Fiscal Year 2017
Annual Report
About Advanced Drainage
Systems, Inc.
Pipe
Allied Products
Advanced Drainage Systems (ADS)
is 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. Its innovative products
are used across a broad range of end
markets and applications, including
non-residential, residential, agriculture
and infrastructure applications. The
Company has established a leading
position in many of its domestic and
international end markets by leveraging
its national sales and distribution
platform, its overall product breadth
and scale and its manufacturing
excellence. Founded in 1966, the
Company operates a global network
of approximately 60 manufacturing
plants and over 30 distribution centers.
Key Financial Highlights
FY 2017 REVENUE
(Figures in millions)
FY 2017 ADJUSTED EBITDA1*
(Figures in millions)
CAGR: 5.4%
CAGR: 10.0%
$1,017
$1,068
$1,180
$1,291 $1,257
$132
$151
$144
$187
$193
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
1 EBITDA adjustments exclude one-time transaction costs
and certain non-cash items.
FY 2017 SALES BY GEOGRAPHY
FY 2017 DOMESTIC SALES
BY END USE
88%
12%
Domestic
International
57%
20%
11%
12%
Non-Residential
Residential
Infrastructure
Agriculture
Consolidated net sales = $1.257 billion
(cid:53)(cid:76)(cid:91)(cid:3)(cid:90)(cid:72)(cid:83)(cid:76)(cid:90)(cid:3)(cid:77)(cid:89)(cid:86)(cid:84)(cid:3)(cid:92)(cid:85)(cid:74)(cid:86)(cid:85)(cid:90)(cid:86)(cid:83)(cid:80)(cid:75)(cid:72)(cid:91)(cid:76)(cid:75)(cid:3)(cid:72)(cid:77)(cid:196)(cid:83)(cid:80)(cid:72)(cid:91)(cid:76)(cid:90)(cid:3)(cid:36)(cid:3)(cid:11)(cid:23)(cid:21)(cid:23)(cid:29)(cid:24)(cid:3)(cid:73)(cid:80)(cid:83)(cid:83)(cid:80)(cid:86)(cid:85)(cid:17)
(cid:58)(cid:96)(cid:90)(cid:91)(cid:76)(cid:84)(cid:20)(cid:62)(cid:80)(cid:75)(cid:76)(cid:3)(cid:53)(cid:76)(cid:91)(cid:3)(cid:58)(cid:72)(cid:83)(cid:76)(cid:90)(cid:3)(cid:36)(cid:3)(cid:11)(cid:24)(cid:21)(cid:26)(cid:24)(cid:31)(cid:3)(cid:73)(cid:80)(cid:83)(cid:83)(cid:80)(cid:86)(cid:85)(cid:17)
Construction:
88%
FY 2017 DOMESTIC REVENUE GROWTH VS. END MARKET
Non-Residential
Residential
Infrastructure
Agriculture
5%
2%
6%
3%
New Residential
Construction
Retail
-6%
-6%
-1%
-1%
Market Growth2
ADS Growth
2 Based on management estimates.
-22%
-22%
*Non-GAAP. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the accompanying Form
10-K for the definitions of non-GAAP measures and reconciliation of non-GAAP measures to GAAP measures.
1
Dear Fellow Shareholders,
Fiscal 2017 was another year of
successful conversion for ADS in
our core construction markets, most
notably in the non-residential and
new-residential construction markets,
where sales outpaced their respective
end markets by an estimated 300
basis points. Our performance was
driven by continued strong growth
in our HP pipe and Allied products,
underscoring market adoption of ADS’
innovation and complete package
of water management solutions and
products. Despite the challenging
broader market environment, we were
able to increase our Adjusted EBITDA
margin by 90 basis points to 15.4%
driven by a favorable resin cost
environment and effective price
management.
Committed to a Balanced Capital Allocation Strategy
In addition, we also continued to demonstrate our
commitment to a balanced capital allocation strategy
including:
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this year, which provided us with additional avenues
of shareholder value creation including investments in
growth and operational improvements as well as cash
returns to shareholders.
• Increasing our cash dividend to $0.06 per share
in June, 2016;
• Maintaining a net debt-to-EBITDA (TTM) ratio of
2.27, well within our target range of 2-3x; and,
• Authorizing a stock repurchase program for
the repurchase of up to $50 million in the
Company’s common stock.
Our investments in innovation and growth resulted in
the launch of the HPXR 75 product line, the acquisition
of Plastic Tubing Industries (PTI) and the completion of
our new Harrisonville, Missouri plant. Collectively these
strategic actions have positioned us to expand the
breadth of our product offering, make further inroads
into large and attractive end markets and better align
our manufacturing footprint to faster growing regions
of the United States.
2
Fiscal Year 2018 and Beyond
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beyond, we are well positioned for
growth. Our strong performance in our
core construction markets is expected
to continue, driven by solid demand and
our conversion strategies, particularly in
our non-residential and new residential
construction end markets.
Certain markets that were challenged in
(cid:196)(cid:90)(cid:74)(cid:72)(cid:83)(cid:3)(cid:25)(cid:23)(cid:24)(cid:30)(cid:3)(cid:79)(cid:72)(cid:93)(cid:76)(cid:3)(cid:73)(cid:76)(cid:78)(cid:92)(cid:85)(cid:3)(cid:91)(cid:86)(cid:3)(cid:90)(cid:91)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:97)(cid:76)(cid:19)(cid:3)(cid:94)(cid:80)(cid:91)(cid:79)(cid:3)
International construction markets expected
to contribute to growth this year.
Overall, we feel very good about our
position in the markets we serve and will
look to accelerate this growth through
innovation as well as bolt-on acquisitions
that complement our product suite and
geographic footprint.
However, our success remains dependent
on our continued commitment to
excellence. This is why I am pleased with
our newly initiated Superior Performance
Program (SPP). Through the SPP, we
are implementing a broad spectrum of
performance improvement initiatives
across our three primary strategic pillars:
Strategic Growth, Operational Excellence
and Commercial Excellence. The intent of
this program is aimed at further driving our
growth and competitive advantage in the
industry while enabling us to deliver a step
(cid:74)(cid:79)(cid:72)(cid:85)(cid:78)(cid:76)(cid:3)(cid:80)(cid:85)(cid:3)(cid:84)(cid:72)(cid:89)(cid:78)(cid:80)(cid:85)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:87)(cid:89)(cid:86)(cid:196)(cid:91)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96)(cid:3)(cid:86)(cid:93)(cid:76)(cid:89)(cid:3)(cid:91)(cid:80)(cid:84)(cid:76)(cid:21)
The Next Chapter in ADS’ Evolution
As I approach retirement this year after
nearly four decades of serving in various
roles at ADS, I look back at a very rewarding
journey. ADS has grown from a small,
private company with $50 million in sales
when I joined to an industry leader with an
exceptionally strong brand and more than
$1.2 billion in sales across multiple end
markets and geographies.
acknowledge our employees and customers
for their ongoing dedication and loyalty to
ADS. Their contributions have made our
Company into what it is today and I hope
they share my pride and enthusiasm for the
opportunities we see to continue building
upon the ADS legacy.
Lastly, to you, our shareholders, I want to
thank you for your continued support and
(cid:74)(cid:86)(cid:85)(cid:196)(cid:75)(cid:76)(cid:85)(cid:74)(cid:76)(cid:3)(cid:80)(cid:85)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:91)(cid:76)(cid:72)(cid:84)(cid:21)(cid:3)(cid:40)(cid:90)(cid:3)(cid:72)(cid:3)(cid:90)(cid:79)(cid:72)(cid:89)(cid:76)(cid:79)(cid:86)(cid:83)(cid:75)(cid:76)(cid:89)
(cid:94)(cid:79)(cid:86)(cid:3)(cid:80)(cid:85)(cid:91)(cid:76)(cid:85)(cid:75)(cid:90)(cid:3)(cid:91)(cid:86)(cid:3)(cid:84)(cid:72)(cid:80)(cid:85)(cid:91)(cid:72)(cid:80)(cid:85)(cid:3)(cid:90)(cid:80)(cid:78)(cid:85)(cid:80)(cid:196)(cid:74)(cid:72)(cid:85)(cid:91)
ownership in the Company, I look forward
to sharing with you many more successful
years with ADS.
I am very proud of the fact that we created
our industry niche having grown our
position for storm sewer applications from
virtually nothing in 1990 to handling more
than a quarter of storm sewer applications
today – 9x the size of the next largest HDPE
pipe competitor. Over that same period, we
have also gone from sourcing virtually 100%
virgin resin to becoming one of the top
(cid:196)(cid:93)(cid:76)(cid:3)(cid:83)(cid:72)(cid:89)(cid:78)(cid:76)(cid:90)(cid:91)(cid:3)(cid:89)(cid:76)(cid:74)(cid:96)(cid:74)(cid:83)(cid:80)(cid:85)(cid:78)(cid:3)(cid:74)(cid:86)(cid:84)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:53)(cid:86)(cid:89)(cid:91)(cid:79)
America, converting more than 400 million
pounds a year of non-virgin material that
(cid:86)(cid:91)(cid:79)(cid:76)(cid:89)(cid:94)(cid:80)(cid:90)(cid:76)(cid:3)(cid:94)(cid:86)(cid:92)(cid:83)(cid:75)(cid:3)(cid:79)(cid:72)(cid:93)(cid:76)(cid:3)(cid:76)(cid:85)(cid:75)(cid:76)(cid:75)(cid:3)(cid:92)(cid:87)(cid:3)(cid:80)(cid:85)(cid:3)(cid:83)(cid:72)(cid:85)(cid:75)(cid:196)(cid:83)(cid:83)(cid:90)(cid:21)
While our Company’s success to date has
been impressive, I believe the best days
are still ahead for us. I want to personally
Sincerely,
Joseph A. Chlapaty
Chairman and CEO
3
Lifecycle of a Raindrop
1
Rain
Waterr
Water passes through an open catch basin
2
3
Non-Virgin Raw Material Sourcing
• Over half of HDPE material used
is recycled
• Over 400 million lbs. of plastic
recycled annually
• Low carbon footprint
• Near zero plant waste
Integrated
Plastic
Recycling &
Re-Use
Water
Management
Design
Solutions
Local, Clean
Manufacturing
Facilities
High-
Performance
Ecologically-
Friendly
Products
• Broad portfolio of innovative products
that help efficiently and safely
manage storm and waste water
• Providing products that are long-
lasting and environmentally friendly
• Extend life cycle
Sustainable Water Management
Solutions
Stormwater run-off is a major source of pollution for many types
of water bodies. Not only are the sediments, hydrocarbons, heavy
metals, pesticides, fertilizers and trash transported by stormwater
detrimental, but sheer volumes and velocities of the stormwater run-off
itself can be harmful to water bodies, wetlands and shorelines.
Current EPA regulations require any development of one acre or larger
to retain stormwater on site and gradually release it over time. This
requirement is met by either using natural solutions, such as retention
ponds, or structural solutions, which include systems constructed
underground.
Partnering For a
Greener Bottom Line
• We purchase and process a
wide variety of reusable HDPE
products through Green Line
Polymers, a wholly owned
subsidiary.
• ADS extends life of the plastic
by recycling post-consumer
and post-industrial HDPE
plastic scrap then grinding,
cleaning, pelletizing and
consuming the material
directly into environmentally-
friendly products rather than
(cid:75)(cid:80)(cid:90)(cid:91)(cid:89)(cid:80)(cid:73)(cid:92)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:91)(cid:86)(cid:3)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:75)(cid:196)(cid:83)(cid:83)(cid:21)
• HDPE and PP pipe scrap
is re-ground and reused in
the manufacturing process,
resulting in virtually no waste.
• 8 domestic recycling facilities.
• Net positive recycler
• (cid:54)(cid:85)(cid:76)(cid:3)(cid:86)(cid:77)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:91)(cid:86)(cid:87)(cid:3)(cid:196)(cid:93)(cid:76)(cid:3)(cid:83)(cid:72)(cid:89)(cid:78)(cid:76)(cid:90)(cid:91)(cid:3)
(cid:75)(cid:86)(cid:84)(cid:76)(cid:90)(cid:91)(cid:80)(cid:74)(cid:3)(cid:89)(cid:76)(cid:74)(cid:96)(cid:74)(cid:83)(cid:76)(cid:89)(cid:90)(cid:17)
To Help Protect the
Environment and
(cid:57)(cid:76)(cid:75)(cid:92)(cid:74)(cid:76)(cid:3)(cid:51)(cid:72)(cid:85)(cid:75)(cid:196)(cid:83)(cid:83)(cid:3)(cid:62)(cid:72)(cid:90)(cid:91)(cid:76)
*www.plasticsnews.com/rankings/recyclers
44
Stormwater passes through to the isolator row
where it filters out first flush sediment
Water passes through other chamber rows and
exits out through an outlet basin or infiltrates through
the ground depending on the system design
water
5
4
Water Sediment
water
Rivers & Streams
As a leading water management solutions provider, we
manufacture a broad portfolio of innovative products that help
(cid:74)(cid:86)(cid:84)(cid:84)(cid:92)(cid:85)(cid:80)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:72)(cid:89)(cid:86)(cid:92)(cid:85)(cid:75)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:94)(cid:86)(cid:89)(cid:83)(cid:75)(cid:3)(cid:76)(cid:77)(cid:196)(cid:74)(cid:80)(cid:76)(cid:85)(cid:91)(cid:83)(cid:96)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:90)(cid:72)(cid:77)(cid:76)(cid:83)(cid:96)(cid:3)(cid:84)(cid:72)(cid:85)(cid:72)(cid:78)(cid:76)(cid:3)(cid:90)(cid:91)(cid:86)(cid:89)(cid:84)(cid:3)
and waste water.
ADS repurposes approximately 25%
of all high density polyethylene (HDPE)
pigmented bottles in the U.S. into an
ADS product
Today, our sustainable solutions are enhancing ecosystems
in communities around the world. Our broad offering of pipe
and engineered allied products are used in a diverse range of
construction projects including non-residential and industrial
projects, residential development, streets, highways and airports.
Our innovative solutions are managing and controlling the
(cid:89)(cid:72)(cid:91)(cid:76)(cid:3)(cid:86)(cid:77)(cid:3)(cid:197)(cid:86)(cid:94)(cid:19)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:91)(cid:76)(cid:84)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:92)(cid:89)(cid:76)(cid:3)(cid:86)(cid:77)(cid:3)(cid:89)(cid:92)(cid:85)(cid:86)(cid:77)(cid:77)(cid:3)(cid:94)(cid:72)(cid:91)(cid:76)(cid:89)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:89)(cid:76)(cid:84)(cid:86)(cid:93)(cid:80)(cid:85)(cid:78)
contaminants from storm water; aiding in protecting regional water
supplies, allowing for more cost-effective use of land and creating
valuable green space.
Effective Resource Management
• Increase use of recycled resin in production process while
maintaining overall quality and performance
• Through our wholly owned subsidiary Green Line Polymers,
we self-process 88% of the Company’s non-virgin plastic
• (cid:51)(cid:76)(cid:93)(cid:76)(cid:89)(cid:72)(cid:78)(cid:76)(cid:3)(cid:83)(cid:72)(cid:89)(cid:78)(cid:76)(cid:3)(cid:197)(cid:76)(cid:76)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:73)(cid:72)(cid:74)(cid:82)(cid:79)(cid:72)(cid:92)(cid:83)(cid:3)(cid:85)(cid:86)(cid:85)(cid:20)(cid:93)(cid:80)(cid:89)(cid:78)(cid:80)(cid:85)(cid:3)(cid:84)(cid:72)(cid:91)(cid:76)(cid:89)(cid:80)(cid:72)(cid:83)(cid:90)(cid:3)(cid:91)(cid:86)(cid:3)(cid:89)(cid:76)(cid:75)(cid:92)(cid:74)(cid:76)(cid:3)
costs
• Continuous improvement initiatives using lean manufacturing
and 5S to improve safety, cost and productivity performance
Sustainable Product Evolution
70%
24%
57%
37%
FY 2005
FY 2017
Virgin
Recycled
255
+
170
million pounds
post-consumer
plastic
million pounds
post-industrial
plastic
high performing
pipe
The amount of HDPE pigmented bottles
we recycled in 2016 is equivalent to over
95,000 miles of 4” corrugated pipe, which
could travel around the Earth 3.8 times
55
Advanced Drainage Systems, Inc.
Ticker: WMS
IPO Date: July 25, 2014
Founded: 1966
IR Contact: Michael Higgins
614-658-0050
Mike.Higgins@ads-pipe.com
HDPE/PP SHARE OF STORM SEWER MARKET1
(HDPE/PP % Share)
<1%
1990
<10%
2000
20%
2010
30%
20172
6
1 Based on management estimates.
2 Fiscal year 2017.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:3)
(cid:4)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO.: 001-36557
ADVANCED DRAINAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
51-0105665
(I.R.S. Employer
Identification Number)
4640 Trueman Boulevard, Hilliard, Ohio 43026
(Address of principal executive offices and zip code)
(614) 658-0050
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value per share
Title of Each Class
Name of Each Exchange On Which Registered
Common Stock, $0.01 par value per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:3)
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 (cid:3) No (cid:4)
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 (cid:3) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (Check one)
(cid:3)
Large Accelerated Filer
(cid:4)
Non-Accelerated Filer
Emerging Growth Company (cid:4)
Accelerated Filer
Smaller Reporting Company
(cid:4)
(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No (cid:3)
The aggregate market value of the shares of common stock held by non-affiliates of the registrant (treating all executive officers and directors of
the registrant, for this purpose, as affiliates of the registrant) was $1,049 million as of September 30, 2016, the last business day of the registrant’s
most recently completed second fiscal quarter, based on the reported closing price of the shares of common stock as reported on the New York
Stock Exchange on September 30, 2016.
As of May 5, 2017, the registrant had 55,338,215 shares of common stock outstanding. The shares of common stock trade on the New York
Stock Exchange under the ticker symbol “WMS”. In addition, as of May 5, 2017, 276,725 shares of unvested restricted common stock were
outstanding and 24,225,130 shares of ESOP preferred stock, convertible into 18,633,970 shares of common stock, were outstanding. As of May
5, 2017, 74,248,910 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.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference specific portions of the Registrant’s Notice of Annual Meeting and Proxy Statement relating to the
Annual Meeting of Stockholders to be held on July 17, 2017.
TABLE OF CONTENTS
Cautionary Statement About Forward-Looking Statements
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Item 6.
Selected Financial and Operating Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountant on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
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ii
Advanced Drainage Systems, Inc.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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
Annual Report on Form 10-K and include statements regarding our intentions, beliefs or current expectations
concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects,
growth strategies, and the industries in which we operate and include, without limitation, statements relating to our
future performance.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are
beyond our control. We caution that forward-looking statements are not guarantees of future performance and that
our actual consolidated results of operations, financial condition, liquidity, and industry development may differ
materially from those made in or suggested by the forward-looking statements contained in this Annual Report on
Form 10-K. In addition, even if our actual consolidated results of operations, financial condition, liquidity, and
industry development are consistent with the forward-looking statements contained in this Annual Report on Form
10-K, those results or developments may not be indicative of results or developments in subsequent periods. A
number of important factors could cause actual results to differ materially from those contained in or implied by the
forward-looking statements, including those reflected in forward-looking statements relating to our operations and
business, the risks and uncertainties discussed in this Annual Report on Form 10-K (including under the heading
“Item 1A. Risk Factors”) and those described from time to time in our other filings with the SEC. Factors that could
cause actual results to differ from those reflected in forward-looking statements relating to our operations and
business include, among other things:
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our ability to remediate the material weaknesses in our internal controls over financial reporting
described in “Item 9A. Controls and Procedures” of this Annual Report, and discovering further
weaknesses of which we are not currently aware or which have not been detected;
the effect of any claims, litigation, investigations or proceedings resulting from the restatement of our
previously issued financial statements, or the matters related to such restatement, including those
described below under “Item 3. Legal Proceedings” of this Annual Report;
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 polyvinyl chloride (“PVC”)
pipe products into demand for our high performance thermoplastic corrugated pipe and Allied Products;
the effect of weather or seasonality;
the loss of any of our significant customers;
the risks of doing business internationally;
the risks of conducting a portion of our operations through joint ventures;
our ability to expand into new geographic or product markets;
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Advanced Drainage Systems, Inc.
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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 “Item 1A. Risk Factors.”
Please read this Annual Report on Form 10-K completely and with the understanding that actual future results
may be materially different from expectations. All forward-looking statements made in this Annual Report on Form
10-K are qualified by these cautionary statements. All forward-looking statements are made only as of the date of
this Annual Report on Form 10-K, and we do not undertake any obligation, other than as may be required by law, to
update or revise any forward-looking statements to reflect future events or developments. Comparisons of results for
current and any prior periods are not intended to express any future trends, or indications of future performance,
unless expressed as such, and should only be viewed as historical data.
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Advanced Drainage Systems, Inc.
Item 1.
Business
COMPANY OVERVIEW
PART I
Unless the context otherwise indicates or requires, as used in this Annual Report on Form 10-K, the terms
“we,” “our,” “us,” “ADS” and the “Company” refer to Advanced Drainage Systems, Inc. and its directly- and
indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean only Advanced
Drainage Systems, Inc. exclusive of its subsidiaries.
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 underground
construction and infrastructure marketplace. Our broad product line includes corrugated high density polyethylene
(or “HDPE”) pipe, polypropylene (or “PP”) pipe and related water management products. 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, 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 the United States, our national footprint combined with our strong local
presence and broad product offering make us the leader in an otherwise highly fragmented sector comprised of many
smaller competitors. We believe the ADS brand has long been associated with quality products and market-leading
performance. Our trademarked green stripe, which is prominently displayed on many of our products, serves as clear
identification of our commitment to the customers and markets we serve.
We believe the markets we serve in the United States represent approximately $11 billion of annual revenue
opportunity. In addition, we believe the increasing acceptance of thermoplastic pipe products in international
markets represents an attractive growth opportunity. For fiscal 2017, we generated net sales of $1,257.3 million, net
income of $35.9 million and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted
EBITDA”) of $193.4 million and, as of March 31, 2017, we had $350.4 million of total outstanding debt. For a
reconciliation of Adjusted EBITDA to the most directly comparable measure calculated in accordance with
accounting principles generally accepted in the United States of America (“GAAP”), see “Item 6. Selected Financial
and Operating Data.” We believe our extensive national footprint in the United States creates a cost and service
advantage versus our HDPE pipe producing competitors, the largest of which has only 11 domestic HDPE pipe
manufacturing plants and, according to the July 25, 2016 ranking by Plastics News of Pipe, Profile & Tubing
Extruders, recently had estimated sales of $140 million, or approximately nine times less than our net sales in fiscal
2017.
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Advanced Drainage Systems, Inc.
As illustrated in the charts below, we provide a broad range of high performance thermoplastic corrugated
pipe and related water management products to a highly diversified set of end markets and geographies.
Fiscal Year 2017 Revenue
RECENT DEVELOPMENTS
In February 2017, we acquired the assets of Plastic Tubing Industries (“PTI”), a manufacturer of HDPE pipe
and related accessories, in an all cash transaction for $9.5 million. At the time of acquisition, $8.5 million was paid
in cash; the remaining $1.0 million will be paid on August 6, 2018. With the acquisition, we will increase our
manufacturing footprint in Georgia and Texas, while adding production capacity to existing manufacturing facilities
in Florida, to better serve growing demand in the region.
SEGMENT INFORMATION
For a discussion of segment and geographic information, see “Note 21. Business Segment Information” to our
audited consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this
Form 10-K.
OUR MANUFACTURING AND DISTRIBUTION PLATFORM
We have a leading domestic and international manufacturing and distribution infrastructure, serving customers
in all 50 U.S. states as well as approximately 80 other countries through 60 manufacturing plants and 34 distribution
centers, including 7 manufacturing plants and 6 distribution centers owned or leased by our joint ventures. We
manufacture our corrugated pipe products in 17 different diameters ranging from 2” to 60” using a continuous
extrusion process, where molten polyethylene or polypropylene is pushed through a die into a moving series of
corrugated U-shaped molds. Blown air and vacuum are used to form the corrugations of the pipe which is pulled
through a corrugator and then cut to length. We utilize customized and proprietary production equipment, which we
believe is faster and more cost efficient than other pipe making equipment generally available in the market.
Domestically, we are capable of producing more than one billion pounds of pipe annually on a standard five-
day per week schedule. Additional capacity is in place to support seasonal production needs and growth in our N-12
pipe sales volume requiring minimal additional capital for molds. Our normal production capacity utilization as a
percentage of total capacity was 67%, 70% and 68% for fiscal 2017, 2016 and 2015, respectively. Our production
equipment is built to accept transportable molds and die tooling over a certain range of sizes so each plant is not
required to house the full range of tooling at any given time. This transportability provides us with the flexibility to
optimize our capacity through centrally-coordinated production planning, which helps to adapt to shifting sales
demand patterns while reducing the capital needed for tooling. With our large manufacturing footprint in place, we
can support rapid seasonal growth in demand, focusing on customer service while minimizing transportation costs.
