales

 

     Three Months Ended
September 30,
 
(Amounts in thousands)    2014      2013  
     (As Restated)(a)      (As Restated)(a)  

Domestic

     

Pipe

   $ 241,713       $ 223,099   

Allied Products

     78,063         72,008   
  

 

 

    

 

 

 

Total domestic

     319,776         295,107   
  

 

 

    

 

 

 

International

     

Pipe

     38,218         30,496   

Allied Products

     8,720         7,124   
  

 

 

    

 

 

 

Total international

     46,938         37,620   
  

 

 

    

 

 

 

Total net sales

   $ 366,714       $ 332,727   
  

 

 

    

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our consolidated financial statements.

Net sales for the second quarter ended September 30, 2014 totaled $366.7 million, increasing $34.0 million, or 10.2%, over the comparable prior year period.

Domestic net sales increased $24.7 million, or 8.4%, for the second quarter ended September 30, 2014, as compared to the prior year period. The sales growth was broken down between our domestic pipe and Allied Products, which increased $18.6 million and $6.1 million, respectively, for the three months ended September 30, 2014. Domestic pipe sales increased $18.6 million, or 8.3%, due to continued growth in our N-12 HDPE and High Performance PP product lines offsetting lower Agricultural single wall sales. Pipe selling prices increased 5.7% as compared to the prior year. Domestic Allied Product sales increased $6.1 million, or 8.4%, led by our StormTech, Nyloplast, Inserta Tee and FleXstorm product lines. Excluding $2.2 million of domestic Allied Product lines sold in fiscal 2014 (a Precast structures business), Domestic Allied Product sales increased $8.3 million, or 11.8%, for the three months ended September 30, 2014 as compared to prior year sales of continuing products.

International net sales for the second quarter ended September 30, 2014 increased $9.3 million, or 24.8%, over the comparable fiscal year 2014 period. The growth was primarily due to increased sales in Canada and Mexico. Favorable weather conditions in Canada for the second quarter resulted in strong sales in the agricultural markets as well as continued acceptance and sales growth of Allied Products across all end markets. Improved public spending and continued positive sales momentum in the electrical conduit market were the main factors in increased second quarter net sales in Mexico versus the comparable prior year period.

System-Wide Net Sales for the second quarter ended September 30, 2014 were $390.6 million, an increase of $38.7 million, or 11.0%, over System-Wide Net Sales of $351.9 million for the second quarter of fiscal 2014. Net sales at our South American Joint Venture operation were negatively impacted by continued softness in the mining markets and an overall construction slowdown due to a declining economic environment and reduced public spending. Net sales growth from our domestic joint ventures (Tigre-ADS USA and BaySaver) provided a combined increase of $5.5 million in net sales for the unconsolidated joint ventures for the three months ended September 30 2014, as compared to the prior year period. Tigre-ADS USA was formed in the first quarter of fiscal year 2015 and our BaySaver was formed in the second quarter of fiscal year 2014.

Cost of goods sold and Gross profit

Gross profit for the second quarter ended September 30, 2014 increased $4.2 million, or 6.4%, over the comparable period for fiscal year 2014.

Domestic gross profit increased $7.5 million, or 12.9%, to $65.6 million for the three months ended September 30, 2014 as compared to $58.1 million during the prior year. The increase was primarily due to sales growth in our N-12 HDPE pipe and High Performance PP pipe product lines and Allied Product lines. Raw material prices increased 11.5% due to higher virgin and non-virgin resin prices for the second quarter of fiscal 2015 as compared to the prior period. Freight costs totaled 8.9% of Domestic net sales for the three months ended September 30, 2014, compared to 9.3% for the prior year period. Strong sales growth in higher margin Allied Products provided an improved profitability mix for the quarter compared to the prior year.

 

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International gross profit decreased $3.3 million, or 44.3%, for the second quarter of fiscal year 2015 over the comparable fiscal year 2014 period despite the strong sales growth in the quarter. International gross profit decreased primarily due to the impact of continued devaluation of the Canadian dollar versus the U.S. dollar and its impact on overall Canadian market selling prices in the second quarter. Raw material prices moved sharply higher (which are primarily purchased in U.S. dollars) and higher freight costs compared to the prior year period also contributed to the declining gross profit for the three months ended September 30, 2014.

Gross profit as a percentage of net sales totaled 19.0% for the second quarter ended September 30, 2014 as compared to 19.7% for the comparable second quarter fiscal 2014.

Selling expenses

Selling expenses consist of field selling, customer service and commission 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 September 30, 2014 increased $1.6 million, or 8.6%, over the comparable fiscal year 2014 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 relatively flat at 5.5% for the second quarter of fiscal 2015 as compared to 5.6% the prior fiscal year 2014 period.

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, 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 September 30, 2014 increased $0.2 million, or 1.4%, over the comparable fiscal year 2014 period.