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Advanced Drainage Systems, Inc.
The standard fittings products (tees, wyes, elbows, etc.) that we produce and sell to connect our pipe on
jobsites are blow molded or injection molded at four domestic plants. In addition, customized fabricated fittings
(e.g., more complex dual wall pipe reducers, bends or structures) are produced in 20 of our North American plants.
In addition to the extrusion of pipe, and blow molding and injection molding of fittings, we also use a variety of
other processes in our manufacturing facilities. These processes include thermoforming, compression molding, and
custom plastic welding and fabrication. The wide variety of production processes and expertise allow us to provide
cost-effective finished goods at competitive prices delivered in a timely fashion to our customers.
Our manufacturing plants have no process-related by-products released into the atmosphere, waterways, or
solid waste discharge. During pipe production start-ups and size change-overs, non-compliant scrap and any
damaged finished goods pipe are recycled through a grinder for internal re-use.
International Presence - We serve international markets primarily through joint ventures with local partners.
This joint venture strategy has provided us with local and regional access to markets such as Brazil, Chile,
Argentina, Mexico, Peru and Colombia. These international facilities produce pipe and related products to be sold in
their respective regional markets. Combining a local partner’s customer relationships, brand recognition and local
management talent, with our world-class manufacturing and process expertise, broad product portfolio and
innovation, creates a powerful platform and exciting opportunities for continued international expansion.
Quality Control - We have two internal quality control laboratory facilities equipped and staffed to evaluate
and confirm incoming raw material and finished goods quality in addition to the quality testing that is done at our
manufacturing facilities. We conduct annual safety, product and process quality audits at each of our facilities, using
centralized internal resources in combination with external third-party services. In the quality area, various national
agencies such as National Transportation Product Evaluation Program (“NTPEP”), International Association of
Plumbing and Mechanical Officials (“IAPMO”), Bureau de normalisation du Québec (“BNQ”), Intertek for
Canadian Standards Association (“CSA”), Entidad Mexicana de Acreditacion A.C. (“EMA”) and NSF International
and numerous state Departments of Transportation (“DOT”) and municipal authorities conduct both scheduled and
unscheduled inspections of our plants to verify product quality and compliance to applicable standards.
Training - Core to our commitment and enablement of a safe and productive manufacturing environment are
our operational and management training programs. Through our ADS Academy, we deliver targeted role-specific
training to our operations team members through a blended curriculum of on-line and hands-on training experiences
covering safety, quality, product knowledge and manufacturing process. Our learning management system, which
hosts over 600 custom modules, serves as the foundation of our operational training programs and provides us with
appropriate scale, efficiency, and governance to support our growth. We have a strong commitment to the training of
our manufacturing supervisors and managers in technical, management, and leadership subjects through intense
role-based assimilation plans, e-learning and classroom-based development experiences.
Fleet - We also operate an in-house fleet of approximately 700 tractors. Our effective shipping radius is
between approximately 300-350 miles from one of our manufacturing plants or distribution centers. The
combination of a dedicated fleet and team of company drivers allows greater flexibility and responsiveness in
meeting dynamic customer jobsite delivery expectations. We strive to achieve less than three-day lead-time on
deliveries, and have the added benefit of redeploying fleet and driver assets to respond to short-term regional spikes
in sales activity. For deliveries that are outside an economic delivery radius of our truck fleet, common carrier
deliveries are tendered using a customized software platform to ensure that lowest delivered freight costs are
achieved. In addition, in the United States and Canada, approximately 12% of our pipe volume is sold on a pick-up
or walk-in basis at our plant and yard locations, further leveraging our footprint and lowering freight cost per pound
and per revenue dollar.
Our North American truck fleet incorporates approximately 1,300 trailers that are specially designed to haul
our lightweight pipe and fittings products. These designs maximize payload versus conventional over the road
trailers and facilitate unassisted unloading of our products at the jobsites by our drivers. The scope of fleet
operations also includes backhaul of purchased raw materials providing a lower delivered cost to our plant locations.
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Advanced Drainage Systems, Inc.
Facility Network - Our scale and extensive network of facilities provide a critical cost advantage versus our
competitors, as we are able to more efficiently transport products to our customers and end users and to promote
faster product shipments due to our proximity to the delivery location.
OUR PRODUCTS
We design, manufacture and market a complete line of high performance thermoplastic corrugated pipe and
related water management products for use in a wide range of end markets. Our product line includes: single, double
and triple wall corrugated polypropylene and polyethylene pipe, or Pipe, and a variety of Allied Products including:
storm retention/detention and septic chambers, or Chambers; PVC drainage structures, or Structures; fittings, or
Fittings; and water quality filters and separators, or Water Quality. We also sell various complementary products
distributed through resale agreements, including geotextile products and drainage grates and other, or Other Resale.
The table below summarizes the percentage of Net Sales for Pipe and Allied Products.
Pipe
Allied Products
Pipe
2017
2016
2015
72%
28%
74%
26%
76%
24%
Dual Wall Corrugated Pipe - Our N-12 pipe is a dual wall HDPE pipe with a corrugated exterior for strength and a
smooth interior wall for hydraulics and flow capacity. Our N-12 pipe competes in the storm sewer and drainage
markets that are also served by concrete pipe.
Our N-12 pipe is available in 17 different diameters ranging from 2” to 60” and in sections ranging from 10’
to 30’ in length. N-12 provides joint integrity, with integral bell and spigot joints for fast push-together installation,
and is sold either with watertight or soil-tight coupling and fitting systems.
Our corrugated polyethylene pipe offers many benefits including ease of installation, job-site handling and
resistance to corrosion and abrasion. Corrugated pipe can easily be cut or coupled together, providing precise laying
lengths while minimizing installation waste and difficulty.
HP Storm Pipe and SaniTite HP Pipe - Our HP Storm pipe utilizes polypropylene resin, which provides
(i) increased pipe stiffness relative to HDPE; (ii) higher Environmental Stress Crack Resistance (“ESCR”); and
(iii) improved thermal properties, which improves joint performance. These improved physical characteristics result
in a reduced need for select backfill, which creates installation savings for customers and expands the range of
possible product applications.
Our SaniTite HP pipe utilizes the same polypropylene resins as our HP Storm pipe but includes a smooth third
exterior wall in 30” to 60” pipe. The highly engineered polypropylene resin along with the triple wall design enables
SaniTite HP to surpass the 46 pounds per square inch (“psi”), stiffness requirement for sanitary sewer applications.
SaniTite HP offers cost and performance advantages relative to reinforced concrete pipe (such as improved
hydraulics and better joint integrity) and PVC pipe (such as impact resistance).
Single Wall Corrugated Pipe - Our single wall corrugated HDPE pipe is ideal for drainage projects where flexibility,
light weight and low cost are important. Single wall HDPE pipe products have been used for decades in agricultural
drainage, highway edge drains, septic systems and other construction applications. In the agricultural market,
improved technology has highlighted the favorable impact of drainage on crop yields. For homeowners, it is an
economical and easily-installed solution for downspout run-off, foundation drains, driveway culverts and general
lawn drainage. Single wall pipe is also used for golf courses, parks and athletic fields to keep surfaces dry by
channeling away excess underground moisture.
Standard single wall products are available in 2” to 24” diameters and sold in varying lengths. Pipe with 2” to 6”
diameters is typically sold in coils ranging from 25’ to over 3,000’ in length, while larger diameter pipe is typically sold
in 20’ lengths. Pipe can be either perforated or non-perforated depending on the particular drainage application.
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Triple Wall Corrugated Pipe and Smoothwall HDPE Pipe - Our ADS-3000 Triple Wall pipe, small diameter triple
wall corrugated pipe, consists of a corrugated polyethylene core molded between a smooth white outer wall and a
smooth black inner wall. This combination of the three wall design adds strength and stiffness, while reducing
weight as compared to PVC 2729. Triple Wall is produced in two sizes, 3” and 4”, and sold through our distribution
network. We also manufacture smoothwall HDPE pipe in 3”, 4”, and 6” diameters that are sold into the residential
drainage and on-site septic systems markets.
High Performance Fiber Reinforced Polypropylene Pipe (“HPXR 75”) - In fiscal 2017, we introduced a new
product, a corrugated polypropylene pipe is combined with a smooth outer wall that incorporates oriented glass fiber
reinforcement, creating a pipe with increased stiffness and installation performance. The product will be available in
diameters ranging from 30 to 60 inches, and 13’ and 20’ lengths.
Allied Products
We produce a range of additional water management products that are complementary to our pipe products
(“Allied Products”). Our Allied Products offer adjacent technologies to our core pipe offering, presenting a complete
drainage solution for our clients and customers. This combination of pipe and Allied Products is a key strategy in
our sales growth, profitability and market share penetration. The practice of selling a drainage system is attractive to
both distributors and end users, by providing a broad package of products that can be sold on individual projects,
and strengthens our competitive advantage in the marketplace. We aggressively seek and evaluate new products,
technologies and regulatory changes that impact our customers’ needs for Allied Products.
Using the strength of our overall sales and distribution platform, our Allied Product strategy allows us to more
deeply penetrate our end markets and anticipate the evolving needs of our customers. The underground construction
industry has historically been project (not product) driven, creating the impetus for owners, engineers and
contractors to seek manufacturers that deliver solution-based product portfolios. Many of the components of
underground construction are related and require linear compatibility of function, regulatory approval and
technology.
Storm and Septic Chambers - Our StormTech chambers are used for stormwater retention, detention and “first flush”
underground water storage on non-residential site development and public projects. These highly engineered
chambers are injection molded from high density polyethylene and polypropylene resins into a proprietary design
which provides strength, durability, and resistance to corrosion. The chambers allow for the efficient storage of
stormwater volume, reducing the underground construction footprint and costs to the contractors, developers, and
property owners. Our StormTech chambers offer great flexibility in design and layout of underground water storage
systems. They are an attractive alternative to open ponds by reducing ongoing maintenance and liability and
providing more useable land for development. Stormwater runoff is collected and stored in rows of chambers and
gradually reenters the water system base, reducing erosion and protecting waterways. The chambers are open
bottom, which allows for high density stacking in both storage and shipment. This freight-efficient feature drives
favorable cost-competitiveness in serving long-distance export markets. These chamber systems typically
incorporate our other product lines such as corrugated pipe, fabricated fittings, water quality units and geotextiles.
Our ARC and BioDiffuser products are chambers that are used in on-site septic systems for residential and
small volume non-residential wastewater treatment and disposal. Rural homes and communities that do not have
access to central sewer lines require an on-site septic solution. Our ARC and BioDiffuser chamber products are
installed and perform their septic treatment function without gravel, reducing costs to the contractor and homeowner
over traditional pipe and stone systems. States and municipalities have different sizing criteria for on-site septic
treatment systems based on soil and site conditions. The innovative design of our ARC chamber is generally
approved for a footprint reduction, further reducing the cost of the septic system. Injection-molded from high
density polyethylene, these products are strong, durable, and chemical-resistant. These interconnecting chambers are
favored by septic contractors because they are lightweight, easy to install and offer articulating features which
increase site-specific design flexibility.
Structures - Our Nyloplast PVC drainage structures are used in non-residential, residential and municipal site
development, road and highway construction, as well as landscaping, recreational, industrial and mechanical
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Advanced Drainage Systems, Inc.
applications. The product family includes inline drains, drain basins, curb inlets and water control structures which
move surface-collected stormwater vertically down to pipe conveyance systems. These custom structures are
fabricated from sections of PVC pipe using a thermo-forming process to achieve exact site-specific hydraulic design
requirements. Our Nyloplast products are a preferred alternative to heavier and larger concrete structures, by
offering greater design flexibility and improved ease of installation which reduces overall project costs and
timelines. The structures incorporate rubber gaskets to ensure watertight connections, preventing soil infiltration
which plagues competitive products.
Our Inserta Tee product line consists of a PVC hub, rubber sleeve and stainless steel band. Inserta Tee is
compression fit into the cored wall of a mainline pipe and can be used with all pipe material types and profiles. This
product offers an easy tap-in to existing sanitary and storm sewers by limiting the excavation needed for installation
compared to competitive products.
Fittings - We produce fittings and couplings utilizing blow molding, injection molding and custom fabrication
on our pipe products. Our innovative coupling and fitting products are highly complementary to our broader product
suite, and include both soil-tight and water-tight capabilities across the full pipe diameter spectrum. Our fittings are
sold in all end markets where we sell our current pipe products.
Water Quality - Our BaySaver product line targets the removal of sediment, debris, oils and suspended solids
throughout a stormwater rain event by separating and/or filtering unwanted pollutants. Our BaySeparators can be
fabricated into multiple sizing combinations to fit a variety of applications and customer requirements. These
products assist owners, developers and design engineers in remaining compliant with discharge requirements set
forth by the Environmental Protection Agency (“EPA”) as well as state and local regulatory agencies. Our BaySaver
product line coupled with our pipe, StormTech chambers, fabricated fittings, Nyloplast structures, FleXstorm inlet
protection systems and geotextiles make up a comprehensive stormwater management solution.
Construction Fabrics & Geotextiles - We purchase and distribute construction fabrics and other geosynthetic
products for soil stabilization, reinforcement, filtration, separation, erosion control, and sub-surface drainage.
Constructed of woven and non-woven polypropylene, geotextile products provide permanent, cost-efficient site-
development solutions. Construction fabrics and geotextiles have applications in all of our end markets.
RAW MATERIALS AND SUPPLIERS
Virgin HDPE and PP resins are derivatives of ethylene and propylene, respectively. Ethylene and propylene
are derived from natural gas liquids or crude oil derivatives in the U.S. We currently purchase in excess of
850 million pounds of virgin and recycled resin annually from over 480 suppliers in North America. As a high-
volume buyer of resin, we are able to achieve economies of scale to negotiate favorable terms and pricing. Our
purchasing strategies differ based on the material (virgin resin v. recycled material) ordered for delivery to our
production locations. The price movements of the different materials also vary, resulting in the need to use a number
of strategies to reduce volatility and successfully pass on cost increases to our customer through timely selling price
increases when needed.
We have developed relationships with all of the North American producers of virgin high density polyethylene
and impact copolymer polypropylene producers that manufacture the grades we need to produce our products,
including Braskem Americas, Inc., Chevron Phillips Chemical Co. LP, The Dow Chemical Company, Equistar
Chemicals, LP, ExxonMobil Chemical Company, Formosa Plastics Corporation, U.S.A., Ineos Olefins &
Polyolefins, USA, Sasol USA, and Nova Chemical. The North American capacity for ethylene derivatives is being
expanded primarily as a result of the new supplies of natural gas liquids being produced through sustained oil and
gas exploration and production. We anticipate that the previously announced projects for ethylene derivative
capacity associated with HDPE will continue coming on stream during 2017, extending through 2018. The
polypropylene capacity expansion projects to utilize the increased supply of propylene are projected to begin coming
on-stream in 2018.
We leverage our raw material blending and processing technologies to produce an HDPE pipe that
incorporates recycled resin. This product, which meets an ASTM International standard, replaces a majority of the
virgin resin that is used in the American Association of State Highway and Transportation Officials product with
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Advanced Drainage Systems, Inc.
optimized recycled materials. To further develop our recycled material strategies, we established Green Line
Polymers, Inc. (“GLP”), as our wholly-owned recycling subsidiary in 2012. GLP procures and processes recycled
raw materials that can be used in products we produce and sell. Our first production facilities were established in
Ohio and Georgia and are focused on processing post-industrial HDPE recycled materials. Based on the success of
this strategy, we acquired a business that could supply clean, post-consumer recycled HDPE to our upper Midwest
plants and established a second post-consumer processing plant, in Pennsylvania, to support our plants in Ohio,
Michigan and the eastern and southern United States. In fiscal 2017, 88% of our non-virgin HDPE raw material
needs were internally processed (enhanced) through our GLP operations.
We maintain relationships with several of the largest environmental companies such as Waste Management,
Inc., Republic Services, Inc., and Rumpke, Inc., which provide us with post-consumer HDPE recycled materials. We
also maintain relationships with several key post-industrial HDPE suppliers, including E.I. du Pont de Nemours and
Company, Silgan Plastics, Consolidated Container Company and Alpla, Inc., which provide us with materials that
cannot otherwise be utilized in their respective production processes.
We are one of the largest domestic recyclers of HDPE. We believe that we are well positioned for future
growth as we add additional recycled material processing facilities, add capacity to existing facilities, and expand
our supplier base for virgin resin. We anticipate continued growth in the availability of ethylene and propylene
which are used to manufacture high density polyethylene and polypropylene, respectively.
CUSTOMERS
We have a large, active customer base of approximately 20,000 customers, with two customers representing
10% or more of fiscal 2017 net sales. Ferguson Enterprises (“Ferguson”) accounted for 12.4% and HD Supply
Waterworks (“HD Supply”) accounted for 11.1% of fiscal 2017 net sales. Our customer base is diversified across
the range of end markets that we serve.
A majority of our sales are made through distributors, including many of the largest national and independent
waterworks distributors, with whom we have long-standing distribution relationships. These include Ferguson, HD
Supply and WinWholesale, who sell primarily to the storm sewer and sanitary sewer markets. We also utilize a
network of hundreds of small to medium-sized independent distributors across the United States. We have strong
relationships with major national retailers that carry drainage products, including The Home Depot, Lowe’s, Ace
Hardware, Carter Lumber and Do it Best. We offer the most complete line of HDPE products in the industry and are
the only national manufacturer that can service the “Big-Box” retailers from coast-to-coast. We also sell to buying
groups and co-ops in the United States that serve the plumbing, hardware, irrigation and landscaping markets.
Selling to buying groups and co-ops provides us a further presence on a national, regional and local basis for the
distribution of our products. Our preferred vendor status with these groups allows us to reach thousands of locations
in an effective manner. Members of these groups and co-ops generally are independent businesses with strong
relationships and brand recognition with smaller contractors and homeowners in their local markets. The
combination of our large sales force, long-standing retail and contractor customer relationships and extensive
network of manufacturing and distribution facilities complements and strengthens our broad customer and market
coverage.
Our customer service organization of more than 130 employees is supplemented by the employees of our
manufacturing plants, distribution centers and drivers of our tractor-trailers. We staff and operate four regional
customer service call centers located in three time zones where orders are processed. In conjunction with our field
sales and engineering team, this highly-trained and competent staff allows us to maintain more customer touch
points and interaction than any of our competitors.
SALES AND MARKETING
We have one of the largest and most experienced sales and engineering force in the industry, with
approximately 340 sales and engineering professionals. Offering the broadest product line in the industry enables
our sales force to source the greatest number of new opportunities and more effectively cross-sell products than any
of our competitors. We consistently maintain thousands of touch-points with customers, civil engineers and
municipal authorities, continuously educating them on new product innovations and their advantages relative to
traditional products. We believe we are the industry leader in these efforts and we view this work as an important
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Advanced Drainage Systems, Inc.
part of our marketing strategy, particularly in promoting N-12 and SaniTite HP for storm and sanitary sewer
systems, as regulatory approvals are essential to the specification and acceptance of these product lines.
Our sales and marketing strategy is divided into four components — comprehensive market coverage, diverse
product offerings, readily-available local inventory and specification efforts. Our goal is to provide the
distributor/owner with the most complete, readily-available product line in our industry. We strive to use our
manufacturing footprint, product portfolio and market expertise to efficiently service our customers.
Our sales and engineering objective is to influence, track and quote all selling opportunities as early in the
project life cycle as possible. Conceptual project visibility allows sales and engineering professionals the ability to
influence design specifications and increase the probability of inclusion of our products in bid documents. We strive
to be meaningfully involved in all phases of the project cycle, including design, bidding, award and installation. In
addition to direct channel customers, we also maintain and develop relationships with federal agencies, municipal
agencies, national standard regulators, private consulting engineers and architects. Our consistent interaction with
these market participants enables us to continue our market penetration. This ongoing dialogue has positioned us as
an industry resource for design guidance and product development and as a respected expert in water management
solutions.
SEASONALITY
Historically, sales of our products have been higher in the first and second quarters of each fiscal year due to
favorable weather and longer daylight conditions accelerating construction activity during these periods. Seasonal
variations in operating results may also be impacted by inclement weather conditions, such as cold or wet weather,
which can delay projects.
In the non-residential, residential and infrastructure markets in the northern United States and Canada,
construction activity typically begins to increase in late March and is slower in December, January and February. In
the southern and western United States, Mexico, Central America and South America, the construction markets are
less seasonal. The agricultural drainage market is concentrated in the early spring just prior to planting and in the fall
just after crops are harvested prior to freezing of the ground in winter.
PRACTICES RELATED TO WORKING CAPITAL ITEMS
Information about the Company’s working capital practices is incorporated herein by reference to “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations
— Working Capital and Cash Flows” of this Form 10-K.
COMPETITION
We operate in a highly fragmented industry and hold leading positions in multiple market sectors.
Competition, including our competitors and specific competitive factors, varies for each market sector.
We believe the principal competitive factors for our market sectors include local selling coverage, product
availability, breadth and cost of products, technical knowledge and expertise, customer and supplier relationships,
reliability and accuracy of service, effective use of technology, delivery capabilities and timeliness, pricing of
products, and the provision of credit. We believe that our competitive strengths and strategy allow us to compete
effectively in our market sectors.
The stormwater drainage industry, in particular, is highly fragmented with many smaller specialty and
regional competitors providing a variety of product technologies and solutions. We compete against concrete pipe,
corrugated steel pipe and PVC pipe producers on a national, regional and local basis. In addition, there are several
HDPE pipe producers in the United States.
In the United States, our primary competitors are concrete pipe producers, including Quikrete, Forterra and
Oldcastle CRH Precast, as well as smaller, regional competitors. In the corrugated steel pipe sector, our primary
national competitor is Contech Engineered Solutions, and we compete with Lane Enterprises, Pacific Corrugated
and Southeast Culvert on a regional level, as well as other smaller competitors. In the PVC pipe sector, we compete
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Advanced Drainage Systems, Inc.
primarily with JM Eagle, Diamond Plastics and North American Pipe. We believe we are the only corrugated HDPE
pipe producer with a national footprint, and our competitors operate primarily on a regional and local level. In the
corrugated HDPE pipe sector in the United States, our primary competitors on a regional basis are JM Eagle, Lane
Enterprises and Prinsco.
INTELLECTUAL PROPERTY
We rely upon a combination of patents, trademarks, trade names, licensing arrangements, trade secrets, know-
how and proprietary technology in order to secure and protect our intellectual property rights, both in the United
States and in foreign countries.
We seek to protect our new technologies with patents and trademarks and defend against patent infringement
allegations. We hold a significant amount of intellectual property rights pertaining to product patents, process
patents and trademarks. We continually seek to expand and improve our existing product offerings through product
development and acquisitions. Although our intellectual property is important to our business operations and in the
aggregate constitutes a valuable asset, we do not believe that any single patent, trademark or trade secret is critical to
the success of our business as a whole. We cannot be certain that our patent applications will be issued or that any
issued patents will provide us with any competitive advantages or will not be challenged by third parties.
In addition to the foregoing protections, we generally control access to and use of our proprietary and other
confidential information through the use of internal and external controls, including contractual protections with
employees, distributors and others. See “Item 1A. Risk Factors — Risks Relating to Our Business — If we are
unable to protect our intellectual property rights, or we infringe on the intellectual property rights of others, our
ability to compete could be negatively impacted.”
EMPLOYEES
As of March 31, 2017, in our domestic and international operations the Company and its consolidated and
unconsolidated joint ventures had approximately 4,500 employees, consisting of approximately 3,100 hourly
personnel and approximately 1,400 salaried employees. As of March 31, 2017, approximately 330 hourly personnel
in our Mexican and South American operations were covered by collective bargaining agreements.
REGULATION
Our operations are affected by various statutes, regulations and laws in the markets in which we operate,
which historically have not had a material effect on our business. We are subject to various laws applicable to
businesses generally, including laws affecting land usage, zoning, the environment, health and safety, transportation,
labor and employment practices, competition, immigration and other matters. Additionally, building codes may
affect the products our customers are allowed to use, and, consequently, changes in building codes may affect the
salability of our products. The transportation and disposal of many of our products are also subject to federal
regulations. The U.S. Department of Transportation (“U.S. DOT”) regulates our operations in domestic interstate
commerce. We are subject to safety requirements governing interstate operations prescribed by the U.S. DOT.
Vehicle dimensions and driver hours of service also remain subject to both federal and state regulation.
We have been able to consistently capitalize on changes in both local and federal regulatory statutes relating to
storm and sanitary sewer construction, repair and replacement. Most noteworthy is the Federal Clean Water Act of
1972 and the subsequent EPA Phase I, II and sustainable infrastructure regulations relating to storm sewer
construction, storm water quantity, storm water quality, and combined sewer separation. Our diversity of products
offering a solution-based selling approach coupled with detailed market knowledge makes us an integral industry
resource in both regulatory changes and compliance.