The modest increase in overall expenses was the result of offsetting activity. The $1.2 million increase in non-cash stock-based compensation was due to an increase of $0.7 million of non-cash compensation related to stock option plans and $0.5 million of non-cash compensation expense related to the non-employee director compensation stock plan created in the second quarter of fiscal 2015. This higher expense was partially offset by lower corporate overhead and departmental expenses that amount to a reduction of approximately $1.0 million.

Intangibles amortization

Intangibles amortization for the three months ended September 30, 2014 was essentially flat compared to the three months ended September 30, 2013.

Interest expense

Interest expense for the three months ended September 30, 2014 increased $0.3 million, or 6.8%, over the comparable fiscal year 2014 period. The increase in the current year second quarter was due to a higher average interest rate on our outstanding indebtedness and a higher average long term debt balance.

Income tax expense

Income tax expense for the three months ended September 30, 2014 was essentially flat compared to the three months ended September 30, 2013.

Net income attributable to ADS and Net income per share

Second quarter net income attributable to ADS for fiscal year 2015 of approximately $16.8 million increased 14.3% from the preceding fiscal year’s net income attributable to ADS for the quarter of $14.7 million, as influenced by the factors noted above. Net income per share for the second quarter fiscal year 2015 totaled $0.41 per basic and diluted share, as compared to $0.21 per basic and diluted share recorded in the comparable prior year period. The income per share for the three months ended September 30, 2014 is

 

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primarily related to higher revenues as well as a favorable adjustment related to the fair value appreciation on convertible preferred stock classified in mezzanine equity which increased income available to common shareholders by $7.3 million, or $0.14 and $0.13 per basic and diluted share, respectively, for common shareholders.

Adjusted EBITDA

 

     Three Months Ended September 30,  
(Amounts in thousands)    2014     2013     % Change  
     (As Restated) (a)     (As Restated) (a)        

Domestic

   $ 53,904      $ 45,290        19.0

International

     1,296        5,228        (75.2 %) 
  

 

 

   

 

 

   

Total adjusted EBITDA

   $ 55,200      $ 50,518        9.3
  

 

 

   

 

 

   

As a percentage of net sales

     15.1     15.2  

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our consolidated financial statements.

Adjusted EBITDA for the second quarter of fiscal year 2015 increased by $4.7 million or 9.3% over the comparable fiscal year 2014 period.

Domestic adjusted EBITDA totaled $53.9 million for the three months ended September 30, 2014 compared to $45.3 million for the prior year second quarter. International adjusted EBITDA totaled $1.3 million for the second quarter of fiscal 2015 compared to earnings of $5.2 million for the prior period.

Adjusted EBITDA as a percentage of net sales totaled 15.1% and 15.2% for the three months ended September 30, 2014 and 2013, respectively.

Six Months Ended September 30, 2014 Compared With Six Months Ended September 30, 2013

The following tables summarize certain financial information relating to our operating results that have been derived from our condensed consolidated financial statements for the six months ended September 30, 2014 and 2013. 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)    Six Months Ended
September 30, 2014
    % of
Net
Sales
    Six Months Ended
September 30, 2013
    % of
Net
Sales
    %
Variance
 
     (As Restated) (a)           (As Restated) (a)              

Net Sales

   $ 693,148        100.0   $ 625,306        100.0     10.8

Cost of goods sold

     562,527        81.2     503,368        80.5     11.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     130,621        18.8     121,938        19.5     7.1

Selling expenses

     39,792        5.7     35,155        5.6     13.2

General and administrative expenses

     29,641        4.3     26,742        4.3     10.8

Loss (gain) on sale of business

     345        —       (4,532     (0.7 %)      (107.6 %) 

Intangible amortization

     5,223        0.8     5,240        0.8     (0.3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     55,620        8.0     59,333        9.5     (6.3 %) 

Interest expense

     10,095        1.5     9,450        1.5     6.8

Other miscellaneous (expense) income, net

     (456     (0.1 %)      20        0.0     (2,380.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     45,981        6.6     49,863        8.0     (7.8 %) 

Income tax expense

     16,819        2.4     18,139        2.9     (7.3 %) 

Equity in net loss of unconsolidated affiliates

     724        0.1     518        0.1     39.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     28,438        4.1     31,206        5.0     (8.9 %) 

Less net income attributable to the non-controlling interests

     3,028        0.4     3,492        0.6     (13.3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

   $ 25,410        3.7   $ 27,714        4.4     (8.3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial data:

          

Adjusted EBITDA (b)

   $ 100,328        14.5   $ 93,994        15.0     6.7

System-Wide Net Sales (b)

     736,834        106.3     660,607        105.6     11.5

Adjusted Earnings per Fully Converted Share (b)

   $ 0.44        —        $ 0.48        —          (8.6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our consolidated financial statements.
(b) See section entitled “Non-GAAP Financial Measures” for further information.

 

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Net sales

 

     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013  
     (As Restated)(a)      (As Restated)(a)  

Domestic

     

Pipe

   $ 457,749       $ 411,179   

Allied Products

     151,652         138,455   
  

 

 

    

 

 

 

Total domestic

     609,401         549,634   
  

 

 

    

 

 

 

International

     

Pipe

     68,149         60,600   

Allied Products

     15,598         15,072   
  

 

 

    

 

 

 

Total international

     83,747         75,672   
  

 

 

    

 

 

 

Total net sales

   $ 693,148       $ 625,306   
  

 

 

    

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our consolidated financial statements.

Net sales totaled $693.1 million for the six months ended September 30, 2014, increasing $67.8 million, or 10.8%, over the comparable period for fiscal year 2014.

Domestic net sales increased $59.8 million, or 10.9%, for the six months ended September 30, 2014, as compared to prior year period. The increase in domestic sales was due to continued strong sales growth in the non-residential, infrastructure, and residential markets, offsetting a decline in Agricultural sales due to less summer drainage work. The sales growth was broken down between our domestic pipe and Allied Products, which increased $46.6 million and $13.2 million, respectively, for the six months ended September 30, 2014. Domestic pipe sales increased $46.6 million, or 11.3%, due to continued growth in our N-12 HDPE pipe and High Performance PP pipe product lines offsetting lower Agricultural single wall sales. Domestic Allied Product sales increased $13.2 million, or 9.5%, due to strong sales volume sold primarily into the non-residential, residential and infrastructure markets. Excluding $5.1 million in sales of Allied Product lines sold in fiscal 2014, Allied Product sales increased $18.3 million, or 13.7%, for the six months ended September 30, 2014 as compared to prior year sales of continuing products. Pipe selling prices increased 5.1% as compared to the prior year.

International net sales increased $8.1 million, or 10.7%, for the six months ended September 30, 2014 over the comparable fiscal year 2014 period. The growth was primarily due to increased sales in Canada and Mexico. Favorable weather conditions in Canada for the second quarter resulted in strong sales in the agricultural markets as well as fiscal year to date sales growth of Allied Products across all end markets. Improved public spending and continued positive sales momentum in the electrical conduit market were the main factors in the increased six month net sales in Mexico versus the comparable prior year period.

System-Wide Net Sales were $736.8 million for the first six months of fiscal year 2015, an increase of $76.2 million, or 11.5%, over System-Wide Net Sales of $660.6 million for the first six months of fiscal year 2014. Net sales at our South American Joint Venture operation were negatively impacted by continued softness in the mining markets and an overall construction slowdown due to a declining economic environment and reduced public spending. Net sales from our domestic joint ventures (Tigre-ADS USA and Baysaver) provided a combined increase of $11.4 million in net sales for unconsolidated joint ventures for the six months ended September 30, 2014 as compared to the prior year. Our Tigre-ADS USA Joint Venture was formed in the first quarter of fiscal year 2015 and our Baysaver Joint Venture was formed in the second quarter of fiscal year 2014.

Cost of goods sold and Gross profit

Gross profit for the six months ended September 30, 2014 increased $8.7 million, or 7.1%, over the comparable prior year period.

Domestic gross profit increased $11.8 million, or 11.0%, to $119.6 million for the six months ended September 30, 2014 as compared to $107.8 million during the prior year. The increase was primarily due to sales growth in our N-12 HDPE pipe and High Performance PP pipe product lines and Allied Product lines. Raw material prices increased 10% due to higher virgin and non-virgin resin prices for the first six months of fiscal 2015 as compared to the prior period. Freight costs totaled 9.3% of net sales for the six months ended September 30, 2014, compared to 9.5% for the prior year period.

International gross profit decreased $3.2 million, or 22.3%, for the first six months of fiscal year 2015 over the comparable fiscal year 2014 period primarily due to the impact of continued devaluation of the Canadian dollar versus the U.S. dollar and its

 

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impact on overall Canadian market selling prices, especially in the second quarter. Raw material prices moved higher (which are primarily purchased in U.S. dollars) and higher freight costs compared to the prior year period also contributed to the declining pipe gross profit for the six months ended September 30, 2014.

Gross profit as a percentage of net sales totaled 18.8% for the six months ended September 30, 2014 as compared to 19.5% for the prior year.

Selling expenses

Selling expenses consist of field selling, customer service and commission 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 six months ended September 30, 2014 increased $4.6 million, or 13.2%, over the comparable fiscal year 2014 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 increased to 5.7% for the first six months of fiscal 2015 as compared to 5.6% in the prior year.

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, 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 six months ended September 30, 2014 increased $2.9 million, or 10.8%, over the comparable fiscal year 2014 period. The increase was primarily the result of increases in non-cash stock-based compensation of $2.7 million, higher professional fees of $1.2 million, and reduced corporate overhead expenses of $1.0 million.

The $2.7 million increase in non-cash stock-based compensation was due to a $1.9 million increase in non-cash compensation related to our stock option plans, primarily the 2013 stock option plan that was implemented late in the second quarter of fiscal 2014, $0.3 million of accelerated non-cash compensation related to immediate vesting resctricted stock shares as the result of the IPO, and $0.5 million of non-cash compensation expense related to the non-employee director compensation stock plan created in the second quarter of fiscal 2015.