An important element of our growth strategy has been our focus on industry education efforts to drive
regulatory approvals for our core HDPE products at national, state and local levels. We employ a team of
approximately 55 field-based engineers who work closely with government agencies to obtain regulatory approvals
for our products, and also with civil engineering firms to specify our products on non-residential construction and
road-building projects. With the introduction of our HP storm and sanitary pipe, we have refocused our efforts
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Advanced Drainage Systems, Inc.
calling on state departments of transportation to enhance their approval of our pipe products. Additional state and
local regulatory approvals will continue to present new growth opportunities in new and existing geographic markets
for us. The trend of substituting traditional materials for HDPE and PP is expected to continue as more states and
municipalities recognize the benefits of our HDPE N-12 pipe and our polypropylene HP pipe by approving it for use
in a broader range of applications.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and
regulations, including those pertaining to air emissions, water discharges, the handling, disposal and transport of
solid and hazardous materials and wastes, the investigation and remediation of contamination and otherwise relating
to health and safety and the protection of the environment and natural resources. To a limited extent, our current and
past operations, and those of many of the companies we have acquired, involve materials that are, or could be
classified as, toxic or hazardous. There is inherent risk of contamination and environmental damage in our
operations and the products we handle, transport and distribute. See “Item 1A. Risk Factors — Risks Relating to Our
Business — We could incur significant costs in complying with environmental, health and safety laws or permits or
as a result of satisfying any liability or obligation imposed under such laws or permits.”
CORPORATE AND AVAILABLE INFORMATION
We were founded in 1966 and are a Delaware corporation. Our principal executive offices are located at 4640
Trueman Boulevard, Hilliard, Ohio 43026, and our telephone number at that address is (614) 658-0050. Our
corporate website is www.ads-pipe.com.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as
amended, (“Exchange Act”) are filed with the SEC. We are subject to the informational requirements of the
Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and
other information filed by the Company with the SEC are available free of charge on our website at www.ads-
pipe.com when such reports are available on the SEC’s website. We use our www.ads-pipe.com website as a means
of disclosing material non-public information and for complying with our disclosure obligations under Regulation
FD. Accordingly, investors should monitor such portions of www.ads-pipe.com in addition to following press
releases, SEC filings and public conference calls and webcasts.
The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC at www.sec.gov.
The contents of the websites referred to above are not incorporated into this filing. Further, our references to
the URLs for these websites are intended to be inactive textual references only.
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Advanced Drainage Systems, Inc.
Item 1A.
Risk Factors
Please carefully consider the risks described below, together with all other information included or
incorporated by reference in this Annual Report on Form 10-K. If any of the following risks actually occur, our
business, financial condition, results of operations and cash flows could be materially adversely affected. In these
circumstances, the market price of our common stock could decline significantly.
Risks Relating to Restatements and Our Financial Reporting Process
The restatements of our previously issued financial statements and the related claims, investigations and
proceedings arising out of the Prior Restatement have been time-consuming and expensive and could expose us
to additional risks that would adversely affect our financial position, results of operations and cash flows.
As described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (the “Fiscal 2015
Form 10-K”), we restated our previously issued consolidated financial statements for the fiscal years ended
March 31, 2014 and 2013, as well as each of the first three quarters in fiscal 2015 and for all of the quarterly periods
in fiscal 2014 (the “Prior Restatement”). We also restated our financial results for the fiscal years ended March 31,
2012 and 2011, as summarized in “Item 6. Selected Financial and Operating Data” to our Fiscal 2015 Form 10-K. In
addition, as described in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2016 (the “Fiscal
2016 Form 10-K”), we restated our previously issued consolidated financial statements for the fiscal years ended
March 31, 2016, 2015 and 2014 as well as each of the quarters in fiscal 2016 and 2015 (the “Stock-Based
Compensation Restatement”). We also restated our financial results for the fiscal years ended March 31, 2013 and
2012, as summarized in “Item 6. Selected Financial and Operating Data” to this Annual Report on Form 10-K for
the fiscal year ended March 31, 2017 (the “Fiscal 2017 Form 10-K”). Both the Prior Restatement and the Stock-
Based Compensation Restatement were time-consuming and expensive and could expose us to a number of
additional risks that would adversely affect our financial position, results of operations and cash flows.
In particular, we incurred significant expense, including audit, legal, consulting and other professional fees in
connection with the Prior Restatement and the Stock-Based Compensation Restatement. Expenses incurred during
fiscal 2017 and 2016 as a result of the Prior Restatement were approximately $24 million and $28 million,
respectively. We have also incurred significant expense in connection with the ongoing remediation of the
weaknesses in our internal control over financial reporting as further described below.
We have identified material weaknesses in our internal control over financial reporting which could, if not
remediated, adversely affect our ability to report our financial condition and results of operations in a timely and
accurate manner, investor confidence in our company and, as a result, the value of our common stock.
We are required to evaluate the effectiveness of our disclosure controls on a periodic basis and publicly
disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002. As of March 31, 2017, we have identified certain material weaknesses in internal
control over financial reporting in the areas of (i) the Company’s 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 as described in “Item 9A. Controls and Procedures” of this
Fiscal 2017 Form 10-K. As a result of such material weaknesses, our management concluded that our disclosure
controls and procedures were not effective as of March 31, 2017.
A “material weakness” 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 our annual or interim
consolidated financial statements will not be prevented or detected on a timely basis. We are actively engaged in
remediation activities designed to address these material weaknesses, but our remediation efforts are not complete
and are ongoing. Although we are working to remedy the ineffectiveness of the Company’s internal control over
financial reporting, there can be no assurance as to when the remediation plan will be fully implemented or the
aggregate cost of implementation. Until our remediation plan is fully implemented, our management will continue to
devote significant time and attention to these efforts. If we do not complete our remediation in a timely fashion, or at
all, or if our remediation plan is inadequate, there will continue to be an increased risk that we will be unable to
timely file future periodic reports with the SEC and that our future consolidated financial statements could contain
errors that will be undetected. If we are unable to report our results in a timely and accurate manner, we may not be
able to comply with the applicable covenants in our financing arrangements, and may be required to seek additional
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Advanced Drainage Systems, Inc.
amendments or waivers under these financing arrangements, which could adversely impact our liquidity and
financial condition. Further and continued determinations that there are material weaknesses in the effectiveness of
the Company’s internal control over financial reporting could reduce our ability to obtain financing or could
increase the cost of any financing we obtain and require additional expenditures of both money and our
management’s time to comply with applicable requirements.
Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in
their implementation, could result in additional material weaknesses or material misstatement in our consolidated
financial statements. Any new misstatement could result in a further restatement of our consolidated financial
statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause
investors to lose confidence in our reported financial information, leading to a decline in our stock price. We cannot
assure you that we will not discover additional weaknesses in our internal control over financial reporting.
As a result of the material weaknesses, our management concluded that we did not maintain effective internal
control over financial reporting as of March 31, 2017. This could cause investors to lose confidence in the reliability
of our financial statements and could result in a decrease in the value of our common stock. Failure to comply with
the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, NYSE, or
other regulatory authorities.
Further, we may be the subject of negative publicity focusing on the restatements of our previously issued
financial results and related matters, and may be adversely impacted by negative reactions from our stockholders,
creditors or others with which we do business. This negative publicity may impact our ability to attract and retain
customers, employees and vendors. The occurrence of any of the foregoing could harm our business and reputation
and cause the price of our securities to decline.
Furthermore, as we grow our business, our disclosure controls and internal controls will become more
complex, and we may require significantly more resources to ensure the effectiveness of these controls. If we are
unable to continue upgrading our financial and management controls, reporting systems, information technology and
procedures in a timely and effective fashion, additional management and other resources may need to be devoted to
assist in compliance with the disclosure and financial reporting requirements and other rules that apply to reporting
companies, which could adversely affect our business, financial position and results of operations.
The ongoing remediation of the material weaknesses in our internal control over financial reporting will require
us to continue to incur significant cost and expense and may require additional management time and attention,
which could adversely affect our financial position, results of operations and cash flows.
We continue to incur significant costs and expenses related to the ongoing remediation of the weaknesses in
our internal control over financial reporting. We have taken a number of steps, including both adding internal
personnel and hiring outside consultants, and intend to continue to take appropriate and reasonable steps to
strengthen our accounting function and reduce the risk of any future misstatements in our financial statements. For
more details about the status of our remediation plan, see “Item 9A. Controls and Procedures” of this Fiscal 2017
Form 10-K. To the extent these steps are not successful, we may have to incur additional time and expense, which
could adversely affect our financial position and cash flows. Our management’s attention has also been, and may
further be, diverted from the operation of our business in connection with the ongoing remediation of material
weaknesses in our internal controls, which efforts could adversely affect our results of operations.
The Prior Restatement of our previously issued financial results has resulted in private litigation as well as an
ongoing investigation by the SEC, and could result in additional litigation, government investigations and
enforcement actions that could have a material adverse impact on our results of operations, financial condition,
liquidity and cash flows.
We have been subject to a securities class action litigation suit that was originally filed in the United States
District Court for the Southern District of New York as a result of the Prior Restatement. Although the District
Court has dismissed all of the plaintiff’s claims, the plaintiff has appealed the dismissal to the United States Court of
Appeals for the Second Circuit. It is possible that the Court of Appeals could reverse the District Court’s decision
and remand for further proceedings. The ongoing remediation of the material weaknesses in our internal control over
financial reporting will require us to continue to incur significant cost and expense and may require additional
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Advanced Drainage Systems, Inc.
management time and attention, which could adversely affect our financial position, results of operations and cash
flows. In addition, the Company has received document subpoenas from the SEC’s Division of Enforcement
pursuant to a formal investigation. Both the securities class action litigation suit and SEC investigation are further
described below under “Item 3. Legal Proceedings.” We could also become subject to additional litigation or
government investigations and enforcement actions arising out of the Prior Restatement, the Stock-Based
Compensation Restatement, as well as delinquent Exchange Act filings.
To date our management has devoted significant time and attention related to these matters, and we may be
required to devote even more time and attention to such matters in the future, and these and any additional matters
that arise could have a material adverse impact on our results of operations, financial condition, liquidity and cash
flows. While we cannot estimate our potential exposure in these matters at this time, we have already incurred
significant amounts investigating the claims underlying the class action litigation and SEC document production and
expect to continue to need to expend significant amounts to defend such litigation and respond to the SEC
investigation. Although we maintain insurance that may provide coverage for some or all of these expenses, and we
have given notice to our insurers of the claims, there is risk that the insurers will rescind or otherwise not renew the
policies, that some or all of the claims will not be covered by such policies, or that, even if covered, our ultimate
liability will exceed the available insurance. For additional discussion of these matters, see “Note 14. Commitments
and Contingencies — Litigation” to our audited consolidated financial statements included in “Item 8. Financial
Statements and Supplementary Data” of this Fiscal 2017 Form 10-K.
Risks Relating to Our Business
Fluctuations in the price and availability of resins, our principal raw materials, and our inability to obtain
adequate supplies of resins from suppliers and pass on resin price increases to customers could adversely affect
our business, financial condition, results of operations and cash flows.
The principal raw materials that we use in our high performance thermoplastic corrugated pipe and Allied
Products are virgin and recycled resins. Our ability to operate profitably depends, to a large extent, on the markets
for these resins. In particular, as resins are derived either directly or indirectly from crude oil derivatives and natural
gas liquids, resin prices fluctuate substantially as a result of changes in crude oil and natural gas prices, changes in
existing processing capabilities and the capacity of resin suppliers. The petrochemical industry historically has been
cyclical and volatile. The cycles are generally characterized by periods of tight supply, followed by periods of
oversupply, primarily resulting from significant capacity additions. For example, resin prices have increased since
2010 due to increased demand in the broader economy. Unanticipated changes in and disruptions to existing
petrochemical capacities could also significantly increase resin prices, often within a short period of time, even if
crude oil and natural gas prices remain low.
Our ability to offer our core products depends on our ability to obtain adequate resins, which we purchase
directly from major petrochemical and chemical suppliers. We have managed a formal resin price risk management
program since early in 2010 that entails both physical fixed price and volume contracts, and in previous periods,
financial hedges which are designed to apply to a significant portion of our annual virgin resin purchases. In
conjunction with our resin price risk management program, we maintain supply agreements with our major resin
suppliers that provide multi-year terms and volumes that are in excess of our projected consumption. For our
polypropylene virgin resin price exposure, we utilize financial hedges of propylene as a proxy for polypropylene.
Historically, the month to month change in market based pricing has been very similar between propylene and
polypropylene. The loss of, or substantial decrease in the availability of, raw materials from our suppliers, or the
failure by our suppliers to continue to provide us with raw materials on commercially reasonable terms, or at all,
could adversely affect our business, financial condition, results of operations and cash flows. In addition, supply
interruptions could arise from labor disputes or weather conditions affecting supplies or shipments, transportation
disruptions or other factors beyond our control. An extended disruption in the timely availability of raw materials
from our key suppliers would result in a decrease in our revenues and profitability.
Our ability to maintain profitability heavily depends on our ability to pass through to our customers the full
amount of any increase in raw material costs, which are a large portion of our overall product costs. We may be
unable to do so in a timely manner, or at all, due to competition in the markets in which we operate. In addition,
certain of our largest customers historically have exerted significant pressure on their outside suppliers to keep
prices low because of their market share. If increases in the cost of raw materials cannot be passed on to our
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Advanced Drainage Systems, Inc.
customers, or the duration of time associated with a pass through becomes extended, our business, financial
condition, results of operations and cash flows will be adversely affected.
Any disruption or volatility in general business and economic conditions in the markets in which we operate
could have a material adverse effect on the demand for our products and services.
The markets in which we operate are sensitive to general business and economic conditions in the
United States and worldwide, including availability of credit, interest rates, fluctuation in capital and business and
consumer confidence. The capital and credit markets have in recent years been experiencing significant volatility
and disruption. These conditions, combined with price fluctuations in crude oil derivatives and natural gas liquids,
declining business and consumer confidence and increased unemployment, precipitated an economic slowdown and
severe recession in recent years. The difficult conditions in these markets and the overall economy affect our
business in a number of ways. For example:
•
•
•
•
The slowdown and volatility of the United States economy in general is having an adverse effect on our
sales that are dependent on the non-residential construction market. Continued uncertainty about current
economic conditions will continue to pose a risk to our business units that serve the non-residential
construction market, as participants in this industry may postpone spending in response to tighter credit,
negative financial news and/or declines in income or asset values, which could have a continued
material adverse effect on the demand for our products and services.
The homebuilding industry underwent a significant decline from its peak in 2005. While new housing
starts demonstrated an annual growth rate of 13.6% from 2010 to 2015, current levels remain
substantially below the long-term average of 1.5 million starts since the U.S. Census Bureau began
reporting the data in 1959. The mortgage markets continue to experience disruption and reduced
availability of mortgages for potential homebuyers due to more restrictive standards to qualify for
mortgages, including with respect to new home construction loans. The multi-year downturn in the
homebuilding industry resulted in a substantial reduction in demand for our products and services in this
market, which in turn had a significant adverse effect on our financial condition and results of
operations during the period from 2008 to 2014, as compared to peak levels.
Our business depends to a great extent upon general activity levels in the agriculture market. Changes in
corn production, soybean production, farm income, farmland value and the level of farm output in the
geographic locations in which we operate are all material factors that could adversely affect the
agriculture market and result in a decrease in the amount of products that our customers purchase. The
nature of the agriculture market is such that a downturn in demand can occur suddenly, resulting in
excess inventories, un-utilized production capacity and reduced prices for pipe products. These
downturns may be prolonged and our revenue and profitability would be harmed.
Demand for our products and services depend to a significant degree on spending on infrastructure,
which is inherently cyclical. Infrastructure spending is affected by a variety of factors beyond our
control, including interest rates, availability and commitment of public funds for municipal spending
and highway spending and general economic conditions. Our products sales may be adversely impacted
by budget cuts by governments, including as a result of lower than anticipated tax revenues.
All of our markets are sensitive to changes in the broader economy. Downturns or lack of substantial
improvement in the economy in any region in which we operate have adversely affected and could continue to
adversely affect our business, financial condition and results of operations. While we operate in many markets, our
business is particularly impacted by changes in the economies of the United States, Canada and Mexico, which
represented approximately 87.7%, 7.4% and 3.8%, respectively, of our net sales for fiscal 2017 and collectively
represented approximately 98.9% of our net sales for fiscal 2017.
We cannot predict the duration of current economic conditions, or the timing or strength of any future
recovery of activities in our markets. Continued weakness in the market in which we operate could have a material
adverse effect on our business, financial condition, results of operations and cash flows. We may have to close
under-performing facilities from time to time as warranted by general economic conditions and/or weakness in the
markets in which we operate. In addition to a reduction in demand for our products, these factors may also reduce
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Advanced Drainage Systems, Inc.
the price we are able to charge for our products and restrict our ability to pass raw material cost increases to our
customers. This, combined with an increase in excess capacity, will negatively impact our profitability, cash flows
and our financial condition, generally.
Demand for our products and services could decrease if we are unable to compete effectively, and our success
depends largely on our ability to convert current demand for competitive products into demand for our products.
We compete with both manufacturers of high performance thermoplastic corrugated pipe and manufacturers
of alternative products, such as concrete, steel and PVC pipe products, on the basis of a number of considerations,
including product characteristics such as durability, design, ease of installation, price on a price-to-value basis and
service. In particular, we compete on a global, national and local basis with pipe products made of traditional
materials which our high performance thermoplastic corrugated pipe products are designed to replace. For example,
our N-12 and SaniTite HP products face competition from concrete, steel and PVC pipe products in the small- and
large-diameter size segments of the market.
Our ability to successfully compete and grow depends largely on our ability to continue to convert the current
demand for concrete, steel and PVC pipe products into demand for our high performance thermoplastic corrugated
pipe and Allied Products. Our thermoplastic pipe typically has an installed cost advantage of approximately 20%
over concrete pipe. However, depending upon certain factors such as the size of the pipe, the geography of a
particular location and then-existing raw material costs, the initial cost of our thermoplastic pipe may be higher than
the initial cost of alternative products such as concrete, steel and PVC pipe products. To increase our market share,
we will need to increase material conversion by educating our customers about the value of our products in
comparison to existing alternatives, particularly on an installed cost basis, working with government agencies to
expand approvals for our products and working with civil engineering firms which may influence the specification
of our products on construction projects. No assurance can be given that our efforts to increase or maintain the
current rate of material conversion will be successful, and our failure to do so would have a material adverse effect
on our business, financial condition, results of operations and cash flows.
We also expect that new competitors may develop over time. No assurance can be given that we will be able
to respond effectively to such competitive pressures. Increased competition by existing and future competitors could
result in reductions in sales, prices, volumes and gross margins that would materially adversely affect our business,
financial condition, results of operations and cash flows. Furthermore, our success will depend, in part, on our
ability to maintain our market share and gain market share from competitors.
Certain of our competitors have financial and other resources that are greater than ours and may be better able
to withstand price competition, especially with respect to traditional products. In addition, consolidation by industry
participants could result in competitors with increased market share, larger customer bases, greater diversified
product offerings and greater technological and marketing expertise, which would allow them to compete more
effectively against us. Moreover, our competitors may develop products that are superior to our products or may
adapt more quickly to new technologies or evolving customer requirements. Technological advances by our
competitors may lead to new manufacturing techniques and make it more difficult for us to compete. In many
markets in which we operate there are no significant entry barriers that would prevent new competitors from
entering the market, especially on the local level, or existing competitors from expanding in the market. In addition,
because we do not have long-term arrangements with many of our customers, these competitive factors could cause
our customers to cease purchasing our products.
In addition, our contracts with municipalities are often awarded and renewed through periodic competitive
bidding. We may not be successful in obtaining or renewing these contracts on financially attractive terms or at all,
which could adversely affect our business, financial condition, results of operations and cash flows.
Our results of operations could be adversely affected by the effects of weather.
Although weather patterns affect our operating results throughout the year, adverse weather historically has
reduced construction activity in our third and fourth fiscal quarters. In contrast, our highest volume of net sales
historically has occurred in our first and second fiscal quarters.
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Advanced Drainage Systems, Inc.
Most of our business units experience seasonal variation as a result of the dependence of our customers on
suitable weather to engage in construction projects. Generally, during the winter months, construction activity
declines due to inclement weather, frozen ground and shorter daylight hours. For example, during the spring of 2013
and 2014, the extremely cold weather significantly reduced the level of construction activities in the United States,
thereby impacting our revenues. In addition, to the extent that hurricanes, severe storms, floods, other natural
disasters or similar events occur in the geographic regions in which we operate, our results of operations may be
adversely affected. For example, Hurricane Andrew in Florida in 1992 and the extensive flooding of the Mississippi
River in 2011 resulted in temporary interruption in business activity in these areas. We anticipate that fluctuations of
our operations results from period to period due to seasonality will continue in the future.
The loss of any of our significant customers could adversely affect our business, financial condition, results of
operations and cash flows.
Our 10 largest customers generated approximately 37.4% of our net sales in fiscal 2017. We cannot guarantee
that we will maintain or improve our relationships with these customers or that we will continue to supply these
customers at historical levels. Because we do not have long-term arrangements with many of our customers, such
customers may cease purchasing our products without notice or upon short notice to us. During the economic
downturn, some of our customers reduced their operations. For example, some homebuilder customers exited or
severely curtailed building activity in certain of our markets. There is no assurance that our customers will increase
their activity level or return it to historic levels. A slow economic recovery could continue to have material adverse
effect on our business, financial condition, results of operations and cash flows.
In addition, consolidation among customers could also result in a loss of some of our present customers to our
competitors. The loss of one or more of our significant customers, a significant customer’s decision to purchase our
products in significantly lower quantities than they have in the past, or deterioration in our relationship with any of
them could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The majority of our net sales are credit sales which are made primarily to customers whose ability to pay is
dependent, in part, upon the economic strength of the industry and geographic areas in which they operate, and
the failure to collect monies owed from customers could adversely affect our financial condition.
The majority of our net sales volume is facilitated through the extension of credit to our customers whose
ability to pay is dependent, in part, upon the economic strength of the industry in the areas where they operate. Our
business units offer credit to customers, either through unsecured credit that is based solely upon the
creditworthiness of the customer, or secured credit for materials sold for a specific job where the security lies in lien
rights associated with the material going into the job. The type of credit offered depends both on the financial
strength of the customer and the nature of the business in which the customer is involved. End users, resellers and
other non-contractor customers generally purchase more on unsecured credit than secured credit. The inability of our
customers to pay off their credit lines in a timely manner, or at all, would adversely affect our business, financial
condition, results of operations and cash flows. Furthermore, our collections efforts with respect to non-paying or
slow-paying customers could negatively impact our customer relations going forward.
Because we depend on the creditworthiness of certain of our customers, if the financial condition of our
customers declines, our credit risk could increase. Significant contraction in our markets, coupled with tightened
credit availability and financial institution underwriting standards, could adversely affect certain of our customers.
Should one or more of our larger customers declare bankruptcy, it could adversely affect the collectability of our
accounts receivable, bad debt reserves and net income.
Our international operations expose us to political, economic and regulatory risks not normally faced by
businesses that operate only in the United States.
International operations are exposed to different political, economic and regulatory risks that are not faced by
businesses that operate solely in the United States. Some of our operations are outside the United States, with
manufacturing and distribution facilities in Canada and several Latin American countries. Our international
operations are subject to risks similar to those affecting our operations in the United States in addition to a number
of other risks, including: difficulties in enforcing contractual and intellectual property rights; impositions or
increases of withholding and other taxes on remittances and other payments by subsidiaries and affiliates; exposure
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Advanced Drainage Systems, Inc.
to different legal standards; fluctuations in currency exchange rates; impositions or increases of investment and other
restrictions by foreign governments; the requirements of a wide variety of foreign laws; political and economic
instability; war; and difficulties in staffing and managing operations, particularly in remote locations.
As a result of our international operations, we could be adversely affected by violations of the U.S. Foreign
Corrupt Practices Act and similar foreign anti-corruption laws.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar foreign anti-corruption laws generally prohibit
companies and their intermediaries from making improper payments or providing anything of value to wrongfully
influence foreign government officials for the purpose of obtaining or retaining business or obtaining an unfair
advantage, and generally require companies to maintain accurate books and records and internal controls, including
at foreign controlled subsidiaries. Recent years have seen a substantial increase in the global enforcement of anti-
corruption laws, with more frequent voluntary self-disclosures by companies, aggressive investigations and
enforcement proceedings by both the U.S. Department of Justice and the SEC resulting in record fines and penalties,
increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought
against companies and individuals.
We have operations in Canada as well as existing joint ventures in Mexico and South America. Our internal
policies provide for compliance with all applicable anti-corruption laws for both us and for our joint venture
operations. Our continued operation and expansion outside the United States, including in developing countries,
could increase the risk of such violations in the future. Despite our training and compliance programs, our internal
control policies and procedures may not always protect us from unauthorized, reckless or criminal acts committed
by our employees, agents or joint venture partners.