The $1.2 million increase in professional fees was due to audit services of $0.8 million in connection with the IPO and additional professional and consulting fees of $0.4 million associated with being a public company.

(Gain) loss on disposal of assets or businesses

(Gain) loss on the sale of assets or business for the six months ended September 30, 2014 was a loss of $0.3 million compared to a gain of $4.5 million over the comparable prior year period. The Company sold its Draintech product line during the first quarter of fiscal year 2014.

Intangibles amortization

Intangibles amortization for the six months ended September 30, 2014 was essentially flat when compared with the same period in the prior year.

Interest expense

Interest expense for the six months ended September 30, 2014 increased $0.6 million, or 6.8%, over the comparable prior year period. The increase was due to a higher average interest rate on our outstanding indebtedness and a higher average outstanding balance in addition to a 2% surcharge on our Term notes paid during the first quarter of fiscal 2015 due to our leverage ratio of Adjusted EBITDA to Funded Debt exceeding 3 times at September 30, 2014. The surcharge increased interest expense by $0.5 million. We repaid a portion of our outstanding indebtedness with the net proceeds from our initial public offering which closed on July 25, 2014. This repayment reduced our leverage ratio below 3 times at September 30, 2014 and eliminated the surcharge on the Term notes for the second quarter of fiscal 2015.

 

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Other miscellaneous (income) expenses, net

Other miscellaneous (income) expense amounted to $0.5 million income during the nine months ended September 30, 2014. Favorable mark-to-market adjustments for changes in fair value on derivative contracts contributed to the income during the current period.

Income tax expense

For the six months ended September 30, 2014 and 2013, the Company recorded income tax provisions of $16.8 million and $18.1 million, respectively, which represents an effective tax rate of 36.6% and 36.4%, respectively. These rates are higher than the federal statutory rate of 35% due principally to state and local income taxes, partially offset by foreign income taxed at lower rates. The effective tax rate for the first six months of the fiscal year 2015 is higher than the prior year period primarily due to the shift in the projections of the proportion of income earned and lower income before income taxes increasing the impact of non-deductible items in our tax calculations.

Equity in net loss of unconsolidated affiliates

Equity in net loss of unconsolidated affiliates represent our proportionate share of net loss attributed to the three unconsolidated joint ventures in which we have significant influence, but not control, over operations. Equity net loss of unconsolidated affiliates for the six months ended September 30, 2014 increased $0.2 million over the comparable prior year period.

Income attributable to non-controlling interests

Income attributable to non-controlling interests decreased $0.5 million for the six months ended September 30, 2014 compared to the comparable prior year period.

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

Year to date net income attributable to ADS of approximately $25.4 million decreased from the preceding fiscal year’s net income attributable to ADS of $27.7 million, as influenced by the factors noted above. Net income per share for the first six months of fiscal year 2015 totaled $0.25 per basic and diluted share, as compared to $0.43 and $0.42 per basic and diluted share, respectively, recorded in the comparable prior year period. The income per share for the six months ended September 30, 2014 is impacted by changes in fair value appreciation on convertible preferred stock classified in mezzanine equity which reduced income available to common shareholders by $11.1 million, or $0.22 and $.021 per basic and diluted share, respectively, for common shareholders.

Adjusted EBITDA

 

     Six Months Ended September 30,  
(Amounts in thousands)    2014     2013     % Change  
     (As Restated) (a)     (As Restated) (a)        

Domestic

   $ 94,896      $ 83,426        13.7

International

     5,432        10,568        (48.6 %) 
  

 

 

   

 

 

   

Total adjusted EBITDA

   $ 100,328      $ 93,994        6.7
  

 

 

   

 

 

   

As a percentage of net sales

     14.5     15.0  

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our consolidated financial statements.

Adjusted EBITDA for the first six months of fiscal year 2015 increased by $6.3 million or 6.7% over the comparable fiscal year 2014 period. Excluding the impact of the one-time $4.8 million gain from the sale of the Draintech business during the first quarter of fiscal 2014, adjusted EBITDA increased $11.1 million or 12.5% for the six months ended September 30, 2014 as compared to the prior year ($100.3 million compared to an adjusted $89.2 million for the prior year).

Domestic adjusted EBITDA totaled $94.9 million for the six months ended September 30, 2014 compared to $83.4 million in the prior year (which included the impact of the one-time $4.8 million gain on the sale). International adjusted EBITDA totaled $5.4 million for the first six months of fiscal 2015 compared to $10.6 million in the prior period.

 

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Adjusted EBITDA as a percentage of net sales totaled 14.5% for the six months ended September 30, 2014 compared to 15.0% for the prior year. Excluding the impact of the one-time gain on adjusted EBITDA in the first quarter of fiscal 2014, adjusted EBITDA as a percentage of net sales would have been 14.3%.

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 comprises 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 measures. 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 September 30,     Six Months Ended September 30,  
(Amounts in thousands)    2014     2013     2014     2013  
     (As Restated) (a)     (As Restated) (a)     (As Restated) (a)     (As Restated) (a)  

Net income

   $ 18,997      $ 16,657      $ 28,438      $ 31,206   

Depreciation and amortization

     16,374        15,885        32,400        31,710   

Interest expense

     5,044        4,721        10,095        9,450   

Income tax expense

     8,926        8,928        16,819        18,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     49,341        46,191        87,752        90,505   

Derivative fair value adjustments

     67        319        163        238   

Foreign currency transaction gains

     (205     (181     (75     (87

Loss (gain) on sale of assets or businesses

     281        204        345        (4,532

Unconsolidated affiliates interest, tax, depreciation and amortization (b)

     878        459        1,675        957   

Contingent consideration remeasurement

     20        40        2        129   

Stock-based compensation

     2,131        980        4,377        1,640   

ESOP deferred stock-based compensation

     2,687        2,506        5,374        5,026   

Transaction costs (c)

     —          —          715        118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 55,200      $ 50,518      $ 100,328      $ 93,994   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our 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 our debt refinancing and completion of the IPO.

The following table presents a reconciliation of Segment Adjusted EBITDA to Net Income, the most comparable GAAP measure, for each of the periods indicated:

 

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Reconciliation of Segment EBITDA and Adjusted Segment EBITDA to Net Income

 

     Three Months Ended September 30,  
     2014     2013  
(Amounts in thousands)    Domestic      International     Domestic      International  
     (As Restated) (a)      (As Restated) (a)     (As Restated) (a)      (As Restated) (a)  

Net income

   $ 17,603       $ 1,394      $ 12,263       $ 4,394   

Depreciation and amortization

     14,937         1,437        14,550         1,335   

Interest expense

     5,020         24        4,667         54   

Income tax expense

     10,897         (1,971     9,778         (850
  

 

 

    

 

 

   

 

 

    

 

 

 

Segment EBITDA

     48,457         884        41,258         4,933   

Derivative fair value adjustments

     67         —          319         —     

Foreign currency transaction gains

     —           (205     —           (181

Loss on sale of assets or businesses

     251         30        186         18   

Unconsolidated affiliates interest, tax, depreciation and amortization (b)

     291         587        1         458   

Contingent consideration remeasurement

     20         —          40         —     

Stock-based compensation

     2,131         —          980         —     

ESOP deferred stock-based compensation

     2,687         —          2,506         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Segment Adjusted EBITDA

   $ 53,904       $ 1,296      $ 45,290       $ 5,228   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our 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.

Reconciliation of Segment EBITDA and Adjusted Segment EBITDA to Net Income

 

     Six Months Ended September 30,  
     2014     2013  
(Amounts in thousands)    Domestic      International     Domestic     International  
     (As Restated) (a)      (As Restated) (a)     (As Restated) (a)     (As Restated) (a)  

Net income

   $ 25,446       $ 2,992      $ 24,097      $ 7,109   

Depreciation and amortization

     29,595         2,805        28,993        2,717   

Interest expense

     10,062         33        9,360        90   

Income tax expense

     18,311         (1,492     18,369        (230
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment EBITDA

     83,414         4,338        80,819        9,686   

Derivative fair value adjustments

     163         —          238        —     

Foreign currency transaction gains

     —           (75     —          (87

Loss (gain) on sale of assets or businesses

     311         34        (4,546     14   

Unconsolidated affiliates interest, tax, depreciation and amortization (b)

     540         1,135        2        955   

Contingent consideration remeasurement

     2         —          129        —     

Stock-based compensation

     4,377         —          1,640        —     

ESOP deferred stock-based compensation

     5,374         —          5,026        —     

Transaction costs (c)

     715         —          118        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment Adjusted EBITDA

   $ 94,896       $ 5,432      $ 83,426      $ 10,568   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our 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 our debt refinancing and completion of 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 (our South American Joint Venture, our BaySaver Joint Venture and our Tigre-ADS USA Joint Venture). 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 for management and segment reporting purposes.

 

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

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013      2014      2013  
     (As Restated) (a)      (As Restated) (a)      (As Restated) (a)      (As Restated) (a)  

Net sales

   $ 366,714       $ 332,727       $ 693,148       $ 625,306   

Net sales associated with our unconsolidated affiliates

           

South American Joint Venture(b)

     16,776         17,544         30,696         33,686   

BaySaver Joint Venture(c)

     3,423         1,615         5,760         1,615   

Tigre-ADS USA Joint Venture(d)

     3,697         —           7,230         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

System-Wide Net Sales

   $ 390,610       $ 351,886       $ 736,834       $ 660,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) See “Note 2. Restatement of Previously Issued Financial Statements” to our 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.

Adjusted Earnings per Fully Converted Share. Adjusted Earnings per Fully Converted Share, which is a non-GAAP measure, is a 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), and Weighted average fully converted common shares outstanding (Non-GAAP), by adjusting our Net income per share - Basic and Weighted average common shares outstanding – Basic, the most comparable GAAP measures.