Furthermore, as part of the Prior Restatement, management identified certain weaknesses in the Company’s
internal control over financial reporting, which weaknesses included certain control deficiencies related to the ADS
Mexicana control environment, as well as the ADS Mexicana revenue recognition cut-off practices. These material
weaknesses are further described in “Item 9A. Controls and Procedures,” below. Certain of the matters related to the
ADS Mexicana control environment were already the subject of investigation by third party advisors to the Audit
Committee as part of the restatement of our previously issued financial statements as set forth in the Fiscal 2015
Form 10-K. Although such matters have resulted in a determination of material weakness, neither the Audit
Committee’s advisors in the course of their investigation nor management concluded whether the weaknesses in the
ADS Mexicana control environment, the ADS Mexicana revenue recognition cut-off practices, or any other material
weaknesses of the Company as described in Item 9A, would result in an ultimate determination by the SEC or any
other applicable regulatory agency that the Company has not complied with the books and records and internal
control provisions of the FCPA as set forth in sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. In the
event that we believe or have reason to believe that our employees, agents or joint venture partners have or may
have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have
outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time
and attention from senior management. A finding that the Company or its affiliates have violated any of these laws
may result in severe criminal or civil sanctions, which could disrupt our business and result in a material adverse
effect on our reputation, financial condition, results of operations and cash flows.
Conducting a portion of our operations through joint ventures exposes us to risks and uncertainties, many of
which are outside of our control, and such risks could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
With respect to our existing joint ventures in Mexico, North America and South America, any differences in
views among the joint venture participants may result in delayed decisions or in failures to agree on major issues.
We also cannot control the actions of our joint venture partners, including any nonperformance, default or
bankruptcy of our joint venture partners. As a result, we may be unable to control the quality of products produced
by the joint ventures or achieve consistency of product quality as compared with our other operations. In addition to
net sales and market share, this may have a material negative impact on our brand and how it is perceived thereafter.
Moreover, if our partners also fail to invest in the joint venture in the manner that is anticipated or otherwise fail to
meet their contractual obligations, the joint ventures may be unable to adequately perform and conduct their
respective operations, requiring us to make additional investments or perform additional services to ensure the
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adequate performance and delivery of products and/or services to the joint ventures’ customers, which could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
We may not be able to successfully expand into new product or geographic markets, which could negatively
impact our future sales and results of operations.
We may expand into new product markets based on our existing manufacturing, design and engineering
capabilities and services. Our business depends in part on our ability to identify future products and product lines
that complement existing products and product lines and that respond to our customers’ needs. We may not be able
to compete effectively unless our product selection keeps up with trends in the markets in which we compete or
trends in new products. In addition, our ability to integrate new products and product lines into our distribution
network could impact our ability to compete. Furthermore, the success of new products and new product lines will
depend on market demand and there is a risk that new products and new product lines will not deliver expected
results, which could negatively impact our future sales and results of operations.
Our expansion into new geographic markets may present competitive, distribution and regulatory challenges
that differ from current ones. We may be less familiar with the target customers and may face different or additional
risks, as well as increased or unexpected costs, compared to existing operations. Expansion into new geographic
markets may also bring us into direct competition with companies with whom we have little or no past experience as
competitors. To the extent we rely upon expansion into new geographic markets for growth and do not meet the new
challenges posed by such expansion, our future sales growth could be negatively impacted, our operating costs could
increase, and our business operations and financial results could be adversely affected.
We may not achieve the acquisition component of our growth strategy, which could negatively impact our
financial condition and results of operations.
Acquisitions may continue to be an important component of our growth strategy; however, there can be no
assurance that we will be able to continue to grow our business through acquisitions as we have done historically or
that any businesses acquired will perform in accordance with expectations or that business judgments concerning the
value, strengths and weaknesses of businesses acquired will prove to be correct. Future acquisitions may result in the
incurrence of debt and contingent liabilities, an increase in interest expense and amortization expense and significant
charges relative to integration costs. Our strategy could be impeded if we do not identify suitable acquisition
candidates and our financial condition and results of operations will be adversely affected if we are unable to
properly evaluate acquisition targets.
Acquisitions involve a number of special risks, including: problems implementing disclosure controls and
procedures for the newly acquired business; unforeseen difficulties extending internal control over financial reporting
and performing the required assessment at the newly acquired business; potential adverse short-term effects on
operating results through increased costs or otherwise; diversion of management’s attention and failure to recruit new,
and retain existing, key personnel of the acquired business; failure to successfully implement infrastructure, logistics
and systems integration; our business growth could outpace the capability of our systems; and the risks inherent in the
systems of the acquired business and risks associated with unanticipated events or liabilities, any of which could have a
material adverse effect on our business, financial condition and results of operations. In addition, we may not be able to
obtain financing necessary to complete acquisitions on attractive terms or at all.
Increased fuel and energy prices, and our inability to obtain sufficient quantities of fuel to operate our in-house
delivery fleet, could adversely affect our business, financial condition, results of operations and cash flows.
Energy and petroleum prices have fluctuated significantly in recent years. Prices and availability of petroleum
products are subject to political, economic and market factors that are outside our control. Political events in
petroleum-producing regions as well as hurricanes and other weather-related events may cause the price of fuel to
increase.
We consume a large amount of energy and petroleum products in our operations, including the manufacturing
process and delivering a significant volume of products to our customers by our in-house fleet. While we utilize a
diesel hedging program associated with our in-house fleet to mitigate against higher fuel prices, our operating profit
will be adversely affected if we are unable to obtain the energy and fuel we require or to fully offset the anticipated
impact of higher energy and fuel prices through increased prices or surcharges to our customers or through other
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hedging strategies. If shortages occur in the supply of energy or necessary petroleum products and we are not able to
pass along the full impact of increased energy or petroleum prices to our customers, our business, financial
condition, results of operations and cash flows would be adversely affected.
We have substantial fixed costs and, as a result, our income from operations is sensitive to changes in our net
sales.
A significant portion of our expenses are fixed costs (including personnel). For fiscal 2017, 2016 and 2015,
domestic fixed costs were 32.1%, 28.7% and 25.5%, respectively, as a percentage of domestic net sales.
Consequently, a percentage decline in our net sales could have a greater percentage effect on our income from
operations if we do not act to reduce personnel or take other cost reduction actions. Moreover, a key element of our
strategy is managing our assets, including our substantial fixed assets, more effectively, including through sales or
other disposals of excess assets. Our failure to rationalize our fixed assets in the time, and within the costs, we
expect could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Internally manufacturing our products at our own facilities subjects our business to risks associated with
manufacturing processes.
We internally manufacture our own products at our facilities. While we maintain insurance covering our
manufacturing and production facilities and have significant flexibility to manufacture and ship our own products
from various facilities, a catastrophic loss of the use of certain of our facilities due to accident, fire, explosion, labor
issues, weather conditions, other natural disaster or otherwise, whether short or long-term, could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
Unexpected failures of our equipment and machinery may result in production delays, revenue loss and
significant repair costs, injuries to our employees, and customer claims. Any interruption in production capability
may limit our ability to supply enough products to customers and may require us to make large capital expenditures
to remedy the situation, which could have a negative impact on our profitability and cash flows. Our business
interruption insurance may not be sufficient to offset the lost revenues or increased costs that we may experience
during a disruption of our operations.
We provide product warranties that could expose us to claims, which could in turn damage our reputation and
adversely affect our business, financial condition, results of operations and cash flows.
We generally provide limited product warranties on our products against defects in materials and workmanship
in normal use and service. Most of our pipe products have a warranty that is not limited in duration. The warranty
period for other products such as our StormTech chambers, our Inserta Tee product line, our BaySaver product line and
our FleXstorm inlet protection systems is generally one year. Estimating the required warranty reserves requires a high
level of judgment. Management estimates warranty reserves, based in part upon historical warranty costs, as a
proportion of sales by product line. Management also considers various relevant factors, including its stated warranty
policies and procedures, as part of its evaluation of its liability. Because warranty issues may surface later in the
product life cycle, management continues to review these estimates on a regular basis and considers adjustments to
these estimates based on actual experience compared to historical estimates. Although management believes that our
warranty reserves as of March 31, 2017 are adequate, actual results may vary from these estimates.
The nature of our business exposes us to construction defect and product liability claims as well as other legal
proceedings, which could damage our reputation and adversely affect our business, financial condition, results of
operations and cash flows.
We are exposed to construction defect and product liability claims relating to our various products if our
products do not meet customer expectations. Such liabilities may arise out of the quality of raw materials we
purchase from third-party suppliers, over which we do not have direct control. We also operate a large fleet of trucks
and other vehicles and therefore face the risk of traffic accidents.
While we currently maintain insurance coverage to address a portion of these types of liabilities, we cannot
make assurances that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any
such insurance will provide adequate coverage against potential claims. Further, while we intend to seek
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indemnification against potential liability for products liability claims from relevant parties, we cannot guarantee
that we will be able to recover under any such indemnification agreements. Product liability claims can be expensive
to defend and can divert the attention of management and other personnel for significant time periods, regardless of
the ultimate outcome. An unsuccessful product liability defense could be highly costly and accordingly result in a
decline in revenues and profitability. In addition, even if we are successful in defending any claim relating to the
products we distribute, claims of this nature could negatively impact customer confidence in us and our products.
From time to time, we are also involved in government inquiries and investigations, as well as consumer,
employment, tort proceedings and other litigation. We cannot predict with certainty the outcomes of these legal
proceedings and other contingencies, including potential environmental remediation and other proceedings
commenced by government authorities. The outcome of some of these legal proceedings and other contingencies
could require us to take actions which would adversely affect our operations or could require us to pay substantial
amounts of money. Additionally, defending against these lawsuits and proceedings may involve significant expense
and diversion of management’s attention and resources from other matters.
Because our business is working capital intensive, we rely on our ability to manage our supply purchasing and
customer credit policies.
Our operations are working capital intensive, and our inventories, accounts receivable and accounts payable
are significant components of our net asset base. We manage our inventories and accounts payable through our
purchasing policies and our accounts receivable through our customer credit policies. If we fail to adequately
manage our supply purchasing or customer credit policies, our working capital and financial condition may be
adversely affected.
Our operations are affected by various laws and regulations in the markets in which we operate, and our failure
to obtain or maintain approvals by municipalities, state departments of transportation, engineers and developers
may affect our results of operations.
Our operations are principally affected by various statutes, regulations and laws in the United States, Canada
and Latin America. While we are not engaged in a regulated industry, we are subject to various laws applicable to
businesses generally, including laws affecting land usage, zoning, the environment, health and safety, transportation,
labor and employment practices (including pensions), competition, immigration and other matters. Additionally,
approvals by municipalities, the U.S. and state departments of transportation, engineers and developers may affect
the products our customers are allowed to use, and, consequently, failure to obtain or maintain such approvals may
affect the saleability of our products. Building codes may also affect the products our customers are allowed to use,
and, consequently, changes in building codes may also affect the saleability of our products. Changes in applicable
regulations governing the sale of some of our products could increase our costs of doing business. In addition,
changes to applicable tax laws and regulations could increase our costs of doing business. We cannot provide
assurance that we will not incur material costs or liabilities in connection with regulatory requirements.
We deliver products to many of our customers through our own fleet of vehicles. The U.S. DOT regulates our
operations in domestic interstate commerce. We are subject to safety requirements governing interstate operations
prescribed by the U.S. DOT. Vehicle dimensions and driver hours of service also remain subject to both federal and
state regulation. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver
hours of service could increase our costs, which, if we are unable to pass these cost increases on to our customers,
would reduce our gross margins and net income (loss) and increase our selling, general and administrative expenses.
We cannot predict whether future developments in law and regulations concerning our business units will
affect our business, financial condition and results of operations in a negative manner. Similarly, we cannot assess
whether our business units will be successful in meeting future demands of regulatory agencies in a manner which
will not materially adversely affect our business, financial condition, results of operations and cash flows.
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Advanced Drainage Systems, Inc.
Interruptions in the proper functioning of information technology systems could disrupt operations and cause
unanticipated increases in costs, decreases in revenues, or both. The implementation of our technology initiatives
could disrupt our operations in the near term, and our technology initiatives might not provide the anticipated
benefits or might fail.
Because we use our information technology (“IT”) systems to, among other things, manage inventories and
accounts receivable, make purchasing decisions and monitor our results of operations, the proper functioning of our
IT systems is important to the successful operation of our business. Although our IT systems are protected through
physical and software safeguards and remote processing capabilities exist, IT systems are still vulnerable to natural
disasters, power losses, unauthorized access, telecommunication failures and other problems. If critical IT systems
fail, or are otherwise unavailable, our ability to process orders, track credit risk, identify business opportunities,
maintain proper levels of inventories, collect accounts receivable and pay expenses and otherwise manage our
business units would be adversely affected.
Management uses IT systems to support decision making and to monitor business performance. We may fail
to generate accurate financial and operational reports essential for making decisions at various levels of
management. Failure to adopt systematic procedures to maintain quality IT general controls could disrupt our
business. In addition, if we do not maintain adequate controls such as reconciliations, segregation of duties and
verification to prevent errors or incomplete information, our ability to operate our business could be limited.
Third-party service providers are responsible for managing a significant portion of our IT systems. Our
business and results of operations may be adversely affected if the third-party service provider does not perform
satisfactorily. Additionally, there is no guarantee that we will continue to have access to these third-party IT systems
after our current license agreements expire, and, if we do not obtain licenses to use effective replacement IT
systems, our financial condition and operating results could be adversely affected.
We have made, and will continue to make, significant technology investments in each of our business units
and in our administrative functions. Our technology initiatives are designed to streamline our operations to allow our
associates to continue to provide high quality service to our customers and to provide our customers a better
experience, while improving the quality of our internal control environment. The cost and potential problems and
interruptions associated with the implementation of our technology initiatives could disrupt or reduce the efficiency
of our operations in the near term. In addition, our new or upgraded technology might not provide the anticipated
benefits, it might take longer than expected to realize the anticipated benefits or the technology might fail altogether.
We may experience a failure in or breach of our operational or information security systems, or those of our
third-party service providers, as a result of cyber-attacks or information security breaches.
Information security risks have generally increased in recent years because of the proliferation of new
technologies and the increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of
our operational or information security systems, or those of our third-party service providers, as a result of cyber-
attacks or information security breaches could disrupt our business, result in the disclosure or misuse of confidential
or proprietary information, damage our reputation, increase our costs and/or cause losses. As a result, cyber security
and the continued development and enhancement of the controls and processes designed to protect our systems,
computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As
cyber threats continue to evolve, we may be required to expend additional significant resources to continue to
enhance our information security measures and/or to investigate and remediate any information security
vulnerabilities.
If we become subject to material liabilities under our self-insured programs, our financial results may be
adversely affected. We may see increased costs arising from health care reform.
We provide workers’ compensation, automobile and product/general liability coverage through a high
deductible insurance program. In addition, we provide medical coverage to some of our employees through a self-
insured preferred provider organization. Our business, financial condition, results of operations and cash flows may
be adversely affected if the number and severity of insurance claims increases.
In March 2010, the United States government enacted comprehensive health care reform legislation which,
among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and
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Advanced Drainage Systems, Inc.
annual and lifetime maximum limits, restricts the extent to which policies can be rescinded and imposes new and
significant taxes on health insurers and health care benefits. The legislation imposes implementation effective dates
which began in 2010 and extend through 2020, and many of the changes require additional guidance from
government agencies or federal regulations. Therefore, due to the phased-in nature of the implementation and the
lack of interpretive guidance, it is difficult to determine at this time what impact the health care reform legislation
will have on our financial results. Possible adverse effects of the health care reform legislation include increased
costs, exposure to expanded liability and requirements for us to revise ways in which we provide healthcare and
other benefits to our employees. As a result, our business, financial condition, results of operations and cash flows
could be materially adversely affected.
Our success depends upon our ability to control labor costs and to attract, train and retain highly-qualified
employees and key personnel.
To be successful, we must attract, train and retain a large number of highly qualified employees while
controlling related labor costs. Our ability to control labor costs is subject to numerous external factors, including
prevailing wage rates and health and other insurance costs. We compete with other businesses for these employees
and invest significant resources in training and motivating them. There is no assurance that we will be able to attract
or retain highly-qualified employees in the future, including, in particular, those employed by companies we acquire.
None of our domestic employees are currently covered by collective bargaining or other similar labor agreements.
However, if a number of our employees were to unionize, including in the wake of any future legislation that makes
it easier for employees to unionize, the effect on us may be negative. Any inability by us to negotiate acceptable new
contracts under any collective bargaining arrangements could cause strikes or other work stoppages, and new
contracts could result in increased operating costs. If any such strikes or other work stoppages occur, or if employees
become represented by a union, we could experience a disruption of our operations and higher labor costs. Labor
relations matters affecting our suppliers of products and services could also adversely affect our business from time
to time.
In addition, our business results of operations depend largely upon our chief executive officer and senior
management team as well as our plant managers and sales personnel, including those of companies recently
acquired, and their experience, knowledge of local market dynamics and specifications and long-standing customer
relationships. We customarily sign executive responsibility agreements with certain key personnel who are granted
restricted stock or stock options under our employee incentive compensation programs, which contain
confidentiality and non-competition provisions. However, in certain jurisdictions, non-competition provisions may
not be enforceable or may not be enforceable to their full extent. Our inability to retain or hire qualified plant
managers or sales personnel at economically reasonable compensation levels would restrict our ability to grow our
business, limit our ability to continue to successfully operate our business and result in lower operating results and
profitability.
If we are unable to protect our intellectual property rights, or we infringe on the intellectual property rights of
others, our ability to compete could be negatively impacted.
Our ability to compete effectively depends, in part, upon our ability to protect and preserve proprietary aspects of
our intellectual property, which we attempt to do, both in the United States and in foreign countries, through a combination
of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and
assignment agreements. Because of the differences in foreign trademark, patent and other laws concerning proprietary
rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in
the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason
could have a material adverse effect on our business, results of operations and financial condition.
We have applied for patent protection relating to certain existing and proposed products, processes and services.
While we generally apply for patents in those countries where we primarily intend to make, have made, use, or sell
patented products, we may not accurately predict all of the countries where patent protection will ultimately be
desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later
date. Furthermore, we cannot assure that any of our patent applications will be approved. We also cannot assure that the
patents issuing as a result of our foreign patent applications will have the same scope of coverage as our United States
patents. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient
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scope or strength to provide us with any meaningful protection or commercial advantage. Further, we cannot assure
that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.
We also rely on unpatented proprietary technology. It is possible that others will independently develop the
same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and
other proprietary information, we generally require applicable employees, consultants, advisors and collaborators to
enter into confidentiality agreements. We cannot assure that these agreements will provide meaningful protection for
our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the
proprietary nature of our technologies, we could be materially adversely affected.
We rely on our trademarks, trade names and brand names to distinguish our products from the products of our
competitors, and have registered or applied to register many of these trademarks. We cannot assure that our
trademark applications will be approved. Third parties may also oppose our trademark applications or otherwise
challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be
forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote
resources to advertising and marketing new brands. Further, we cannot assure that competitors will not infringe our
trademarks or that we will have adequate resources to enforce our trademarks. We also license third parties to use
certain of our trademarks. In an effort to preserve our trademark rights, we enter into license agreements with these
third parties which govern the use of our trademarks and which require our licensees to abide by quality control
standards with respect to the goods and services that they provide under our trademarks. Although we make efforts
to police the use of our trademarks by our licensees, we cannot assure that these efforts will be sufficient to ensure
that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark
rights could be diluted.
Although we rely on copyright laws to protect the works of authorship (including software) created by us, we
generally do not register the copyrights in any of our copyrightable works. Copyrights of United States origin must
be registered before the copyright owner may bring an infringement suit in the United States. Furthermore, if a
copyright of United States origin is not registered within three months of publication of the underlying work, the
copyright owner is precluded from seeking statutory damages or attorneys’ fees in any United States enforcement
action and is limited to seeking actual damages and lost profits. Accordingly, if one of our unregistered copyrights
of United States origin is infringed by a third party, we will need to register the copyright before we can file an
infringement suit in the United States, and our remedies in any such infringement suit may be limited.
The misuse of our intellectual property rights by others could adversely impact our ability to compete, cause
our net sales to decrease or otherwise harm our business. If it became necessary for us to resort to litigation to
protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail.
Also, we cannot be certain that the products that we sell do not and will not infringe issued patents or other
intellectual property rights of others. Further, we are subject to legal proceedings and claims in the ordinary course
of our business, including claims of alleged infringement of the patents, trademarks and other intellectual property
rights of third parties by us or our customers, whom we generally indemnify in connection with their use of the
products that we manufacture. These claims could divert management’s attention and resources and may require us
to initiate or defend protracted and costly litigation on behalf of ourselves or our customers, regardless of the merits
of the claims. Should we be found liable for infringement, we may be required to enter into licensing agreements (if
available on acceptable terms or at all) or pay damages and cease making or selling certain products. Moreover, we
may need to redesign or sell different products to avoid future infringement liability. Any of the foregoing could
cause us to incur significant costs, prevent us from selling our products or negatively impact our ability to compete.
We could incur significant costs in complying with environmental, health and safety laws or permits or as a
result of satisfying any liability or obligation imposed under such laws or permits.
Our operations are subject to various federal, state, local and foreign environmental, health and safety laws
and regulations. Among other things, these laws regulate the emission or discharge of materials into the
environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes,
protect the health and safety of our employees and the end users of our products, regulate the materials used in and
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Advanced Drainage Systems, Inc.
the recycling of products and impose liability for the costs of investigating and remediating, and damages resulting
from, present and past releases of hazardous substances. Violations of these laws and regulations, failure to obtain or
maintain required environmental permits or non-compliance with any conditions contained in any environmental
permit can result in substantial fines or penalties, injunctive relief, requirements to install pollution or other controls
or equipment, civil and criminal sanctions, permit revocations and/or facility shutdowns. We could be held liable for
the costs to address contamination of any real property we have ever owned, leased, operated or used, including as a
disposal site. We could also incur fines, penalties, sanctions or be subject to third-party claims for property damage,
personal injury or nuisance or otherwise as a result of violations of or liabilities under environmental laws in
connection with releases of hazardous or other materials.
In addition, changes in, or new interpretations of, existing laws, regulations or enforcement policies, the
discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations
in the future, including additional investigation or other obligations with respect to any potential health hazards of
our products or business activities or the imposition of new permit requirements, may lead to additional compliance
or other costs that could have material adverse effect on our business, financial condition, results of operations and
cash flows.
A change in our product mix could adversely affect our results of operations.
Our results may be affected by a change in our product mix on which our gross margin depends. Changes in
our product mix may result from marketing activities to existing customers and needs communicated to us from
existing and prospective customers. Our outlook, budgeting and strategic planning assume a certain product mix of
sales. If actual results vary from this projected product mix of sales, our financial results could be negatively
impacted.
We may be affected by global climate change or by legal, regulatory or market responses to such potential
change.
Concern over climate change, including the impact of global warming, has led to significant federal, state, and
international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions. For example, in the past
several years, the U.S. Congress has considered various bills that would regulate GHG emissions. While these bills
have not yet received sufficient Congressional support for enactment, some form of federal climate change
legislation is possible in the future. Even in the absence of such legislation, the Environmental Protection Agency,
spurred by judicial interpretation of the Clean Air Act, may regulate GHG emissions, especially diesel engine
emissions, and this could impose substantial costs on us. These costs include an increase in the cost of the fuel and
other energy we purchase and capital costs associated with updating or replacing our internal fleet of trucks and
other vehicles prematurely. In addition, new laws or future regulation could directly and indirectly affect our
customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory
products) and our business (through the impact on our inventory availability, cost of sales, operations or demands
for the products we sell). Until the timing, scope and extent of any future regulation becomes known, we cannot
predict its effect on our cost structure or our operating results. Notwithstanding our dedication to being a responsible
corporate citizen, it is reasonably possible that such legislation or regulation could impose material costs on us.
Anti-terrorism measures and other disruptions to the raw material supply network could impact our operations.
Our ability to provide efficient distribution of products to our customers is an integral component of our
overall business strategy. In the aftermath of terrorist attacks in the United States, federal, state and local authorities
have implemented and continue to implement various security measures that affect the raw material supply network
in the United States and abroad. If security measures disrupt or impede the receipt of sufficient raw materials, we
may fail to meet the needs of our customers or may incur increased expenses to do so.
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Advanced Drainage Systems, Inc.
Risks Relating to Our Indebtedness
We have substantial debt and may incur substantial additional debt, which could adversely affect our financial
health, reduce our profitability, limit our ability to obtain financing in the future and pursue certain business
opportunities and reduce the value of your investment.
As of March 31, 2017, we had an aggregate principal amount of $350.4 million of outstanding debt. In fiscal
year 2017, we incurred $13.6 million of interest expense related to this debt.
The amount of our debt or such other obligations could have important consequences for holders of our
common stock, including, but not limited to: a substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for
other purposes; our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt
service requirements or general corporate purposes and other purposes may be impaired in the future; we are
exposed to the risk of increased interest rates because a portion of our borrowings is at variable rates of interest; we
may be at a competitive disadvantage compared to our competitors with less debt or with comparable debt at more
favorable interest rates and that, as a result, may be better positioned to withstand economic downturns; our ability
to refinance indebtedness may be limited or the associated costs may increase; our ability to engage in acquisitions
without raising additional equity or obtaining additional debt financing may be impaired in the future; it may be
more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on and acceleration of
such indebtedness; we may be more vulnerable to general adverse economic and industry conditions; and our
flexibility to adjust to changing market conditions and our ability to withstand competitive pressures could be
limited, or we may be prevented from making capital investments that are necessary or important to our operations
in general, growth strategy and efforts to improve operating margins of our business units.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to
reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or refinance our debt. We
cannot make assurances that we will be able to refinance our debt on terms acceptable to us, or at all. In the future, our
cash flow and capital resources may not be sufficient for payments of interest on and principal of our debt, and such
alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
We cannot make assurances that we will be able to refinance any of our indebtedness, or obtain additional
financing, particularly because of our high levels of debt and the debt incurrence restrictions imposed by the
agreements governing our debt, as well as prevailing market conditions. We could face substantial liquidity
problems and might be required to dispose of material assets or operations to meet our debt service and other
obligations. Subject to certain exceptions, our Secured Bank Term Loans and our Senior Notes, which we have
defined in “Note 12. Debt” to our consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data,” restrict our ability to dispose of assets and how we use the proceeds from any such
dispositions. We cannot make assurances that we will be able to consummate those dispositions, or if we do, what
the timing of the dispositions will be or whether the proceeds that we realize will be adequate to meet our debt
service obligations, when due.
Despite our current level of indebtedness, we may still be able to incur substantially more debt. This could further
exacerbate the risks to our financial condition described above.
We may be able to incur significant additional indebtedness in the future. Although the agreements governing
our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these
restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not
constitute indebtedness, including obligations under lease arrangements that are currently recorded as operating
leases. In addition, our Revolving Credit Facility provides an aggregate commitment of up to $325.0 million. As of
March 31, 2017, we had an additional $120.1 million of availability under the Revolving Credit Facility. Our
subsidiary ADS Mexicana had $10.5 million in availability outstanding under a separate revolving credit facility. If
new debt is added to our current debt levels, the related risks that we now face could intensify. See “Note 12. Debt”
to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”
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Advanced Drainage Systems, Inc.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly
impact our ability to operate our business and adversely affect the holders of our common stock.
The covenants contained in our Secured Bank Term Loans and our Senior Notes, which we refer to
collectively as our Credit Facilities, are consistent. These covenants, among other things, restrict or limit our ability
to: dispose of assets; incur additional indebtedness (including guarantees of additional indebtedness); prepay or
amend our various debt instruments; pay dividends and make certain payments; redeem stock or make other
distributions; create liens on assets; make certain investments; engage in certain asset sales, mergers, acquisitions,
consolidations or sales of all, or substantially all, of our assets; and engage in certain transactions with affiliates.
Our ability to comply with the covenants and restrictions contained in the Credit Facilities may be affected by
economic, financial and industry conditions beyond our control. The breach of any of these covenants or restrictions
could result in a default under the Credit Facilities that would permit the applicable lenders or noteholders, as the case
may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest.
If we are unable to repay indebtedness, secured parties having secured obligations, such as the lenders under the Credit
Facilities, could proceed against the collateral securing the secured obligations. This could have serious consequences
to our financial condition and results of operations and could cause us to become bankrupt or insolvent.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms.
Although we believe that our current cash position and the additional committed funding available under our
Credit Facilities is sufficient for our current operations, any reductions in our available borrowing capacity, or our
inability to renew or replace our debt facilities, when required or when business conditions warrant, could have a
material adverse effect on our business, financial condition and results of operations. The economic conditions,
credit market conditions, and economic climate affecting our industry, as well as other factors, may constrain our
financing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations
under indebtedness outstanding from time to time will depend upon our future operating performance, the
availability of credit generally, economic conditions and financial, business and other factors, many of which are
beyond our control. The market conditions and the macroeconomic conditions that affect our industry could have a
material adverse effect on our ability to secure financing on favorable terms, if at all.
If financing is not available when needed, or is available on unfavorable terms, we may be unable to take
advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition and results of operations. If we raise additional funds through further
issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders
could suffer significant dilution in their percentage ownership, and any new securities we issue could have rights,
preferences and privileges senior to those of holders of our common stock.
We may not be able to satisfy our outstanding obligations upon a change of control.
Under the Secured Bank Term Loans, a change of control (as defined therein) constitutes an event of default
that permits the lenders to accelerate the maturity of borrowings under the agreement and terminate their
commitments to lend. Additionally, under the Senior Notes, a change of control (as defined therein) constitutes an
event of default that permits the noteholders to declare all of their notes to be immediately due and payable. In order
to avoid events of default under each of our Credit Facilities, we may therefore have to avoid certain change of
control transactions that would otherwise be beneficial to us.
Risks Relating to Our Common Stock
Our ability to make future dividend payments, if any, may be restricted.
We have a history of paying dividends to our stockholders when sufficient cash is available, and we
currently intend to pay dividends in the future. Any determination to pay dividends on our capital stock in the
future will be at the discretion of our board of directors, subject to applicable laws and the provisions of our
amended and restated certificate of incorporation (including those relating to the payment of dividends on our
convertible preferred stock), and will depend on our financial condition, results of operations, capital
requirements, general business conditions and other factors that our board of directors considers relevant. In
28
Advanced Drainage Systems, Inc.
addition, the terms of our Credit Facilities contain restrictions on our ability to pay dividends. Also, Delaware law
may impose requirements that may restrict our ability to pay dividends to holders of our common stock.
We cannot assure our stockholders that an active market for shares of our common stock can be sustained and
the market price of our common stock may be volatile and could decline in the future.
We cannot assure that an active public market for our common stock will be sustained. In the absence of a
public trading market, you may not be able to liquidate your investment in our common stock. The market price of
our common stock may fluctuate significantly. Among the factors that could affect our stock price are: industry or
general market conditions; domestic and international economic factors unrelated to our performance; changes in
our customers’ preferences; new regulatory pronouncements and changes in regulatory guidelines; actual or
anticipated fluctuations in our quarterly operating results; changes in securities analysts’ estimates of our financial
performance or lack of research and reports by industry analysts; action by institutional stockholders or other large
stockholders, including future sales; speculation in the press or investment community; investor perception of us and
our industry; changes in market valuations or earnings of similar companies; announcements by us or our
competitors of significant products, contracts, acquisitions or strategic partnerships; developments or disputes
concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with
intellectual property lawsuits we may initiate, or in which we may be named as defendants; failure to complete
significant sales; any future sales of our common stock or other securities; and additions or departures of key
personnel.
The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating
performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock. In the past, following periods of volatility in the market price of a company’s securities, class action
litigation has often been instituted against such company. Any litigation of this type brought against us could result
in substantial costs and a diversion of our management’s attention and resources, which would harm our business,
operating results and financial condition.
Future sales of shares by existing stockholders, including our Employee Stock Ownership Plan, could cause our
stock price to decline.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales
could occur, could cause the market price of our common stock to decline. Based on shares outstanding as of
March 31, 2017, we have 55.3 million outstanding shares of common stock, including 0.3 million outstanding shares
of our restricted stock, a significant portion of which are freely tradeable without restriction under the Securities Act
of 1933, as amended, (“Securities Act”) unless held by “affiliates,” as that term is defined in Rule 144 under the
Securities Act. The remaining shares of common stock outstanding are restricted securities within the meaning of
Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if their offer and sale
is registered under the Securities Act or if the offer and sale of those securities qualify for an exemption from
registration, including exemptions provided by Rules 144 and 701 under the Securities Act. In connection with our
initial public offering, we filed one or more registration statements on Form S-8 under the Securities Act to register
the shares of common stock to be issued under our equity compensation plans and, as a result, all shares of common
stock acquired upon exercise of stock options granted under our plans are also freely tradable under the Securities
Act, unless purchased by our affiliates. As of March 31, 2017, there were stock options outstanding to purchase a
total of approximately 2.5 million shares of our common stock. In addition, approximately 1.0 million shares of
common stock are available for grant under our 2013 Stock Option Plan.
Certain of our significant stockholders may distribute shares that they hold to their investors who themselves
may then sell into the public market. Such sales may not be subject to the volume, manner of sale, holding period
and other limitations of Rule 144 of the Securities Act (“Rule 144”). As resale restrictions end, the market price of
our common stock could decline if the holders of those shares sell them or are perceived by the market as intending
to sell them.
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Advanced Drainage Systems, Inc.
All of the shares of our convertible preferred stock held by our Employee Stock Ownership Plan (“ESOP”)
may be converted into our common stock at any time by action of the ESOP trustee, and will be automatically
converted into our common stock upon distributions of such shares allocated to the ESOP accounts of ESOP
participants upon a distribution event such as retirement or other termination of employment. Such distributed
common stock will not be subject to any lock-up agreement and will be eligible for future sale, subject to the
applicable volume, manner of sale, holding period and other limitations of Rule 144. As of March 31, 2017, there
were approximately 24.2 million shares of convertible preferred stock held by our ESOP, which in aggregate could
be converted into approximately 18.6 million shares of our common stock. All of these shares will be eligible for
future sale, either by the ESOP trustee or by ESOP participants, subject to the limitations of Rule 144.
In the future, we may issue additional shares of common stock or other equity or debt securities convertible
into common stock in connection with a financing, acquisition, litigation settlement or employee arrangement or
otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could cause
the trading price of our common stock to decline.
Our directors, officers and principal stockholders have significant voting power and may take actions that may
not be in the best interests of our other stockholders.
As of May 5, 2017, our directors, officers and principal stockholders and their affiliates collectively own
approximately 51.0% of our outstanding shares of common stock. Additionally, our ESOP holds convertible
preferred stock that converts into a substantial number of shares of our common stock and, prior to conversion, is
entitled to vote on a one-for-one basis on any matter requiring the vote or consent of our stockholders, voting
together with our common stock as a single class unless otherwise required by law. Thus, the collective voting
power of our directors, officers and principal stockholders and their affiliates as of May 5, 2017 is approximately
65.9%, inclusive of the outstanding shares of convertible preferred stock held by the ESOP. As a result, these
stockholders, if they act together, may be able to control our management and affairs and most matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a change of control and might adversely
affect the market price of our common stock. This concentration of ownership may not be in the best interests of our
other stockholders.
The trustee of our ESOP has certain limited powers to vote a large block of shares on matters presented to
stockholders for approval.
In general, the ESOP trustee votes the shares of convertible preferred stock held by the ESOP as directed by
the ESOP’s participants. Consequently, the ESOP trustee has the ability to vote a significant block of shares on
certain matters presented to stockholders for approval. Each participant in the ESOP may direct the ESOP trustee on
how to vote the shares of convertible preferred stock allocated to the participant’s ESOP accounts; and the ESOP
trustee must vote any unallocated stock and allocated stock for which no participant instructions were received in the
same proportion as the allocated stock for which participants’ voting instructions have been received is voted.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a
change in control of us and may affect the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws include a number of
provisions that may discourage, delay or prevent a change in our management or control over us that stockholders
may consider favorable. For example, our amended and restated certificate of incorporation and amended and
restated bylaws: authorize the issuance of “blank check” preferred stock that could be issued by our board of
directors to thwart a takeover attempt; maintain a classified board of directors, as a result of which our board will
continue to be divided into three classes, with each class serving for staggered three-year terms, which prevents
stockholders from electing an entirely new board of directors at an annual meeting; limit the ability of stockholders
to remove directors; provide that vacancies on our board of directors, including newly-created directorships, may be
filled only by a majority vote of directors then in office; prohibit stockholders from calling special meetings of
stockholders; prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of
the stockholders; do not give the holders of our common stock cumulative voting rights with respect to the election
of directors, which means that the holders of a majority of our outstanding shares of common stock can elect all
directors standing for election; establish advance notice requirements for nominations for election to our board of
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Advanced Drainage Systems, Inc.
directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; require a super-
majority stockholders vote of 75% to approve any reorganization, recapitalization, share exchange, share
reclassification, consolidation, merger, conversion or sale of all or substantially all assets to which we are a party
that is not approved by the affirmative vote of at least 75% of the members of our board of directors; and require the
approval of holders of at least 75% of the outstanding shares of our voting common stock to amend the bylaws and
certain provisions of the certificate of incorporation.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or
Delaware General Corporation Law that has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect
the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws may also make it
difficult for stockholders to replace or remove our management. These provisions may facilitate management
entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in
the best interests of our stockholders.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit
our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers,
employees or agents.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting
a claim of breach of a fiduciary duty owed to us or our stockholders by our directors, officers, employees or agents;
any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and
restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us
that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest
in shares of our common stock shall be deemed to have notice of and to have consented to the provisions of our
amended and restated certificate of incorporation described above. The choice of forum provision may limit a
stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers, employees or agents, which may discourage such lawsuits against us or our directors, officers, employees
or agents. If a court were to find the choice of forum provision contained in our amended and restated certificate of
incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Item 1B.
Unresolved Staff Comments
None.
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Advanced Drainage Systems, Inc.
Item 2.
Properties
Real Property
We have a network of 60 manufacturing plant locations and 34 distribution centers, summarized in the
following table:
United States
Canada
Mexico (1)
South America (1)(2)
Netherlands
Total
Manufacturing
Plants
48
5
4
3
—
60
Distribution
Centers
22
5
—
6
1
34
Total
70
10
4
9
1
94
(1) Manufacturing plants and distribution centers in Mexico and South America are owned or leased by our
joint ventures.
(2) Manufacturing plants and distribution centers owned or leased by our South America joint venture are not
consolidated in ADS.
We sell to customers across all 50 U.S. states and 10 Canadian provinces through 80 locations in the United
States and Canada.
We currently own approximately 36,000 square feet and lease approximately 9,500 square feet of office space
in Hilliard, Ohio for our corporate headquarters.
Our network of 60 manufacturing plants consist of 48 that are owned and 12 that are leased. We generally
prefer to own our manufacturing plant locations, with a typical pipe manufacturing facility consisting of
approximately 40,000 square feet and 15-20 acres of land for storage of pipe and related products. Our network of
34 distribution centers consisted of 1 owned and 33 leased. We believe that our properties have been adequately
maintained and are generally in good condition. The extent to which we use our properties varies by property and
from time to time but we believe the capacity of our facilities is adequate for the level of production and distribution
activities necessary in our business as presently conducted. Each distribution center carries single wall and dual wall
pipe and fittings and Allied Products per needs of the local market.
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Advanced Drainage Systems, Inc.
Our manufacturing plants and distribution centers, including those operated through our joint ventures, are
shown in the map below. (1)
(1) Additionally, we have a distribution center in Rotterdam, The Netherlands.
In-house Fleet
As of March 31, 2017, our in-house fleet consist of approximately 700 tractors and approximately 1,300
trailers that are specially designed to haul our lightweight pipe and fittings products.
Item 3.
Legal Proceedings
On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all
others similarly situated v. Advanced Drainage Systems, Inc., et al. (Case No. 1:15-cv-05955-KPF), was
commenced in the U.S. District Court for the Southern District of New York (the “District Court”), naming the
Company, along with Joseph A. Chlapaty, the Company’s Chief Executive Officer, and Mark B. Sturgeon, the
Company’s former Chief Financial Officer, as defendants and alleging violations of the federal securities laws. An
amended complaint was filed on April 28, 2016. The amended complaint alleges that the Company made material
misrepresentations and/or omissions of material fact in its public disclosures during the period from July 25, 2014
through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder. On March 10, 2017, the District Court dismissed Plaintiff’s
claims against all defendants in their entirety and with prejudice. Plaintiff has appealed the District Court’s order to
the United States Court of Appeals for the Second Circuit, and the appeal is pending.
On August 12, 2015, the SEC Division of Enforcement (“Enforcement Division”) informed the Company that
it was conducting an informal inquiry with respect to the Company. As part of this inquiry, the Enforcement
Division requested the voluntary production of certain documents generally related to the Company’s accounting
practices. Subsequent to the initial voluntary production request, the Company received document subpoenas from
the Enforcement Division pursuant to a formal order of investigation. The Company has from the outset cooperated
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Advanced Drainage Systems, Inc.
with the Enforcement Division’s investigation and intends to continue to do so. While it is reasonably possible that
this investigation ultimately could be resolved unfavorably to the Company, the Company is currently unable to
estimate the range of possible losses, but they could be material.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of
our business, including but not limited to commercial disputes, environmental matters, employee related claims,
intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures.
The Company does not believe that such litigation, claims, and administrative proceedings will have a material
adverse impact on our financial position or our results of operations. The Company records a liability when a loss is
considered probable, and the amount can be reasonably estimated.
Item 4.
Mine Safety Disclosures
Not applicable.
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Advanced Drainage Systems, Inc.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information for Common Stock
Our common stock began trading on the NYSE under the symbol “WMS” on July 25, 2014. Prior to that date,
there was no public trading market for our common stock. The following table sets forth the high and low sales
prices per share of our common stock as reported on the NYSE and the dividends paid for each quarter of fiscal
years 2017 and 2016:
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
Stock Prices
High
Low
Dividends Paid
Per Share
$
$
$
$
$
$
$
$
27.74 $
28.49 $
24.12 $
26.29 $
33.28 $
33.06 $
32.50 $
23.65 $
20.98 $
22.64 $
18.60 $
20.00 $
$
26.33 $
25.74 $
22.00 $
17.72 $
$
0.06
0.06
0.06
0.06
0.24
0.05
0.05
0.05
0.05
0.20
During each quarter of 2016, the Board of Directors approved a quarterly cash dividend of $0.05 per share to
all common stockholders. In addition, during each quarter of 2017, the Board of Directors approved a quarterly cash
dividend of $0.06 per share to all common stockholders. Any future determination relating to dividends will be
made at the discretion of our Board of Directors and will depend on a number of factors, including our future
earnings, capital requirements, financial condition, future prospects, contractual restrictions, legal requirements and
other factors our Board of Directors may deem relevant.
During the first quarter of fiscal 2018, the Company declared a quarterly cash dividend of $0.07 per share of
common stock. The dividend is payable on June 15, 2017 to stockholders of record at the close of business on June
5, 2017.
Holders of Record
As of May 5, 2017, we had 291 holders of record of our common stock. The number of holders of record is
based upon the actual number of holders registered as of such date and does not include holders of shares in “street
name” or persons, partnerships, associates, corporations or other entities in security position listings maintained by
depositories.
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Advanced Drainage Systems, Inc.
Stock Performance Graph
The following graph presents a comparison from July 25, 2014 (the date our common stock commenced
trading on the NYSE) through March 31, 2017 of the cumulative return of our common stock, the Standard and
Poor’s Index (“S&P 500”) and the Russell 2000 Index (“Russell 2000”). The graph assumes investments of $100 on
July 25, 2014 in our common stock and in each of the two indices and the reinvestment of dividends.
Recent Sales of Unregistered Securities
Since the completion of our IPO, we have not sold any securities without registration under the Securities Act
of 1933, as amended.
Issuer Purchases of Equity Securities
In February 2017, our Board of Directors authorized the repurchase of up to $50 million of our common stock.
Repurchases of common stock will be made in accordance with applicable securities laws. The stock repurchase
program does not obligate us to acquire any particular amount of common stock, and may be suspended or
terminated at any time at our discretion. We did not make any repurchases of shares of our common stock during the
three months ended March 31, 2017.
Equity Compensation Plan Information
For equity compensation plan information, refer to “Part III, Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters,” of this Annual Report on Form 10-K.
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Advanced Drainage Systems, Inc.
Item 6. Selected Financial and Operating Data
The following tables set forth selected historical consolidated financial data, for the periods and as of the dates
2017
2015
2016
2013
2014
8,509
8,548
76,328
17,467
362
9,754
38,661
19,368
812
9,224
94,334
18,460
(2,863)
10,145
48,327
18,807
974,960
205,113
80,481
75,855
875,232
192,548
74,042
62,897
961,451 1,005,326
285,352
295,810
88,478
91,475
92,504
110,950
$1,257,261 $1,290,678 $1,180,073 $1,067,780 $1,017,102
829,849
187,253
71,805
52,140
indicated, that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and our consolidated financial statements and notes thereto included in “Item
8. Financial Statements and Supplementary Data,” of this Form 10-K. The following table presents Non-GAAP
measures of Adjusted Earnings per Fully Converted Share, Adjusted EBITDA and Free Cash Flow. We explain
these measures below and reconcile to their most directly comparable financial measures calculated and presented in
accordance with GAAP. Our historical results are not necessarily indicative of future results.
(Amounts in thousands, except per share data)
Consolidated statement of operations data:
Net sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Loss (gain) on disposal of assets and
costs from exit and disposal activities
Intangibles amortization
Income from operations
Interest expense
Derivative (gains) losses and other (income)
expense, net
Income before income taxes
Income tax expense
Equity in net loss (income) of unconsolidated
affiliates
Net income (loss)
Less net income attributable to noncontrolling
interest
Net income (loss) attributable to ADS
Accretion of redeemable noncontrolling
interest
Change in fair value of redeemable convertible
preferred stock
Dividends to redeemable convertible preferred
stockholders
Dividends paid to unvested restricted
stockholders
Net income (loss) available to common
stockholders and participating securities
Undistributed loss allocated to participating
securities
Net income (loss) available to common
stockholders
Weighted average common shares outstanding:
(951)
10,028
54,231
18,526
(1,177)
30,697
19,637
14,370
4,923
6,284
16,575
59,299
23,498
(5,970)
64,831
24,615
103
35,602
13,339
21,401 $ (19,553) $
5,234
30,567
5,515
25,052
4,308
35,908
2,958
32,950
2,335
(3,696)
4,131
(7,827)
(266)
22,529
3,593
4,381
3,086
7,974
2,520
20,009
(10,139)
(11,054)
(19,553)
27,971 $
(9,762) $
22,671
29,671
(3,979)
(9,762)
(1,425)
(1,270)
(1,646)
(1,560)
(1,700)
12,306
13,352
(5,869)
(1,046)
(661)
(932)
(736)
(25)
(24)
(11)
(73)
—
—
—
—
—
—
(52)
—
$
Basic
Diluted
Fully Converted (Non-GAAP)
Net income (loss) per share
Basic
Diluted
Fully Converted (Non-GAAP)
Cash dividends declared per share
54,919
55,624
73,866
53,978
55,176
73,500
51,344
51,344
71,601
47,277
47,277
67,877
46,698
47,254
67,545
$
0.51 $
0.50
0.58
0.24
0.40 $
0.39
0.48
0.20
(0.38) $
(0.38)
0.06
0.08
(0.21) $
(0.21)
0.55
1.68
0.26
0.26
0.40
0.10
37
Advanced Drainage Systems, Inc.
(Amounts in thousands)
Consolidated balance sheet data:
Cash
Working capital (1)
Total assets
Long-term debt
Long-term capital lease obligations
Total liabilities
Total mezzanine equity (2)
Total stockholders’ equity (deficit)
Consolidated statement of cash flows data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing
activities
Other financial data:
Adjusted EBITDA (Non-GAAP)
Capital expenditures
Free cash flow (Non-GAAP)
2017
2016
2015
2014
2013
$
3,931 $
3,623 $
6,555 $
187,378
6,450 $
184,812
1,361
228,947 226,535 190,334
1,046,285 1,037,316 1,033,581 977,164 940,151
385,772 436,926 332,788
28,851
748,435 787,012 664,175
108,021 643,191 608,346
177,125 (453,039) (332,370)
310,849
58,710
695,850
112,825
237,610
312,214
56,809
723,080
111,747
202,489
45,503
34,366
$ 104,239 $ 135,342 $
(49,018)
(61,259)
74,379 $ 72,410 $ 75,353
(44,796)
(38,712)
(76,093)
(42,825)
(82,964)
1,791
(31,109)
(31,338)
$ 193,371 $ 187,340 $ 143,877 $ 151,333 $ 131,591
39,835
35,518
46,676
57,563
44,942
90,400
32,080
42,299
40,933
31,477
(1) Working capital is equal to current assets less current liabilities. Working capital is an indication of liquidity
(2)
and potential need for short-term funding.