To effect this adjustment, we have (1) removed the adjustment for the change in fair value of Redeemable convertible preferred stock classified as mezzanine equity from the numerator of the Net income per share - Basic computation, (2) added back the dividends to Redeemable convertible preferred stockholders and dividends paid to unvested restricted stockholders, (3) made corresponding adjustments to the amount allocated to participating securities under the two-class earnings per share computation method, and (4) added back ESOP deferred compensation attributable to the shares of redeemable convertible preferred stock allocated to employee ESOP accounts during the applicable period, which is a non-cash charge to our earnings and not deductible for income tax purposes.

We have also made adjustments to the Weighted average common shares outstanding – Basic to assume, (1) share conversion of the Redeemable convertible preferred stock to outstanding shares of 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 Earnings Per Fully Converted Share (Non-GAAP), and the corresponding Weighted Average Fully Converted Common Shares Outstanding (Non-GAAP) to our Net income per share and corresponding Weighted average common shares outstanding amounts, the most comparable GAAP measure, for each of the periods indicated.

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2014     2013     2014     2013  
     (As Restated) (a)     (As Restated) (a)     (As Restated) (a)     (As Restated) (a)  

Net income available to common shareholders

   $ 21,358      $ 10,129      $ 12,579      $ 20,098   

Adjustments to net income available to common shareholders:

        

Change in fair value of Redeemable convertible preferred stock

     7,319        (3,186     (11,054     (4,764

Dividends to Redeemable convertible preferred stockholders

     (37     (214     (75     (430

Dividends paid to unvested restricted stockholders

     —          (8     —          (16

Undistributed income allocated to participating securities

     (2,768     (1,203     (1,702     (2,406
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments to net income (loss) available to common shareholders

     4,514        (4,611     (12,831     (7,616
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ADS

     16,844        14,740        25,410        27,714   

Fair Value of ESOP Compensation related to Convertible preferred stock

     2,687        2,506        5,374        5,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income - (Non-GAAP)

   $ 19,531      $ 17,246      $ 30,784      $ 32,740   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Common Shares Outstanding – Basic

     51,518        47,250        49,538        47,220   

Unvested restricted shares

     237        335        235        328   

Redeemable convertible preferred shares

     20,099        20,341        20,099        20,379   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Weighted Average Common Shares Outstanding - Fully Converted (Non-GAAP)

     71,854        67,926        69,872        67,927   

Adjusted Earnings Per Fully Converted Share (Non-GAAP)

   $ 0.27      $ 0.25      $ 0.44      $ 0.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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(a) See “Note 2. Restatement of Previously Issued Financial Statements to our 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.

As of September 30, 2014, we had $6.5 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. No restrictions exist on our liquidity that is impacted by the significance of cash held by foreign subsidiaries.

Working Capital and Cash Flows

During the six months ended September 30, 2014, our net increase in cash was $2.7 million compared to a net increase of $0.7 million for the six months ended September 30, 2013. During the six months ended September 30, 2014, our source of funds was primarily driven by higher operating earnings, proceeds of $79.1 million from primary shares sold during our IPO, decreased inventories ($27.6 million) and non-cash charges (depreciation, amortization, compensation expense and shared based compensation expense). For the same period ending September 30, 2014, our use of cash was primarily driven by increased accounts receivable balances (up $97.8 million), spending for capital expenditures (15.6 million), repayment of $95.3 million of Long Term Debt in second quarter fiscal 2015 and investments in joint ventures ($7.6 million). During the six months ended September 30, 2013, our primary source of cash was also provided by operating earnings, decreased inventories ($37.1 million) borrowings on the Revolving Credit Facility and a new Term Note. For the six months ended September 30, 2013, our use of cash was primarily due to increases in accounts receivable ($92.3 million) and for capital expenditures ($21.6 million).

As of September 30, 2014, we had $139.8 million in liquidity, including $6.6 million of cash and cash equivalents and $133.2 million in borrowings available under our Revolving Credit Facilities, 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 September 30, 2014, we had total consolidated indebtedness of approximately $397.6 million down $56.5 million compared to March 31, 2014. We repaid a portion of our outstanding indebtedness 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:

 

     Six Months Ended
September 30,
 
(Amounts in thousands)    2014      2013  
     (As Restated)(a)      (As Restated)(a)  

Statement of Cash Flows data:

     

Net cash from operating activities

   $ 14,906       $ 8,385   

Net cash from investing activities

     (23,972      (21,524

Net cash from financing activities

     11,946         13,805   

 

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(a) See “Note 2. Restatement of Previously Issued Financial Statements” to the Condensed Consolidated Financial Statements.

Operating Cash Flows

During the six months ended September 30, 2014, cash provided by operating activities was $14.9 million as compared with cash provided by operating activities of $8.4 million for the six months ended September 30, 2013. Cash flow from operating activities during the six months ended September 30, 2014 was impacted lower net income and by moderately higher stock-based compensation compared to the prior period and lower inventory, offsetting an increase in the use of cash related to changes in accounts receivable, and accounts payable. Cash flow from operating activities for the six months ended September 30, 2013 also included a reduction of $4.8 million gain realized from the sale of assets for the Draintech product line.