Prior to our IPO, our mezzanine equity also included redeemable common stock held by certain stockholders
who have certain rights associated with such shares, which rights are considered to be a redemption right,
which is beyond our control and common stock subject to repurchase agreements. Our mezzanine equity
consists of the redeemable convertible preferred stock held by our ESOP as well the Redeemable
noncontrolling interest in subsidiaries related to the noncontrolling interest in the BaySaver joint venture. See
“Note 17. Mezzanine Equity,” within our consolidated financial statements included in “Item 8. Financial
Statements and Supplementary Data,” of this Form 10-K for further information regarding the accounting
treatment for certain of the amounts included in mezzanine equity, “Note 16. Stockholders’ Equity,” for
further information regarding the accounting treatment of our Common stock subject to repurchase
agreements, and “Note 8. Fair Value Measurement” regarding the accounting treatment for our mezzanine
equity post-IPO.
Non-GAAP Measures
Adjusted Earnings per Fully Converted Share - Adjusted Earnings per Fully Converted Share, Adjusted Net
Income and Weighted Average Fully Converted Common Shares Outstanding, which are non-GAAP measures, are
supplemental measures of financial performance that are not required by, or presented in accordance with GAAP.
We calculate Adjusted earnings per fully converted share (Non-GAAP), Adjusted Net Income (Non-GAAP), and
Weighted average fully converted common shares outstanding (Non-GAAP), by adjusting our Net income per share
— Basic, Net income available to common stockholders - Basic and Weighted average common shares outstanding
— Basic, the most comparable GAAP measures. To effect this adjustment with respect to Net income available to
common stockholders – Basic, we have (1) removed the adjustment for the change in fair value of redeemable
convertible preferred stock classified as mezzanine equity, (2) 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, (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 and (5) added back compensation expense recorded as a result of the January
2014 Special Dividend.
38
Advanced Drainage Systems, Inc.
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 a key metric used by management and our
Board of Directors to assess our financial performance on a per share basis assuming all shares held by the ESOP
and all shares of redeemable common stock are converted to common stock. This information is useful to investors
as the preferred shares held by the ESOP are required to be distributed to our employees over time, which is done in
the form of common stock after the conversion of the preferred shares. As such, this measure is included in this
report because it provides the investors with information to understand the impact on the financial statements once
all preferred shares are converted and distributed. 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.
39
Advanced Drainage Systems, Inc.
The following table presents a reconciliation of Adjusted Earnings Per Fully Converted Share (Non-GAAP),
Adjusted Net Income (Non-GAAP) and Weighted Average Fully Converted Common Shares Outstanding (Non-
GAAP) to Net income (loss) per share — Basic, Net income (loss) available to common stockholders - Basic and
Weighted average common shares outstanding — Basic, the most comparable GAAP measures, respectively, for
each of the periods indicated.
(Amounts in thousands, except per share data)
Net income (loss) available to common
stockholders - Basic
Adjustments to Net income (loss) available to
common stockholders - Basic:
Change in fair value of redeemable
convertible preferred stock
Accretion of redeemable non-controlling
interest in subsidiaries
Dividends to redeemable convertible
preferred stockholders
Dividends paid to unvested restricted
stockholders
Undistributed income allocated to
participating securities
Total adjustments to net income (loss)
available to common stockholders - Basic
Net income (loss) attributable to ADS
Adjustments to net income (loss) attributable
to ADS:
Fair value of ESOP compensation related
to redeemable convertible preferred
stock
Special dividend compensation
Adjusted net income (Non-GAAP)
Weighted average common shares
outstanding — Basic
Adjustments to weighted average common
shares outstanding — Basic:
Unvested restricted shares
Redeemable convertible preferred shares
Weighted Average Fully Converted
Common Shares Outstanding (Non-
GAAP)
Net income (loss) per share - Basic
Adjusted Earnings per Fully Converted
Share (Non-GAAP)
2017
2016
2015
2014
2013
$
27,971 $
21,401 $ (19,553) $
(9,762) $
12,306
—
—
11,054
3,979
5,869
1,560
932
—
—
—
1,646
1,425
661
10,139
736
73
24
1,700
1,270
11
—
25
52
—
1,046
4,979
32,950
3,651
25,052
11,726
(7,827)
14,143
4,381
7,703
20,009
9,568
—
42,518 $
10,250
—
35,302 $
12,144
—
4,317 $
7,891
25,134
37,406 $
7,283
—
27,292
$
54,919
53,978
51,344
47,277
46,698
90
18,857
123
19,399
228
20,029
336
20,264
292
20,555
73,866
0.51 $
73,500
0.40 $
71,601
(0.38) $
67,877
(0.21) $
67,545
0.26
0.58 $
0.48 $
0.06 $
0.55 $
0.40
$
$
Adjusted EBITDA - Adjusted EBITDA, a non-GAAP financial measure, has been presented in this Annual
Report on Form 10-K as a supplemental measure of financial performance that is not required by, or presented in
accordance with GAAP. We calculate adjusted EBITDA as net income before interest, income taxes, depreciation
and amortization, stock-based compensation expense, non-cash charges and certain other expenses.
Adjusted EBITDA is included in this Annual Report on Form 10-K because it is a key metric used by
management and our Board of Directors to assess our financial performance. Adjusted EBITDA is frequently used
by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant
compliance and executive performance evaluations, we use adjusted EBITDA to supplement GAAP measures of
performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare
our performance against that of other peer companies using similar measures.
40
Advanced Drainage Systems, Inc.
Adjusted EBITDA is not a GAAP measure of our financial performance and should not be considered as an
alternative to net income as a measure of financial performance or cash flows from operations or any other
performance measure derived in accordance with GAAP, and it should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items. Adjusted EBITDA contains certain other
limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and
cash costs to replace assets being depreciated and amortized. In evaluating adjusted EBITDA, you should be aware
that in the future we will incur expenses that are the same as or similar to some of the adjustments in this
presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency
transaction losses. Our presentation of adjusted EBITDA should not be construed to imply that our future results
will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP
results in addition to using adjusted EBITDA supplementally. Our measure of adjusted EBITDA 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 EBITDA to Net income (loss), the most comparable
GAAP measure, for each of the periods indicated.
(Amounts in thousands)
Net income (loss)
Depreciation and amortization
Interest expense
Income tax expense
EBITDA
Derivative fair value adjustments (a)
Foreign currency transaction (gains) losses (b)
Loss (gain) on disposal of assets or
businesses
Unconsolidated affiliates interest, taxes,
depreciation and amortization (c)
Special dividend compensation (d)
Contingent consideration remeasurement
Stock-based compensation expense
(benefit) (e)
ESOP deferred stock-based
compensation (f)
Expense (benefit) related to executive
termination payments(g)
Expense related to executive stock
repurchase agreements(h)
Loss related to BaySaver step acquisition
Inventory step up related to PTI acquisition
Bargain purchase gain on PTI acquisition
Restatement-related costs (i)
Impairment of investment in unconsolidated
affiliate (j)
Transaction costs (k)
Adjusted EBITDA
2017
2016
72,355
17,467
24,615
$ 35,908 $ 30,567 $
71,009
18,460
23,498
150,345 143,534
2,163
697
(10,921)
(1,629)
2014
2013
2015
(3,696) $
65,472
19,368
6,284
7,974 $ 22,529
63,102
63,674
18,526
18,807
13,339
19,637
87,428 110,092 117,496
(4)
1,085
7,746
5,404
(53)
845
8,509
812
362
(2,863)
(951)
2,751
—
(265)
3,215
—
371
3,585
—
174
2,845
25,134
738
2,137
—
(74)
8,307
(5,868)
24,247
4,338
3,017
9,568
10,250
12,144
7,891
7,283
1,092
(294)
328
737
832
—
—
525
(609)
24,026
—
490
—
—
27,970
1,011
—
—
—
—
69
—
—
—
—
770
—
—
—
—
1,300
372
—
—
$ 193,371 $ 187,340 $ 143,877 $ 151,333 $ 131,591
—
1,560
—
1,448
4,000
—
(a)
Represents the non-cash gains and losses arising from changes in mark-to-market values for derivative
contracts related to diesel fuel, interest rate and propylene swaps. The impact of resin physical and financial
derivatives is included in cost of goods sold.
(b) Represents the gains and losses incurred on purchases, sales and intercompany loans and dividends
denominated in non-functional currencies. Fiscal 2015 includes a $5.6 million loss on Canadian currency
derivative contract related to the Ideal Pipe acquisition.
41
Advanced Drainage Systems, Inc.
(c)
Represents our proportional share of interest, income taxes, depreciation and amortization related to our South
American joint venture and our Tigre-ADS USA joint venture, which are accounted for under the equity
method of accounting. In addition, these amounts include our proportional share of interest, income taxes,
depreciation and amortization related to our BaySaver joint venture prior to our acquisition of BaySaver on
July 17, 2015, which was previously accounted for under the equity method of accounting. Fiscal year 2014
includes our proportionate share of an asset impairment of $1.0 million recorded by our South American joint
venture.
(d) Represents compensation recorded as a result of the January 2014 Special Dividend on shares of redeemable
(e)
(f)
convertible preferred stock held by the ESOP.
Represents the non-cash stock-based compensation cost related to our stock options and restricted stock
awards.
Represents the non-cash stock-based compensation expense attributable to the shares of convertible preferred
stock allocated to employee ESOP accounts during the applicable period.
(g) Represents the non-cash compensation expense recorded related to future bonus payments to certain
executives upon retirement or other qualified termination events.
(h) Represents the non-cash compensation expense recorded related to agreements with certain executives to
(i)
repurchase their company stock at the time of death or certain events of termination. These agreements were
terminated upon the IPO.
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with the restatement of our prior period financial statements.
(j)
Represents an other-than-temporary impairment of our investment in the South American Joint Venture.
(k) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with our debt refinancing, the IPO and secondary public offering and asset acquisitions and dispositions.
Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations
less capital expenditures. Free cash flow is a measure used by management and the Company’s Board of Directors
to assess the Company’s ability to generate cash. Accordingly, free cash flow has been presented in this Annual
Report on Form 10-K as a supplemental measure of liquidity that is not required by, or presented in accordance with
GAAP, because management believes that free cash flow provides useful information to investors and others in
understanding and evaluating our ability to generate cash flow from operations after capital expenditures.
Free cash flow is not a GAAP measure of our liquidity and should not be considered as an alternative to cash
flow from operating activities as a measure of liquidity or any other liquidity measure derived in accordance with
GAAP. Our measure of free cash flow is not necessarily comparable to other similarly titled captions of other
companies due to different methods of calculation.
The following table presents a reconciliation of free cash flow to Cash flow from operating activities, the most
comparable GAAP measure, for each of the periods indicated.
(Amounts in thousands)
Cash flow from operating activities
Capital expenditures
Free cash flow
2017
2016
2015
$ 104,239 $ 135,342 $ 74,379 $ 72,410 $ 75,353
(39,835)
$ 57,563 $ 90,400 $ 42,299 $ 31,477 $ 35,518
(44,942)
(46,676)
(32,080)
(40,933)
2014
2013
42
Advanced Drainage Systems, Inc.
Item 7.
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, 2017 refers to fiscal 2017, which is the period from April 1, 2016 to March 31, 2017.
The following discussion and analysis of our financial condition and results of our operations should be read
in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report
on Form 10-K. 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 below. Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and those discussed in the sections titled “Item 1A. Risk
Factors” and “Cautionary Statement About Forward-Looking Statements” included elsewhere in this Annual
Report on Form 10-K. Please read the following discussion together with the sections titled “Item 1A. Risk
Factors,” “Item 6. Selected Financial and Operating Data” and our consolidated financial statements, including
the related notes, included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
We consolidate all of our joint ventures for purposes of GAAP, except for our South American 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 underground
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 the United States, our national
footprint combined with our strong local presence and broad product offering make us the leader in an otherwise
highly fragmented sector comprised of many smaller competitors. We believe the markets we serve in the United
States represent approximately $11 billion of annual revenue opportunity. In addition, we believe the increasing
acceptance of thermoplastic pipe products in international markets represents an attractive growth opportunity.
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 materials as contractors, civil design
engineers and municipal agencies increasingly acknowledge the superior physical attributes and compelling value
proposition of our thermoplastic products. In addition, we believe that overall demand for our products will benefit
as the regulatory environment continues to evolve.
Our broad product line includes HDPE pipe, 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.
Key Factors Affecting Our Results of Operations
Product Demand- There are numerous factors that influence demand for our products. Our businesses are
cyclical in nature and sensitive to general economic conditions, primarily in the United States, Canada, Mexico
and South America. The non-residential, residential, agricultural and infrastructure markets we serve are
affected by the availability of credit, lending practices, interest rates and unemployment rates. Demand for new
homes, farm income, commercial development and highway infrastructure spending have a direct impact on
43
Advanced Drainage Systems, Inc.
our financial condition and results of operations. Accordingly, the following factors may have a direct impact
on our business in the markets in which our products are sold:
•
•
•
•
•
•
•
•
•
•
the strength of the economy;
the amount and type of non-residential and residential construction;
funding for infrastructure spending;
farm income and agricultural land values;
inventory of improved housing lots;
changes in raw material prices;
the availability and cost of credit;
non-residential occupancy rates;
commodity prices; and
demographic factors such as population growth and household formation.
Product Pricing - The price of our products is impacted by competitive pricing dynamics in our industry as well as
by raw material input costs. Our industry is highly competitive and the sales prices for our products may vary based
on the sales policies of our competitors. Raw material costs represent a significant portion of the cost of goods sold
for our pipe products, or Pipe. We aim to increase our product selling prices in order to cover raw material price
increases, but the inability to do so could impact our profitability. Movements in raw material costs and resulting
changes in the selling prices may also impact changes in period-to-period comparisons of net sales.
Material Conversion - Our HDPE and PP pipe and related water management product lines compete with other
manufacturers of corrugated polyethylene pipe as well as manufacturers of alternative products made with
traditional materials, such as concrete, steel and PVC. Our net sales are driven by market trends, including the
continued increase in adoption of thermoplastic corrugated pipe products as a replacement for traditional materials.
Thermoplastic corrugated pipe is generally lighter, more durable, more cost effective and easier to install than
comparable products made from traditional materials. We believe customers will continue to acknowledge the
superior attributes and compelling value proposition of our thermoplastic products and expanded regulatory
approvals allow for their use in new markets and geographies. In addition, we believe that PP pipe products will also
help accelerate conversion given the additional applications for which our PP pipe products can be used.
We believe the adoption of HDPE and PP pipe outside of the United States is still in its early stages and
represents a significant opportunity for us to continue to increase the conversion to our products from traditional
products in these markets, including Canada, Mexico and South America where we operate.
Growth in Allied Products - Our Allied Products include storm and septic chambers, PVC drainage structures,
fittings, stormwater filters and water separators. These products complement our pipe product lines and allow us to
offer a comprehensive water management solution to our customers and drive organic growth. Our leading market
position in pipe products allows us to cross-sell Allied Products effectively. Our comprehensive offering of Allied
Products also helps us increase pipe sales in certain markets. Our Allied Products are less sensitive to increases in
resin prices since resin prices represent a smaller percentage of the cost for Allied Products.
Our leading position in the pipe market has allowed us to increase organic growth of our Allied Products. We
also expect to expand our Allied Product offerings through acquisitions.
Raw Material Costs - Our raw material cost and product selling prices fluctuate with changes in the price of resins
utilized in production. We actively manage our resin purchases and pass fluctuations in the cost of resin through to
our customers, where possible, in order to maintain our profitability. Fluctuations in the price of crude oil and
natural gas prices may impact the cost of resin. In addition, changes in and disruptions to existing ethylene or
polyethylene capacities could also significantly increase resin prices (such as the aftermath of Hurricanes Katrina
and Rita in late 2015), often within a short period of time, even if crude oil and natural gas prices remain low. Our
44
Advanced Drainage Systems, Inc.
ability to pass through raw material price increases to our customers may, in some cases, lag the increase in our
costs of goods sold. Sharp rises in raw material prices over a short period of time have historically occurred with a
significant supply disruption (hurricanes or fires at petrochemical facilities), which may increase prices to levels that
cannot be fully passed through to customers due to pricing of competing products made from different raw materials
or the anticipated length of time the raw material pricing will stay elevated. For more information regarding risks
relating to our raw material costs, see “Item 1A. Risk Factors — Risks Relating to Our Business.”
We currently purchase in excess of 850 million pounds of virgin and recycled resin annually from over
480 suppliers in North America. As a high-volume buyer of resin, we are able to achieve economies of scale to
negotiate favorable terms and pricing. Our purchasing strategies differ based on the material (virgin resin versus
recycled material) ordered for delivery to our production locations. The price movements of the different materials
also vary, resulting in the need to use a number of strategies to reduce volatility.
In order to reduce the volatility of raw material costs in the future, our raw material strategies for managing
our costs include the following:
•
•
•
•
increasing the use of less price-volatile recycled HDPE resin in our pipe products in place of virgin resin
while meeting or exceeding industry standards;
internally processing an increasing percentage of our recycled HDPE resin in order to closely monitor
quality and minimize costs (approximately 88% of our recycled HDPE resin was internally processed in
fiscal year 2017);
managing a resin price risk program that entails both physical fixed price and volume contracts along
with financial hedges. For our polypropylene virgin resin price exposure, we utilize financial hedges of
propylene as a proxy for the polypropylene.
maintaining supply agreements with our major resin suppliers that provide multi-year terms and
volumes that are in excess of our projected consumption.
We also consume a large amount of energy and other petroleum products in our operations, including the
electricity we use in our manufacturing process as well as the diesel fuel consumed in delivering a significant
volume of products to our customers through our in-house fleet. As a result, our operating profit also depends upon
our ability to manage the cost of the energy and fuel we require, as well as our ability to pass through increased
prices or surcharges to our customers.
Seasonality - Our operating results are impacted by seasonality. Historically, sales of our products have been higher
in the first and second quarters of each fiscal year due to favorable weather and longer daylight conditions
accelerating construction project activity during these periods while fourth quarter results are impacted by the timing
of spring in the northern United States and Canada. Seasonal variations in operating results may also be significantly
impacted by inclement weather conditions, such as cold or wet weather, which can delay projects, resulting in
decreased net sales for one or more quarters, but we believe that these delayed projects generally result in increased
net sales during subsequent quarters.
In the non-residential, residential and infrastructure markets in the northern United States and Canada, the
construction season typically begins to gain momentum in late March and lasts through November, before winter
sets in, significantly slowing the construction markets. In the southern and western United States, Mexico, Central
America and South America, the construction markets are less seasonal. The agricultural drainage market is
concentrated in the early spring just prior to planting and in the fall just after crops are harvested prior to freezing of
the ground in winter.
Currency Exchange Rates - Although we sell and manufacture our products in many countries, our sales and
production costs are primarily denominated in U.S. dollars. We have wholly-owned facilities in Canada, the
Netherlands, and Puerto Rico and joint venture facilities in Mexico, Chile, Brazil, Argentina, Colombia and Peru.
The functional currencies in the areas in which we have wholly-owned facilities and joint venture facilities other
than the U.S. dollar are the Canadian dollar, Euro, Mexican peso, Chilean peso, Brazilian real, Argentine peso and
Colombian peso. From time to time, we use derivatives to reduce our exposure to currency fluctuations. During
45
Advanced Drainage Systems, Inc.
fiscal 2015, we began to implement hedging strategies to manage exposure to the Canadian dollar and, to a lesser
extent, the Mexican peso, which we continued in fiscal 2016 and 2017.
Description of our Segments
We operate a geographically diverse business, serving customers in approximately 80 countries. For fiscal
2017, approximately 88% ($1,102.2 million) of net sales were attributable to customers located in the United States
and approximately 12% ($155.1 million) of net sales were attributable to customers outside of the United States.
Our operations are organized into two reportable segments based on the markets we serve: Domestic and
International. We generate a greater proportion of our net sales and gross profit in our Domestic segment, which
consists of all regions of the United States. We expect the percentage of total net sales and gross profit derived from
our International segment to continue to increase in future periods as we continue to expand globally. See “Note 21.
Business Segment Information,” to our audited consolidated financial statements included in “Item 8. Financial
Statements and Supplementary Data” of this Form 10-K.
Domestic - Our operating results have been, and will continue to be, impacted by macroeconomic trends in the
United States. For fiscal 2017, 2016, and 2015, we generated net sales attributable to our Domestic segment of
$1,102.2 million, $1,113.8 million, and $1,027.9 million, respectively. Unconsolidated sales for our domestic
unconsolidated joint ventures (our Tigre-ADS USA joint venture and our BaySaver joint venture prior to July 17,
2015), were $18.7 million, $20.9 million and $24.9 million in fiscal years 2017, 2016, and 2015, respectively.
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 those markets serviced through our
joint ventures in Mexico and South America. Pipe manufactured in these countries is primarily sold into the same
region. Our joint venture strategy has provided us with local and regional access to new markets. For fiscal 2017,
2016, and 2015, we generated net sales attributable to our International segment of $155.1 million, $176.9 million,
and $152.1 million, respectively. Our investment in the South American Joint Venture is accounted for under the
equity method and is not consolidated for financial reporting purposes. The unconsolidated sales of the South
American Joint Venture were $42.2 million, $50.3 million, and $58.5 million, in fiscal 2017, 2016, and 2015,
respectively.
Recent Developments
Acquisition of Plastic Tubing Industries - In February 2017, we acquired the assets of Plastic Tubing Industries
(“PTI”), a manufacturer of HDPE pipe and related accessories, in an all cash transaction for $9.5 million. At the
time of acquisition, $8.5 million was paid in cash; the remaining $1.0 million will be paid on August 6, 2018. With
the acquisition, we will increase our manufacturing footprint in Georgia and Texas, while adding production
capacity to existing manufacturing facilities in Florida, to better serve growing demand in the region.
Non-GAAP Financial Measures
Adjusted EBITDA - Adjusted EBITDA, which is a non-GAAP financial measure, has been presented in this Annual
Report on Form 10-K as a supplemental measure of financial performance that is not required by, or presented in
accordance with GAAP. We calculate adjusted EBITDA as net income before interest, income taxes, depreciation
and amortization, stock-based compensation expense, non-cash charges and certain other expenses.
Adjusted EBITDA is included in this Annual Report on Form 10-K because it is a key metric used by
management and our Board of Directors to assess our financial performance. Adjusted EBITDA is frequently used
by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant
compliance and executive performance evaluations, we use adjusted EBITDA to supplement GAAP measures of
performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare
our performance against that of other peer companies using similar measures.
Adjusted EBITDA is not a GAAP measure of our financial performance and should not be considered as an
alternative to net income as a measure of financial performance, or any other performance measure derived in
accordance with GAAP, and it should not be construed as an inference that our future results will be unaffected by
46
Advanced Drainage Systems, Inc.
unusual or non-recurring items. In evaluating adjusted EBITDA, be aware that in the future we will incur expenses
that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation
expense, derivative fair value adjustments, and foreign currency transaction losses. Our presentation of adjusted
EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments.
Management compensates for these limitations by relying on our GAAP results in addition to using adjusted
EBITDA. Our measure of adjusted EBITDA is not necessarily comparable to other similarly titled captions of other
companies due to different methods of calculation.
For a reconciliation of adjusted EBITDA to net income (loss), the most comparable GAAP measure, see “Item
6. Selected Financial and Operating Data”.
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 Tigre-ADS USA joint venture and our BaySaver joint venture prior to July 17, 2015).
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 Tigre-
ADS USA joint venture and our BaySaver joint venture are managed as an integral part of our Domestic segment.
However, with the exception of our BaySaver joint venture which we have consolidated since we acquired it on
July 17, 2015, they are not consolidated under GAAP. System-Wide Net Sales is prepared as if our South American
Joint Venture, our Tigre-ADS USA joint venture, and our BaySaver joint venture were accounted for as
consolidated subsidiaries for all periods.
The following table presents a reconciliation of System-Wide Net Sales to Net sales, the most comparable
GAAP measure, for each of the periods indicated:
(Amounts in thousands)
Net sales
Net sales associated with our unconsolidated
affiliates
South American Joint Venture (a)
BaySaver joint venture (b)
Tigre-ADS USA joint venture (c)
System-Wide Net Sales
2017
2016
$1,257,261 $1,290,678 $1,180,073
2015
42,235
—
18,691
58,454
10,623
14,264
$1,318,187 $1,361,941 $1,263,414
50,320
3,611
17,332
(a) On July 31, 2009, we entered into an arrangement to form our South American joint venture.
(b) On July 15, 2013, we entered into an arrangement to form our BaySaver joint venture. As of July 17, 2015, we
increased our ownership to 65%, and have consolidated BaySaver since that date. As such, net sales from our
BaySaver joint venture prior to July 17, 2015 are included in this line item.
(c) On April 7, 2014, we entered into an arrangement to form our Tigre-ADS USA joint venture.
Adjusted Earnings per Fully Converted Share, Adjusted Net Income and Weighted Average Fully Converted
Common Shares Outstanding - Adjusted Earnings Per Fully Converted Share (Non-GAAP) is a key metric used by
management and our Board of Directors to assess our financial performance as if all shares held by the ESOP and all
redeemable common shares were to be converted to common shares. This information is useful to investors as the
preferred shares held by the ESOP are required to be distributed to our employees over time, which is done in the
form of common stock after the conversion of the preferred shares. As such, this measure is included in this report
because it provides the investors with information to understand the impact on the financial statements once all
preferred shares are converted and distributed. 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.
47
Advanced Drainage Systems, Inc.
For a reconciliation and definition of Adjusted Earnings Per Fully Converted Share (Non-GAAP), Adjusted
Net Income (Non-GAAP), and the Weighted Average Fully Converted Common Shares Outstanding (Non-GAAP)
to our Net Income (loss) available to common stockholders - Basic, Net income (loss) per share - Basic and
Weighted average common shares outstanding - Basic, the most comparable GAAP measures, see “Item 6. Selected
Financial and Operating Data”.
Free Cash Flow - Free Cash Flow is a non-GAAP financial measure used by management and the Company’s
Board of Directors to assess the Company’s ability to generate cash. Management believes that Free Cash Flow
provides useful information to investors and others in understanding and evaluating our ability to generate cash flow
from operations after capital expenditures. Free Cash Flow does not include property, plant and equipment
purchases completed through financing arrangements. Free Cash Flow should not be considered as an alternative to
cash flow from operating activities as a measure of liquidity or any other liquidity measure derived in accordance
with GAAP. Our measure of Free Cash Flow is not necessarily comparable to other similarly titled captions of other
companies due to different methods of calculation.
For a reconciliation of Free Cash Flow to Cash flow from operating activities, the most comparable GAAP
measure, see “Item 6. Selected Financial and Operating Data”.
Results of Operations
Results of Operations by Segment
The following table presents our net sales by segment, net sales by segment as a percentage of total net sales,
net income by segment, net income by segment as a percentage of total net income, Segment Adjusted EBITDA and
Segment Adjusted EBITDA as a percentage of total Adjusted EBITDA by segment for the periods presented.
(Amounts in thousands)
Net sales by segment
Domestic:
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
Net income (loss) by segment
Domestic
International
Total net income (loss)
Segment Adjusted EBITDA
Domestic
International
Total Adjusted EBITDA
2017
2016
2015
$ 786,546
315,690
1,102,236
62.6% $ 812,071
301,725
25.1%
87.7% 1,113,796
62.9% $ 771,214 65.4%
256,719 21.8%
23.4%
86.3% 1,027,933 87.1%
122,384
32,641
155,025
125,407 10.6%
2.3%
152,140 12.9%
$1,257,261 100.0% $1,290,678 100.0% $1,180,073 100.0%
139,731
37,151
176,882
10.8%
2.9%
13.7%
9.7%
2.6%
12.3%
26,733
$
$
35,118
790
97.8% $
2.2%
35,908 100.0% $
24,875
5,692
81.4% $
18.6%
30,567 100.0% $
(9,443) 255.5%
5,747 (155.5)%
(3,696) 100.0%
$ 175,676
17,695
86.9% $ 128,973 89.6%
14,904 10.4%
13.1%
$ 193,371 100.0% $ 187,340 100.0% $ 143,877 100.0%
90.8% $ 162,875
24,465
9.2%
48
Advanced Drainage Systems, Inc.
Fiscal Year Ended March 31, 2017 Compared with Fiscal Year Ended March 31, 2016
The following table summarizes certain financial information relating to our operating results that have been
derived from our consolidated financial statements for the fiscal years ended March 31, 2017 and 2016. 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)
Consolidated Statements of Operations data:
Net sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Loss on disposal of assets and costs from exit
and disposal activities
Intangible amortization
Income from operations
Interest expense
Derivative (gains) losses and other (income)
expense, net
Income before income taxes
Income tax expense
Equity in net loss of unconsolidated affiliates
Net income
Less net income (loss) attributable to the non-
controlling interest
Net income attributable to ADS
Fiscal Year
Ended
March 31, 2017
% of
Net Sales
Fiscal Year
Ended
March 31, 2016
% of
Net Sales
%
Variance
$ 1,257,261 100.0% $ 1,290,678
1,005,326
76.5
285,352
23.5
88,478
7.3
92,504
8.8
961,451
295,810
91,475
110,950
100.0%
77.9
22.1
6.9
7.2
(2.6)%
(4.4)
3.7
3.4
19.9
8,509
8,548
76,328
17,467
(5,970)
64,831
24,615
4,308
35,908
0.7
0.7
6.1
1.4
(0.5)
5.2
2.0
0.3
2.9
812
9,224
94,334
18,460
16,575
59,299
23,498
5,234
30,567
0.1
0.7
7.3
1.4
1.3
4.6
1.8
0.4
2.4
947.9
(7.3)
(19.1)
(5.4)
(136.0)
9.3
4.8
(17.7)
17.5
2,958
32,950
0.2
2.6% $
5,515
25,052
0.4
1.9%
(46.4)
31.5%
$
Net sales - Net sales totaled $1,257.3 million in fiscal 2017, decreasing $33.4 million or 2.6%, as compared to
$1,290.7 million in fiscal 2016.
Fiscal Year Ended March 31,
2017
2016
$ Variance
% Variance
(in thousands)
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
$
786,546 $
315,690
1,102,236
812,071
301,725
1,113,796
122,384
32,641
155,025
139,731
37,151
176,882
$ 1,257,261 $ 1,290,678
$
$
(25,525)
13,965
(11,560)
(17,347)
(4,510)
(21,857)
(33,417)
(3.1)%
4.6
(1.0)%
12.4%
(12.1)
(12.4)
(2.6)%
Our Domestic sales decreased $11.6 million, or 1.0%, as compared to fiscal 2016. Domestic pipe sales
decreased $25.5 million, or 3.1%, which was primarily a result of volume decreases of $16.6 million and net price
decreases of $8.8 million. The agriculture market has experienced continued sales decreases. Allied product sales
increased $14.0 million, or 4.6%, as well as increased sales volume of products sold primarily into the non-
residential and infrastructure end markets.
49
Advanced Drainage Systems, Inc.
International sales decreased $21.9 million, or 12.4%, to $155.0 million in fiscal year 2017, as compared to
$176.9 million in the prior year. The decrease in pipe sales resulted from a reduction in volumes of $15.1 million
and net price decreases of $2.7 million. There was also a decrease in Allied product sales of $4.5 million, or 12.1%.
Cost of goods sold and Gross profit - Cost of goods sold decreased $43.9 million, or 4.4%, to $961.5 million during
year 2017 as compared to $1,005.3 million during fiscal 2016.
Gross profit increased $10.5 million, or 3.7%, to $295.8 million from $285.4 million during fiscal 2016. Gross
profit as a percentage of net sales increased to 23.5% in fiscal 2017 from 22.1% in fiscal 2016.
Gross Profit
Domestic
International
Total gross profit
Fiscal Year Ended March 31,
2017
2016
$ Variance
% Variance
(in thousands)
$ 267,976 $ 249,817
35,535
$ 295,810 $ 285,352
27,834
$
$
18,159
(7,701)
10,458
7.3%
(21.7)
3.7%
Domestic gross profit increased $18.2 million, or 7.3%, to $268.0 million for fiscal 2017 as compared to
$249.8 million during fiscal 2016. The increase was primarily the result of lower raw material costs of $38.7 million
due to decreased raw material prices. The increase was offset by the decrease in net sales discussed above, a $5.2
million increase in labor and overhead costs and a $3.5 million increase in transportation expenses.
International gross profit decreased $7.7 million, or 21.7%, for fiscal 2017 over fiscal 2016 primarily due to
the decrease in sales discussed above and a $6.6 million increase in labor and overhead cost. The decreases were
offset by a $17.2 million decrease in raw material due to decreased raw material cost and a $1.3 million decrease in
transportation expenses.
Selling expenses - Selling expenses for fiscal 2017 increased $3.0 million, or 3.4%, over fiscal 2016. The increase
was primarily the result of an increase in bad debt expense of $2.9 million primarily resulting from the deterioration
of five customer accounts, including a $0.6 million write off of a receivable from an unconsolidated affiliate. As a
percentage of net sales, selling expenses increased to 7.3% for fiscal year 2017 compared to 6.9% over fiscal year
2016.
General and administrative expenses - General and administrative expenses for fiscal 2017 increased $18.4 million,
or 19.9%, over fiscal 2016. The increase was primarily due to stock-based compensation expense of $8.0 million for
fiscal 2017 compared to a benefit of $5.1 million for fiscal 2016. Additionally, legal and professional fees increased
by $6.5 million as a result of third-party consulting expenses and ongoing litigation.
Loss on disposal of assets and costs from exit and disposal activities - Loss on the disposal of assets or businesses
totaled $8.5 million in fiscal 2017 compared to $0.8 million in fiscal 2016, a net increase of $7.7 million in fiscal
2017 as compared to fiscal 2016. In fiscal 2017, we recorded expenses related to three manufacturing facilities that
were closed during fiscal 2017 of approximately $3.5 million and accelerated depreciation of specifically identified
obsolete assets of approximately $3.0 million. In addition, we recorded $2.0 million of disposals and partial
disposals of fixed assets, as compared to $0.8 million in fiscal 2016.
Intangible amortization - Intangible amortization remained relatively flat in fiscal 2017 compared to fiscal 2016.
Interest expense - Interest expense from our debt and capital lease obligations decreased $1.0 million or 5.4% in
fiscal 2017 as compared to fiscal 2016. Our average overall outstanding debt was down by $46.0 million or 11.8%
for fiscal 2017 compared to the average balance outstanding for fiscal 2016. The impact of lower debt outstanding
on interest expense was partially offset by higher average capital lease obligations of $6.6 million or 9.1% for fiscal
2017 compared to fiscal 2016, which resulted in a decrease in interest expense.
50
Advanced Drainage Systems, Inc.
Derivative (gains) losses and other (income) expense, net – Derivative (gains) losses and other (income) expense,
net, improved to gains of $6.0 million in fiscal 2017 compared to losses of $16.6 million in fiscal 2016. The
following table details the net unrealized and realized (gain) loss on derivatives.
(Amounts in millions)
Net unrealized (gain) loss
Propylene raw material
Fuel hedging
Realized (gain) loss
Propylene raw material
Fuel hedging
Fiscal Year Ended March 31,
2017
2016
$ Variance
$
$
(8.0)
(2.6)
$
2.9
(0.2)
6.7
1.9
11.7
3.1
(10.9)
(2.4)
(5.0)
(1.2)
In addition, fiscal 2016 included a loss of $0.5 million recognized for the fair value remeasurement of our original
investment in BaySaver at the time we acquired a controlling interest in July 2015, whereas there was no
comparable amount in the current year. The remainder of the change is primarily related to foreign exchange gains.
Income tax expense - The provision for income taxes totaled $24.6 million in fiscal 2017 compared to $23.5 million
in fiscal 2016, an increase of $1.1 million. These provisions represent an effective tax rate of 38.0% in fiscal 2017
compared to 39.6% in fiscal 2016. The current year tax rate is higher than the federal statutory rate of 35% due
principally to state and local income taxes and non-deductible expenses, partially offset by foreign income taxed at
lower rates. The current year tax rate decreased from the prior year primarily due to the income tax impacts of the
closure of the Puerto Rico manufacturing facility partially offset by the income tax impacts of stock-based
compensation. For fiscal 2017, uncertain tax positions related to foreign jurisdictions were released due to the lapse
of statute of limitations.
Equity in net loss of unconsolidated affiliates - Equity in net loss of unconsolidated affiliates decreased $0.9 million
over fiscal 2017 to a net loss of $4.3 million for fiscal 2017 compared to a net loss of $5.2 million during fiscal
2016. The net loss decreased due to the $4.0 million impairment charge related to our investment in the South
American Joint Venture in fiscal 2016, which was partially offset by the $1.3 million impairment charge related to
our investment in the South American Joint Venture in fiscal 2017 and our share of higher net losses during fiscal
2017 of $2.5 million compared to $1.4 million during fiscal 2016.
Net income attributable to noncontrolling interest - Income attributable to noncontrolling interest decreased
$2.5 million, or 46.4%, to $3.0 million in fiscal 2017 compared to $5.5 million in fiscal year 2016. The decrease was
primarily attributable to a decrease in the net income of ADS-Mexicana.
51
Advanced Drainage Systems, Inc.
Fiscal Year Ended March 31, 2016 Compared with Fiscal Year Ended March 31, 2015
The following table summarizes certain financial information relating to our operating results that have been
derived from our consolidated financial statements for the fiscal years ended March 31, 2016 and 2015. 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)
Consolidated Statements of Operations data:
Net sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Loss on disposal of assets and costs from exit and
disposal activities
Intangible amortization
Income from operations
Interest expense
Derivative losses and other expense, net
Income before income taxes
Income tax expense
Equity in net loss of unconsolidated affiliates
Net income (loss)
Fiscal Year
Ended
March 31, 2016
% of
Net Sales
Fiscal Year
Ended
March 31, 2015
% of
Net Sales
%
Variance
$ 1,290,678 100.0% $ 1,180,073 100.0%
1,005,326
285,352
88,478
92,504
77.9
22.1
6.9
7.2
812
9,224
94,334
18,460
16,575
59,299
23,498
5,234
30,567
0.1
0.7
7.3
1.4
1.3
4.6
1.8
0.4
2.4
974,960
205,113
80,481
75,855
362
9,754
38,661
19,368
14,370
4,923
6,284
2,335
(3,696)
82.6
17.4
6.8
6.4
—
0.8
3.3
1.6
1.2
0.4
0.5
0.2
(0.3)
9.4%
3.1
39.1
9.9
21.9
124.3
(5.4)
144.0
(4.7)
15.3
1,104.5
273.9
124.2
(927.0)
Less net income (loss) attributable to the non-
controlling interest
Net income (loss) attributable to ADS
$
5,515
25,052
0.4
1.9% $
4,131
(7,827)
0.4
(0.7)% (420.1)%
33.5
Net sales - Net sales totaled $1,290.7 million in fiscal 2016, increasing $110.6 million or 9.4%, as compared to
$1,180.1 million in fiscal 2015.
Fiscal Year Ended March 31,
2016
2015
$ Variance
% Variance
(in thousands)
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
$
812,071 $
301,725
1,113,796
771,214
256,719
1,027,933
139,731
37,151
176,882
125,407
26,733
152,140
$ 1,290,678 $ 1,180,073
$
$
40,857
45,006
85,863
14,324
10,418
24,742
110,605
5.3%
17.5
8.4%
11.4%
39.0
16.3
9.4%
Our Domestic sales increased $85.9 million, or 8.4%, as compared to fiscal 2015. Domestic pipe sales increased
$40.9 million, or 5.3%, due to continued growth in our N-12 HDPE and High Performance Polypropylene product
lines and further gains from conversion to our products from traditional products, offsetting lower agricultural sales.
Domestic pipe selling prices decreased 0.2% as compared to the prior year. Allied Product sales increased
$45.0 million, or 17.5%, due to strong sales volume sold primarily into the non-residential, residential and
infrastructure markets. In addition, approximately $10.2 million of the total Allied Product sales increase relates to
the acquisition of BaySaver during the second fiscal quarter of fiscal 2016. International sales increased
$24.8 million, or 16.3%, to $176.9 million in fiscal 2016, as compared to $152.1 million in the prior year. The
growth was primarily due to increased sales in Canada, including in particular the contribution from the acquisition
of Ideal Pipe, which increased sales by approximately $39.7 million, helping to offset decreased sales in Mexico of
52
Advanced Drainage Systems, Inc.
$9.4 million. In addition, the Canadian dollar was approximately 13% weaker against the U.S. dollar during fiscal
2016 compared to fiscal 2015, which had a negative impact on net sales for Canada of $15.2 million during the year
ended March 31, 2016.
Cost of goods sold and Gross profit - Cost of goods sold increased $30.3 million, or 3.1%, to $1,005.3 million
during fiscal 2016 as compared to $975.0 million during fiscal 2015.
Gross profit increased $80.3 million, or 39.1%, to $285.4 million from $205.1 million during fiscal year 2015.
Gross profit as a percentage of net sales increased to 22.1% in fiscal 2016 from 17.4% in fiscal 2015.
Gross Profit
Domestic
International
Total gross profit
Fiscal Year Ended March 31,
2016
2015
$ Variance
% Variance
(in thousands)
$
$
249,817 $
35,535
285,352 $
179,470
25,643
205,113
$
$
70,347
9,892
80,239
39.2%
38.6
39.1%
Domestic gross profit increased $70.4 million, or 39.2%, to $249.8 million for fiscal year 2016 as compared to
$179.4 million during fiscal 2015. In addition to the impact of the 8.4% increase in domestic net sales over the prior
fiscal year, the increase was driven by a reduction in raw material costs of approximately 10.0%, particularly pipe
resin costs. Raw material prices were flat in the first quarter and declined in the second, third and fourth quarters of
fiscal 2016 as compared to the prior year periods. Freight costs totaled 9.8% of domestic net sales for both fiscal
2016 and 2015. The higher freight costs relate to increased depreciation charges associated with new tractors and
trailers added to the delivery fleet, which offset the benefit of lower diesel fuel. Diesel prices began to moderate
towards the end of fiscal year 2015 and continued to decline throughout fiscal 2016. Diesel fuel prices during 2016
were approximately 31.0% below fiscal 2015.
International gross profit increased $9.9 million, or 38.6%, for fiscal year 2016 over fiscal 2015. This was the
result of the impact of a 16.3% increase in international net sales, decreased resin costs and improved gross profit
performance in Mexico during fiscal 2016.
Selling expenses - Selling expenses for fiscal 2016 increased $8.0 million, or 9.9% over fiscal 2015. The increase as
a percentage of net sales for fiscal 2016 was primarily driven by bad debt expense and stock-based compensation.
Fiscal 2016 included a benefit of $0.5 million from stock-based compensation as compared to expense of $1.5
million for the comparable period, which was primarily the result of the impact that the decrease in the Company’s
stock price had on its accounting for liability-classified stock awards. The increase in bad debt expense of $1.6
million was primarily a result of a write off of a receivable from an unconsolidated affiliate.
General and administrative expenses - General and administrative expenses for the fiscal 2016 increased $16.6
million, or 21.9%, over fiscal 2015. The increase was primarily the result of significant increases in professional
fees for accounting, audit, tax, legal and other professional fees incurred in connection with the restatement of
previously filed quarterly and annual financial statements as part of the preparation of our Fiscal 2015 Form 10-K.
There were no such amounts in fiscal 2015. These fees amounted to approximately $28.0 million in fiscal year 2016.
There was also an increase in salary and compensation expenses of 12%, or $3.4 million, as well as incremental
general and administrative expenses related to the Ideal Pipe and BaySaver acquisitions of $1.9 million. There were
additional increases related to higher corporate overhead including higher depreciation expense as well as increased
legal and administrative costs associated with being a public company. These increases were partially offset by a
decrease in stock-based compensation of $26.7 million, which was primarily the result of the impact that the
decrease in the Company’s stock price had on its accounting for liability-classified stock awards. Overall, general
and administrative expenses amounted to 7.2% of net sales compared to 6.4% in the prior year.
Loss on disposal of assets and costs from exit and disposal activities - Loss on the disposal of assets or businesses
totaled $0.8 million in fiscal 2016 compared to of $0.4 million in fiscal 2015, a net increase of $0.4 million in fiscal
2016 as compared to fiscal 2015. Businesses sold in fiscal year 2015 related to our GEO-flow product line, while
53
Advanced Drainage Systems, Inc.
there were no businesses sold in fiscal 2016. Dispositions of machinery and equipment resulted in a loss of
$0.8 million and $1.1 million in fiscal 2016 and 2015, respectively, and related to the replacement of assets in the
normal course of business.
Intangible amortization - Intangible amortization decreased $0.6 million or 5.4% in fiscal 2016 compared to fiscal
2015. The decrease is mainly the result of intangible assets of $7.8 million becoming fully amortized during fiscal
2015, offset by the additional amortization for the Ideal Pipe intangible assets acquired in the fourth quarter of fiscal
2015 and the BaySaver intangible assets acquired in the second quarter of fiscal 2016.
Interest expense - Interest expense from our debt and capital lease obligations decreased $0.9 million or 4.7% in
fiscal 2016 as compared to fiscal 2015. For fiscal 2015, the Company carried a higher Revolving Credit Facility
balance through July 2014 until the IPO proceeds were used to reduce the Revolving Credit Facility balance.
Derivative losses and other expense, net - Derivative losses and other expense, net, increased $2.2 million in fiscal
2016 to $16.6 million compared to $14.4 million in fiscal 2015. The increase in expense is predominantly a result of
both realized and unrealized losses on hedging activities. The hedging losses in fiscal 2016 were $16.9 million
comprised of realized losses on cash settlements of $14.7 million and unrealized losses on mark-to-market
adjustments of $2.2 million. This compares to a net hedging loss of $15.4 million incurred during fiscal 2015,
consisting of realized losses on cash settlements of $7.7 million and unrealized losses of $7.7 million on the
unfavorable mark-to-market adjustments. In addition to the hedging losses, the Company realized a loss of
$0.5 million upon completing the acquisition of BaySaver as a result of remeasuring our investment as of the
July 17, 2015 step acquisition. See “Note 3. Acquisitions.” The balance of the change relates primarily to foreign
currency transaction activity and other insignificant gains or losses.
Income tax expense - The provision for income taxes totaled $23.5 million in fiscal 2016 compared to $6.3 million
in fiscal 2015, an increase of $17.2 million. These provisions represent an effective tax rate of 39.6% in fiscal 2016
compared to 127.6% in fiscal 2015. The fiscal 2015 effective tax rate significantly exceeded the federal statutory
rate due in part to the significant permanent differences associated with non-deductible ESOP stock appreciation and
stock-based compensation expense, the effect of which was increased by the near break-even amount of pre-tax
income, whereas the fiscal 2016 effective tax rate more closely approximates a normal effective tax rate for the
Company.
Equity in net loss of unconsolidated affiliates - Equity in net loss of unconsolidated affiliates increased $2.9 million
over fiscal 2015 to a net loss of $5.2 million for fiscal 2016 compared to a net loss of $2.3 million during fiscal
2015. The increase was primarily due to a $4.0 million impairment charge related to our investment in the South
American Joint Venture, which was partially offset by lower net losses generated by the South American Joint
Venture which reduced our share of the losses during fiscal 2016 to $1.4 million compared to $2.6 million for the
comparable prior year period.
Net income attributable to noncontrolling interest - Income attributable to noncontrolling interest increased
$1.4 million, or 33.5%, to $5.5 million in fiscal 2016 compared to $4.1 million in fiscal 2015. As noted above, the
35.0% noncontrolling interest for BaySaver is now included in the fiscal 2016 results beginning after July 17, 2015.
Liquidity and Capital Resources
Our primary liquidity requirements are working capital, capital expenditures, debt service, and dividend
payments for our convertible preferred stock and common stock. We have historically funded, and expect to
continue to fund, our operations primarily through internally generated cash flow, debt financings, equity issuance
and capital and operating leases. From time to time we may explore additional financing methods and other means
to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms
or at all.
As of March 31, 2017, we had $5.1 million in cash that was held by our foreign subsidiaries and undistributed
earnings of approximately $28.0 million. Our intent is to indefinitely reinvest our earnings in foreign subsidiaries
with the exception of cash dividends paid by our ADS Mexicana joint venture. In the event that foreign earnings are
repatriated, these amounts will be subject to income tax liabilities in the appropriate tax jurisdiction.
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Advanced Drainage Systems, Inc.
At March 31, 2017, we had no undistributed earnings of our unconsolidated subsidiaries included in retained
earnings.
In February 2017, our Board of Directors authorized the repurchase of up to $50 million of our common stock.
Repurchases of common stock will be made in accordance with applicable securities laws. The stock repurchase
program does not obligate us to acquire any particular amount of common stock, and may be suspended or
terminated at any time at our discretion.
Working Capital and Cash Flows
During the fiscal 2017, our net decrease in cash amounted to $0.1 million compared to a net increase of
$3.0 million during fiscal 2016. Our source of funds in fiscal 2017 was primarily driven by a decrease in cash used
in financing activities offset by increased cash used in investing activities and a decrease in cash used by operations.
Our use of cash in fiscal year 2017 was primarily driven by increased inventories, capital expenditures, payment of
capital lease obligations, and the payment of dividends. Our source of funds in fiscal 2016 was primarily driven by
higher operating earnings and the impact of increased current liabilities, lower inventories and non-cash charges
(depreciation, amortization and stock-based compensation expense). Our use of cash in fiscal 2016 was primarily
driven by capital expenditures, a reduction of our debt, payment of capital lease obligations, and the payment of
dividends. Our source of funds in fiscal 2015 was primarily driven by higher operating earnings, net proceeds of
$72.2 million from shares sold during our IPO after deduction of deferred offering costs, and the impact of non-cash
charges (depreciation, amortization, compensation expense and share-based compensation expense). Our use of cash
in fiscal 2015 was primarily driven by increased inventory balances of $10.1 million the settlement of a Canadian
dollar currency hedge related to the Ideal Pipe acquisition of $5.6 million, spending for acquisitions of $36.4
million, net repayment of $54.2 million of debt and payment of $9.3 million of capital lease obligations.