Investing Cash Flows

During the six months ended September 30, 2014, cash used for investing activities was $24.0 million, primarily due to $15.6 million for capital expenditures in support of operations, a $3.6 million investment for a 49% interest in a newly created domestic joint venture operation, and a $4.0 million investment in our international joint venture operation to support growth initiatives. During the six months ended September 30, 2013, cash used for investing activities was $21.5 million, primarily due to capital expenditures in support of operations, net of $5.9 million in proceeds received from the sale of the Draintech product line.

Financing Cash Flows

During the six months ended September 30, 2014, cash provided by financing activities was a net $11.9 million, utilizing primarily borrowings on our Revolving Credit facility to support our typical seasonal demand increase following the winter months and early spring. Revolving Credit borrowings amounted to a net outflow of $52.2 million, offset by net proceeds from the IPO. During the six months ended September 30, 2013, cash provided by financing activities was $13.8 million primarily due to borrowings from Term and Revolving debt ($30.6 million), offset by modest payments for dividends and redemption of convertible preferred stock in connection with the ESOP.

Capital Expenditures

Capital expenditures totaled $15.6 million and $21.6 million for the six months ended September 30, 2014 and September 30, 2013, respectively. Our capital expenditures for the six months ended September 30, 2014 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 $35 million in fiscal year 2015. Such capital expenditures are expected to be financed using funds generated by operations. As of September 30, 2014, 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 $325.0 million and (ii) the Term Loan Facility providing for the Term Loans in an aggregate original principal amount of $100 million. 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. For further information about the Bank Term Loans, see “Note 12. Debt” to the financial statements included in “Item 8. Financial and Supplementary Data” of our Form 10-K for the year ended March 31, 2015 filed concurrently with this Form 10-Q/A as of September 30, 2014. As of September 30, 2014, the outstanding principal drawn on the Revolving Credit Facility was $193.8 million, with $123.2 million available to be drawn. As of September 30, 2014, the outstanding principal balance of the Term Loan was $95.0 million.

 

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We used the net proceeds from the initial public offering, which closed on July 25, 2014, to repay a portion of our outstanding indebtedness under the Revolving Credit Facility.

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. For further information about the Mexicana Revolving Credit Facilities, see “Note 12. Debt” to the financial statements included in “Item 8. Financial and Supplementary Data” of our Form 10-K for the year ended March 31, 2015 filed concurrently with this Form 10-Q/A as of September 30, 2014. As of September 30, 2014, the outstanding principal drawn on the revolving credit facility was $2.0 million, with $10.0 million 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 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. For further information about the Senior Notes, see “Note 12. Debt” to the financial statements included in “Item 8. Financial and Supplementary Data” of our Form 10-K for the year ended March 31, 2015 filed concurrently with this Amendment No. 1 on Form 10-Q as of September 30, 2014 . We have no further amount available for issuance of senior notes under the private shelf agreement. At September 30, 2014 the outstanding principal balance on these notes was $100 million.

Covenant Compliance

Our outstanding debt agreements and instruments contain various restrictive 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 financial statements included in “Item 8. Financial and Supplementary Data” of our Form 10-K for the year ended March 31, 2015 filed concurrently with this Form 10-Q/A as of, and for the three and six months ended September 30, 2014. We were in compliance with our debt covenants as of September 30, 2014.

Contractual Obligation as of September 30, 2014

 

     Payments Due by Period  
(Amounts in thousands)    Total      Less than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
 
     (Restated)      (Restated)      (Restated)      (Restated)      (Restated)  

Contractual obligations:

              

Long-term debt (1)

   $ 397,583       $ 11,148       $ 71,740       $ 314,695       $ —     

Interest payments (2)

     48,012         14,205         25,246         8,561         —     

Operating leases

     9,610         2,842         3,469         1,054         2,245   

Capital leases

     70,290         15,157         28,296         17,430         9,407   

Contractual purchase obligations (3)

     20,153         20,153         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 545,648       $ 63,505       $ 128,751       $ 341,740       $ 11,652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) The current Revolving Credit Facility and Term Loan mature in June, 2018.
(2) Based on applicable rates and pricing margins as of September 30, 2014, including interest rate swaps.
(3) Purchase obligations include various commitments with vendors to purchase inventory.

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 11. Related Party Transactions” of our Notes to Condensed Consolidated Financial Statements. As of September 30, 2014, our South American Joint Venture had approximately $12.3 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 Annual Report on Form 10-K for the year ended March 31, 2015 (filed concurrently with this Form 10-Q/A) which includes our restated consolidated financial statements for the year ended March 31, 2014.

Forward-Looking Statements

This Quarterly Report on Form 10-Q/A includes forward-looking statements. Some of the forward-looking statements can be identified by the use of terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “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.

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;

 

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    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; and

 

    other risks and uncertainties, including those listed under “Risk Factors.”

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to various market risks, primarily related to changes in interest rates, 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 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 $1.9 million based on our borrowings as of September 30, 2014. 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 $3.2 million per year. To mitigate the impact of interest rate volatility, we had two interest rate swaps in effect as of September 30, 2014. The first swap is at $70 million notional value, amortizing $2.5 million per quarter at a fixed LIBOR rate of 1.105%, and expired in September 2014. The other swap is a $50 million notional value, non-amortizing swap at a LIBOR rate of 0.86%, which expires in September 2016. A third $50 million notional value swap took effect on September 1, 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.

 

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Raw Material and Commodity Price Risk

Our primary raw materials used in the production of our products are polyethylene and polypropylene resins. 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. If the price of HDPE and PP virgin resin increased or decreased by 5%, it would result in a change to our annual cost of goods sold of approximately $25 million.

Inflation

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.

Financial Instruments

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 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 Operations.

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. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

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In connection with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (the “Original Form 10-Q”), the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of September 30, 2014 (the “Evaluation Date”). Subsequent to the filing of the Original Form 10-Q and in connection with the restatement discussed elsewhere in this Quarterly Report on Form 10-Q/A, the Company’s management identified material weaknesses in the Company’s internal control over financial reporting applicable to the period covered by this periodic report. As a result of its identification of the material weaknesses, management, under the supervision and with the participation of our CEO and CFO, reevaluated the effectiveness of the Company’s disclosure controls and procedures as of the Evaluation Date. Based on that reevaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of the Evaluation Date.

A material weakness in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have identified certain material weaknesses in our internal control over financial reporting in the areas of (i) Company control environment, (ii) accounting for leases, (iii) accounting for inventory, (iv) journal entry and account reconciliation, (v) ADS Mexicana control environment, and (vi) ADS Mexicana revenue recognition cut-off practices. The material weaknesses in our internal control over financial reporting are more fully described in Item 9A in our Annual Report on Form 10-K for the year ended March 31, 2015, which is being filed concurrently with this Form 10-Q/A.

Changes in Internal Control over Financial Reporting

While there have been significant changes in our internal control over financial reporting subsequent to September 30, 2014, as described in Item 9A of our Annual Report on Form 10-K for the year ended March 31, 2015, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in legal proceedings incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business. In connection with ASC 450, Contingencies, we have not accrued for material loss contingencies relating to any legal proceedings because we believe that, although unfavorable outcomes in proceedings may be possible, they are not considered by our management to be probable and reasonably estimable. We believe that the outcome of any such pending matters, either individually or in the aggregate, will not have a material impact on our business or financial condition.

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 Annual Report on Form 10-K for the year ended March 31, 2015, 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 Annual Report on Form 10-K for the year ended March 31, 2015 and in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and “Part II, Item 1 — Legal Proceedings” of this Amended Quarterly Report on Form 10-Q/A.

Item 2. Unregistered Sale of Equity Securities

On July 24, 2014, the Company’s Registration Statement (File No. 333-194980) was declared effective by the SEC for the initial public offering of its common stock, par value $0.01 per share. We registered the offering and sale of 16,675,000 shares of common stock, including 2,175,000 shares of common stock to be sold to the underwriters pursuant to their over-allotment option, at a price of $16.00 per share, with an aggregate price of the registered offering amount $266.8 million. On July 25, 2014, the Company closed its initial public offering of 14,500,000 shares of the Company’s common stock which were sold by the Company and certain of our stockholders. On August 22, 2014, an additional 600,000 shares of common stock were sold by certain of our stockholders pursuant to the underwriters’ partial exercise of their over-allotment option. The shares sold in the initial offering (including shares sold pursuant to the over-allotment option) were sold at a public offering price of $16.00 per share, for an aggregate offering price of $241.6 million. Barclays Capital Inc., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and RBC Capital Markets, LLC acted as joint book-running managers for the offering. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Fifth Third Securities, Inc. and PNC Capital Markets LLC acted as co-managers for the offering.

 

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As a result of our initial public offering, we received proceeds of $79.1 million, after deducting underwriting discounts and commissions of approximately $5.5 million, from the sale by us of 5,289,474 shares of common stock. We did not receive any proceeds from the sale of shares by the selling stockholders. None of the expenses associated with the initial public offering were paid to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, except that the Company paid such portion of the fees and expenses of counsel to the selling stockholders that exceed $100,000 and any transfer taxes payable in connection with the initial public offering.

There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on July 28, 2014. We used the net proceeds that we received from our initial public offering to repay a portion of our outstanding indebtedness under the revolving portion of the Company’s credit facility.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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: March 29, 2016

 

    ADVANCED DRAINAGE SYSTEMS, INC.
    By:  

/s/ Joseph A. Chlapaty

      Joseph A. Chlapaty
      President and Chief Executive Officer
      (Principal Executive Officer)
    By:  

/s/ Scott A. Cottrill

      Scott A. Cottrill
      Executive Vice President, Chief Financial Officer, Secretary and Treasurer
      (Principal Financial Officer)

 

 

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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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