As of March 31, 2017, we had $151.6 million in liquidity, including $6.5 million of cash, $120.1 million in
borrowings available under our Revolving Credit Facility and $25.0 million under the senior notes, 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 March 31, 2017, we had consolidated indebtedness (excluding capital lease obligations) of
approximately $350.4 million, down $1.2 million compared to March 31, 2016.
The following table sets forth the major sources and uses of cash for each of the periods presented:
(Amounts in thousands)
Statement of Cash Flows data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing
activities
2017
2016
2015
$
104,239 $
(61,259)
135,342 $
(49,018)
74,379
(76,093)
(42,825)
(82,964)
1,791
Working Capital - Working capital is an indication of liquidity and potential need for short-term funding. We define
working capital as current assets less current liabilities.
Working capital decreased to $184.8 million as of March 31, 2017, from $187.4 million as of March 31, 2016,
primarily due to a decrease in accounts receivable of $17.9 million and deferred income taxes and other current
assets of $8.9 million. As disclosed in Note 1, the reduction of net current deferred tax assets is due to the adoption
of an accounting standard update that requires all deferred tax assets and liabilities to be classified as non-current.
These increases were largely offset by an increase in inventory of $27.9 million.
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Advanced Drainage Systems, Inc.
Working capital decreased to $187.4 million as of March 31, 2016, from $228.9 million as of March 31, 2015,
primarily due to a decrease in inventories of $30.1 million and an increase in accounts payable of $7.7 million and
current maturities of long-term debt and capital lease obligations of $29.8 million, largely offset by an increase in
receivables of $32.6 million.
Operating Cash Flows - During the fiscal 2017, cash provided by operating activities was $104.2 million as
compared with cash provided by operating activities of $135.3 million for fiscal 2016. Cash flow from operating
activities during fiscal 2017 was primarily impacted by a $27.9 million increase in inventory and other changes in
working capital.
During fiscal 2016, cash provided by operating activities was $135.3 million as compared with cash provided
by operating activities of $74.4 million for fiscal 2015. Cash flow from operating activities during fiscal 2016 was
primarily impacted by an increase in net income of $34.3 million, a $18.1 million reduction in the use of cash related
to changes in current assets and current liabilities, a $29.5 million change in the impact of deferred income taxes and
a $5.5 million increase in depreciation and amortization, partially offset by a reduction in ESOP and stock-based
compensation of $33.0 million and a reduction in the fair market value adjustments to derivatives of $5.5 million.
Investing Cash Flows - During fiscal 2017, cash used for investing activities was $61.3 million, primarily due to
$46.7 million for capital expenditures and additions to capitalized software, and $8.6 million for the acquisition of
Plastic Tubing Industries (“PTI”) and $4.6 million for the purchase of equipment through financing.
During fiscal 2016, cash used for investing activities was $49.0 million, primarily due to $44.9 million for
capital expenditures and additions to capitalized software, and $3.2 million for the acquisition of BaySaver.
During fiscal 2015, cash used for investing activities was $76.1 million, primarily due to $32.1 million for
capital expenditures and additions to capitalized software, a $36.4 million investment in Ideal Pipe, a $3.6 million
investment in a domestic joint venture operation created in the first quarter fiscal 2015, and a $4.0 million
investment in our international joint venture operation to support growth initiatives.
Financing Cash Flows - During fiscal 2017, cash used in financing activities was $42.8 million, primarily for net
debt payments of $5.1 million, payments on our capital lease obligations of $21.8 million and dividend payments of
$16.8 million.
During fiscal 2016, cash used in financing activities was $83.0 million, primarily for net debt payments of
$48.7 million, payments on our capital lease obligations of $19.8 million and dividend payments of $16.2 million.
During fiscal 2015, cash provided by financing activities was $1.8 million, with net proceeds of $72.2 million
from the IPO of our common stock after deducting deferred offering costs, largely offset by net debt payments,
payments on our capital lease obligation, IPO offering costs and dividend payments.
Capital Expenditures
Capital expenditures totaled $46.7 million for fiscal 2017. Our capital expenditures were used primarily for
major plant equipment replacements, new equipment to provide capacity additions, facility expansions and yard
upgrades, our recycled resin initiatives and capitalized software. Our most significant capital expenditures
specifically for increased capacity was $7.5 million in fiscal 2017 for the opening of our new manufacturing facility
in Harrisonville, MO.
Capital expenditures totaled $44.9 million for fiscal 2016. Our capital expenditures were used primarily for
major plant equipment replacements, new equipment to provide capacity additions, facility expansions and yard
upgrades, our recycled resin initiatives and capitalized software. Our most significant capital expenditures
specifically for increased capacity was $7.9 million in fiscal 2016, primarily for tooling for the Midwest and South
regions.
We currently anticipate that we will make capital expenditures of approximately $55-60 million in fiscal
2018. Such capital expenditures are expected to be financed using funds generated by operations.
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Advanced Drainage Systems, Inc.
Debt and Capitalized Lease Obligations
See “Note 5. Leases” and “Note 12. Debt” to our consolidated financial statements included in “Item 8.
Financial Statements and Supplementary Data” for a discussion of the Company’s financing transactions, including
the Secured Bank Term Loans, the Senior Notes and the Company’s capital lease obligations.
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 Coverage Ratio maintenance covenant. For
any relevant period of determination, the Leverage Ratio is calculated by dividing Total Consolidated Indebtedness
(funded debt plus guarantees) by Consolidated EBITDA. The current upper limit is 4.0 times. The Fixed Charge
Coverage 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. We were in compliance with our debt covenants as of March 31, 2017. In
December 2016, we determined that certain intercompany loans between ADS Mexicana and ADS, Inc. that
occurred between November 2014 and November 2015 that triggered an event of default according to the terms of
the ADS Mexicana Revolving Credit Facility. On December 13, 2016, ADS Mexicana obtained a covenant waiver
from the lenders.
Contractual Obligations as of March 31, 2017
(Amounts in thousands)
Contractual obligations:
Long-term debt (1)
Interest payments (2)
Operating leases
Capital leases
Contractual purchase obligations (3)
Total
Payments Due by Period
Total
Less than
1 Year
1-3 Years 3-5 Years
More than
5 Years
$ 350,361 $ 37,789 $ 311,080 $
3,961
4,452
35,465
—
1,492 $
31
2,136
21,792
—
$ 483,126 $ 93,545 $ 354,958 $ 25,451 $
14,325
12,692
87,658
18,090
10,333
3,004
24,329
18,090
—
—
3,100
6,072
—
9,172
The Secured Bank Term Loans mature in June 2018.
(1)
(2) Based on applicable rates and pricing margins as of March 31, 2017.
(3)
Purchase obligations include commitments with vendors to purchase raw material.
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Advanced Drainage Systems, Inc.
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 Consolidated Financial Statements included in “Item 8. Financial Statements and
Supplementary Data,” of this Form 10-K. Our maximum potential obligation under this guarantee totals $11 million
as of March 31, 2017. The maximum borrowing permitted under the South American Joint Venture’s credit facility
is $22 million. As of March 31, 2017, our South American Joint Venture had approximately $16.0 million of
outstanding debt subject to our guarantee, resulting in our guarantee of 50%, or $8.0 million, of that amount. 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
Our discussion and analysis of financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated
financial statements requires management to make estimates and judgments that affect the reported amounts in our
consolidated financial statements and accompanying notes.
Certain of our accounting policies involve a higher degree of judgment and complexity in their application,
and therefore, represent the critical accounting policies used in the preparation of our financial statements. If
different assumptions or conditions were to prevail, the results could be materially different from our reported
results. We believe the following accounting policies may involve a higher degree of judgment and complexity in
their application and represent the critical accounting policies used in the preparation of our financial statements. For
additional discussion of our significant accounting policies, see “Note 1. Background and Summary of Significant
Accounting Policies” to our consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data” included in this Form 10-K.
Policy
Consolidation and Investments-Our
consolidated financial statements
include our wholly-owned
subsidiaries, our majority owned
subsidiaries, 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, including our South
American joint venture and our
Tigre-ADS USA joint venture.
Allowance for Doubtful Accounts-
We hold receivables from customers
in various countries. Credit is
extended to customers based on an
evaluation of their financial
condition and collateral is generally
not required.
Judgments and Estimates
Significant judgment may be
necessary to determine if we are the
primary beneficiary of a VIE. The
non-controlling interests in our
subsidiaries that are consolidated but
not wholly owned by us are included
in the accompanying financial
statements.
Effect if Actual Results Differ
from Assumptions
We currently consolidate ADS
Mexicana as the primary
beneficiary. We do not consolidate
our South American joint venture or
our Tigre-ADS USA joint venture.
Changes in the primary beneficiary
would change our consolidation
conclusion.
The evaluation of the customer’s
financial condition is performed to
reduce the risk of loss. Accounts
receivable are evaluated for
collectability based on numerous
factors, including the length of time
individual receivables are past due,
past transaction history with
customers, their credit worthiness
and the economic environment.
This estimate is periodically
adjusted when management becomes
aware of a specific customer’s
inability to meet its financial
obligations (e.g., bankruptcy filing)
or as a result of changes in historical
collection patterns.
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Advanced Drainage Systems, Inc.
Policy
Inventories- Inventories are stated at
the lower of cost or market value.
Cost is determined using the FIFO
method, which is based on analyses
that are highly complex due to the
significant number of materials
purchased by the company. The
complexity of the FIFO analysis is
further increased in periods of
volatile raw material pricing.
Accounting for Leases- We enter
into leases for buildings,
transportation and other equipment,
and airplanes. Judgment is required
in applying the criteria necessary to
determine if a lease should be
classified as a capital lease.
Goodwill- Goodwill is reviewed
annually for impairment as of
March 31 or whenever events or
changes in circumstances indicate
the carrying value may not be
recoverable. Implied fair value of
goodwill is determined by
considering both the income and
market approach.
Judgments and Estimates
Market value is based on estimated
net realizable value, which is based
on assumptions related to
deterioration, obsolescence and
other judgmental factors. The
valuation of inventory also involves
estimates and assumptions relate to
which overhead costs qualify for
capitalization and in what amounts.
Specifically, judgment is required in
applying the criteria to determine if
a lease should be capitalized
including whether to include certain
lease renewal periods in the lease
term, the present value of minimum
lease payments, the fair value of
leased assets, and the useful lives of
assets.
Determining the fair value of a
reporting unit is judgmental in
nature and involves the use of
significant estimates and
assumptions. These estimates and
assumptions include revenue growth
rates and operating margins used to
calculate projected future cash
flows, risk-adjusted discount rates,
future economic and market
conditions, and determination of
appropriate market comparables.
The fair value estimates are based on
assumptions management believes to
be reasonable, but are inherently
uncertain.
Effect if Actual Results Differ
from Assumptions
Our lower of cost or market estimate
is currently not material.
Changes in which renewal periods
are included would impact the asset
and the related liability.
We performed our annual
impairment test for goodwill as of
March 31, 2017. We determined for
our Domestic reporting unit that it
was not more likely than not that the
fair value of the reporting unit was
less than its carrying value. We
determined for the remaining
goodwill that the fair value exceeded
the carrying value for each of our
reporting units. Accordingly, we did
not incur any impairment charges for
goodwill in fiscal 2017, 2016 or
2015. Future events and
unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
59
Effect if Actual Results Differ
from Assumptions
We did not record any impairment
charges for intangible assets in fiscal
2017, 2016, or 2015. Future events
and unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
Advanced Drainage Systems, Inc.
Policy
Judgments and Estimates
Determining the fair value of these
assets is judgmental in nature and
involves the use of significant
estimates and assumptions. Future
events and unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
Definite-lived intangible assets -
Definite-lived intangible assets are
tested for recoverability whenever
events or changes in circumstances
indicate that carrying amounts of the
asset group may not be recoverable.
Asset groups are established
primarily by determining the lowest
level of cash flows available. If the
estimated undiscounted future cash
flows are less than the carrying
amounts of such assets, an
impairment loss is recognized to the
extent the fair value of the asset less
any costs of disposition is less than
the carrying amount of the asset.
Indefinite lived intangible assets-
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. Determining the fair
value of these assets is judgmental in
nature and involves the use of
significant estimates and
assumptions. We base our fair value
estimates on assumptions we believe
to be reasonable, but that are
inherently uncertain. To estimate the
fair value of these indefinite-lived
intangible assets, we use an income
approach, which utilizes a market
derived rate of return to discount
anticipated performance. An
impairment loss is recognized when
the estimated fair value of the
intangible asset is less than the
carrying value.
60
Judgments and Estimates
Under these circumstances, we
would adjust the carrying value
down to its estimated fair value,
which then becomes its new carrying
value. Determining the fair value of
these assets is judgmental in nature
and involves the use of significant
estimates and assumptions.
Effect if Actual Results Differ
from Assumptions
We recorded an impairment charge
of $1.3 million and $4.0 million in
fiscal 2017 and 2016, respectively,
on our South American Joint
Venture.
We estimate an allowance for
doubtful accounts based on
numerous factors, including the
length of time individual receivables
are past due, past transaction history
with customers, their credit
worthiness and the economic
environment.
If our historical experience differs
from future experience, our
allowance for doubtful accounts
could differ.
Advanced Drainage Systems, Inc.
Policy
Other Assets- Other assets includes
equity-method investments. We
evaluate other assets for impairment
whenever events or changes in
circumstances indicate that the
carrying amount might not be
recoverable, and recognizes an
impairment loss when a decline in
value below carrying value is
determined to be other-than-
temporary.
Revenue Recognition-We sell pipe
products and related water
management products. We ship
products to customers predominantly
by internal fleet and to a lesser
extent by third-party carriers. We do
not provide any additional revenue
generating services after product
delivery.
Sales, net of sales tax and
allowances for returns, rebates and
discounts are recognized from
product sales when persuasive
evidence of an arrangement exists,
delivery has occurred, the price to
the buyer is fixed or determinable
and collectability is reasonably
assured. We recognize revenue when
both persuasive evidence of an
arrangement and the price is fixed or
determinable. Title to the products
and risk of loss generally passes to
the customer upon delivery. We
perform credit check procedures on
all new customers, establishes credit
limits accordingly, and monitors the
creditworthiness of existing
customers, which is the basis for
concluding that collectability is
reasonably assured.
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Advanced Drainage Systems, Inc.
Policy
Employee Stock Ownership Plan
(ESOP)- When shares of convertible
preferred stock are allocated to the
ESOP stock accounts of ESOP
participants, we reduce the amount
of deferred compensation reflected
in Deferred compensation —
unearned ESOP shares in
mezzanine equity.
Stock-Based Compensation Plan-
Equity-classified awards are
measured based on the grant-date
estimated fair value of each award,
net of estimated forfeitures, and
liability-classified awards are re-
measured at their fair value, net of
estimated forfeitures, at each
relevant reporting date for
accounting purposes. Liability-
classified stock options are re-
measured at fair value each period
until they are exercised.
Compensation expense is recognized
on a straight-line basis over the
employee’s requisite service period,
which is generally the vesting period
of the grant.
Judgments and Estimates
Shares of convertible preferred stock
are valued based on an annual
valuation for the ESOP by an
independent third-party appraisal
firm.
Effect if Actual Results Differ
from Assumptions
If the valuation of shares differ from
our estimate, it could result in a
significant decrease or increase in
ESOP compensation in the fourth
quarter.
If any of the assumptions used in the
model change significantly, stock-
based compensation recorded in
future periods may differ materially
from that recorded previously for
liability-classified awards.
The fair value of each stock option
granted is estimated using the Black-
Scholes option pricing model.
Determining the fair value of stock
options under the Black-Scholes
option-pricing model requires
judgment, common stock volatility,
expected term of the awards,
dividend yield and the risk-free
interest rate. The assumptions used in
calculating the fair value of stock
options represent our best estimates,
based on management’s judgment
and subjective future expectations.
These estimates involve inherent
uncertainties.
We developed our
assumptions as follows:
Volatility.
Expected term.
Risk-free interest rate.
Dividend yield.
•
•
•
•
We estimate potential forfeitures of
grants and adjust stock-based
compensation expense accordingly.
The estimate of forfeitures is
adjusted over the requisite service
period to the extent that actual
forfeitures differ from the prior
estimates. We estimate forfeitures
based upon our historical experience
and, at each period, review the
estimated forfeiture rate and make
changes as factors affecting the
forfeiture rate calculations and
assumptions change.
62
Effect if Actual Results Differ
from Assumptions
If the redemption feature became
applicable, there would be
adjustments to the fair value of
redeemable convertible preferred
stock. The current carrying value of
redeemable convertible preferred
stock are $12.50 per share in equity.
Currently, the fair value of
redeemable convertible preferred
stock is valued at $16.80.
As of March 31, 2017, we had
valuation allowances of $2.2 million
and unrecognized tax benefits of
$6.2 million. Although we believe
our estimates are reasonable, if these
judgments are not accurate then
future income tax expense or benefit
could be different.
Judgments and Estimates
As of March 31, 2015, the Company
has determined that it is not probable
that the redemption feature will
become applicable. Since the
Redeemable convertible preferred
stock is not currently redeemable
and it is not probable that the
instrument will become redeemable,
subsequent adjustment to fair value
is not required. As such, the
Redeemable convertible preferred
stock was recorded to fair value at
the effective date of the IPO on
July 25, 2014 and will remain in
mezzanine equity without further
adjustment to carrying value unless
it becomes probable that the
redemption feature will become
applicable.
They are measured using the enacted
tax rates expected to apply to taxable
income in the years in which the
related temporary differences are
expected to be recovered or settled.
Initial recognition, derecognition
and measurement is based on
management’s judgment given the
facts, circumstances and information
available at the reporting date.
Advanced Drainage Systems, Inc.
Policy
Valuation of redeemable
convertible preferred stock- Prior to
the effective date of the IPO, the
trustee of our ESOP had the ability
to put the shares of our Redeemable
convertible preferred stock to us. 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 of the
ESOP, which granted it the ability to
put the shares of our Redeemable
convertible preferred stock to us,
would then become applicable.
Preferred securities that become
redeemable upon a contingent event
that is not solely within the control
of the Company should be classified
outside of permanent equity.
Income Taxes- Income taxes are
accounted for under the asset and
liability method. Deferred tax assets
and liabilities are recognized and
represent the future tax
consequences attributable to
differences between the financial
statement carrying amounts of
existing assets and liabilities and
their respective tax bases.
Uncertain tax positions- We
recognize uncertain tax positions in
accordance with FASB ASC 740,
“Income Taxes” which provides
guidance related to the financial
statement recognition and
measurement of tax positions taken
or expected to be taken in a tax
return. The standard prescribes the
minimum recognition threshold that
a tax position is required to meet
before being recognized in the
financial statements. ASC 740,
“Income Taxes” also provides
guidance on derecognition,
classification, interest and penalties,
accounting in interim periods and
disclosure.
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Advanced Drainage Systems, Inc.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see “Note 1. Background and Summary of Significant
Accounting Policies” to our consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data.”
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to various market risks, primarily related to changes in interest rates, credit risk, raw material
supply prices, and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or
cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in
each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course
of business, as we do not engage in speculative, non-operating transactions.
Interest Rate Risk
We are subject to interest rate risk associated with our bank debt. Changes in interest rates impact the fair
value of our fixed-rate debt, but there is no impact to earnings and cash flow. Alternatively, changes in interest rates
do not affect the fair value of our variable-rate debt, but they do affect future earnings and cash flow. The Revolving
Credit Facility, the Term Note, and our industrial development revenue bond, or IDRB, notes bear variable interest
rates. The Revolving Credit Facility and Term Note bear interest either at LIBOR or the Prime Rate, at our option,
plus applicable pricing margins. The IDRB notes bear interest at weekly commercial paper rates, plus applicable
pricing margins. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted
interest expense by approximately $2.6 million based on our borrowings as of March 31, 2017. 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 $3.9 million, as of March 31, 2017.
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. One customer has
an accounts receivable balance equal to approximately 16% of our Receivables balance as of March 31, 2017.
Raw Material and Commodity Price Risk
Our primary raw materials used in the production of our products are high density polyethylene and
polypropylene resins. As these resins are hydrocarbon-based materials, changes in the price of feedstocks, such as
crude oil derivatives and natural gas liquids, 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 contributes to the management of our overall risk
and the potential impact on our results of operations. A 1% increase in the price of resin would increase our cost of
goods sold by approximately $4 million.
We have a resin price risk management program with physical fixed price contracts and financial hedge
contracts which are designed to apply to a significant portion of our annual virgin resin purchases. We also maintain
supply agreements with our major resin suppliers that provide multi-year terms and volumes that are in excess of our
projected consumption. These supply agreements generally do not 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. To manage this risk for our polypropylene virgin resin price exposure, we utilize
financial hedges of propylene as a proxy for polypropylene. Historically, the month to month change in market
based pricing has been very similar between propylene and polypropylene.
64
Advanced Drainage Systems, Inc.
Our use of forward fixed price contracts, financial hedges and the incorporation of vertical integration for
recycled material have increased our focus on efficiency and resulted in lower overall supply costs.
We began a diesel hedging program in 2008 which was executed through several financial swaps covering
future months demand for diesel fuel and are designed to decrease our exposure to changing fuel costs. These
hedges covered a significant portion of the diesel fuel consumed by the truck fleet that we operate to deliver
products to our customers.
Inflation Risk
Our cost of goods sold is subject to inflationary pressures and price fluctuations of the raw materials we use,
primarily high density polyethylene and polypropylene resins. Historically, we have generally been able, over time,
to recover the effects of inflation and price fluctuations through sales price increases and production efficiencies
related to technological enhancements and improvements. However, we cannot reasonably estimate our ability to
successfully recover any price increases.
Foreign Currency Exchange Rate Risk
We have operations in countries outside of the United States, all of which use the respective local foreign
currency as their functional currency. Each of these operations may enter into contractual arrangements with
customers or vendors that are denominated in currencies other than its respective functional currency. Consequently,
our results of operations may be affected by exposure to changes in foreign currency exchange rates and economic
conditions in the regions in which we sell or distribute our products. Exposure to variability in foreign currency
exchange rates from these transactions is managed, to the extent possible, by natural hedges which result from
purchases and sales occurring in the same foreign currency within a similar period of time, thereby offsetting each
other to varying degrees.
In addition to the foreign currency transaction-related gains and losses that are reflected within the results of
operations, we are subject to foreign currency translation risk, as the financial statements for our foreign subsidiaries
are measured and recorded in the respective subsidiary’s functional currency and translated into U.S. dollars for
consolidated financial reporting purposes. The resulting translation adjustments are recorded net of tax impact in the
Consolidated Statements of Comprehensive (Loss) Income.
Item 8.
Financial Statements and Supplementary Data
The Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements and
supplementary financial data required for this Item are set forth on pages F-1 through F-62 of this Annual Report on
Form 10-K and are incorporated herein by reference.
Item 9.
Changes in and Disagreements with Accountant on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer
and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as
of March 31, 2017. Disclosure controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified under Securities Exchange Commission (“SEC”) rules and forms.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
65
Advanced Drainage Systems, Inc.
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2017
because of the identified material weaknesses in our internal control over financial reporting, as further described
below.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting as of March 31, 2017. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control — Integrated Framework (2013). A material weakness in internal controls 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 our annual or interim financial statements will not be
prevented or detected on a timely basis. Because of its inherent limitations, even appropriate internal control over
financial reporting may not prevent or detect misstatements.
Based on this assessment, management has concluded that we did not maintain effective internal control
over financial reporting as of March 31, 2017, due to the fact that material weaknesses previously identified and
disclosed had not been remediated. The material weaknesses in our internal control over financial reporting as of
March 31, 2017, were 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.
Following the identification of the material weaknesses referenced below and first noted in fiscal 2015, and
with the oversight of the Audit Committee, we have commenced a process to remediate the underlying causes of
these material weaknesses, enhance the control environment and strengthen our internal control over financial
reporting. We are still in the process of implementing our comprehensive remediation plan as further described
below. Accordingly, the previously identified material weaknesses cannot be considered remediated until each
control has been appropriately designed, has operated for a sufficient period of time, and until management has
concluded, through testing, that the control is operating effectively. Management has determined the following six
material weaknesses, as previously disclosed, remained outstanding as of March 31, 2017:
•
•
Control Environment — Our control environment, which is the foundation for the discipline and structure
necessary for effective internal control over financial reporting, was determined to be ineffective. Our
ineffective control environment is evidenced by: (i) an insufficient number of personnel appropriately
qualified to perform control design, execution and monitoring activities, (ii) an insufficient number of
personnel with an appropriate level of GAAP knowledge and experience and ongoing training in the
application of GAAP commensurate with our external financial reporting requirements, which resulted in
erroneous judgments regarding the proper application of GAAP, (iii) in certain instances, insufficient
documentation or basis to support account balances and accounting estimates, and (iv) certain aspects of
the Company’s “tone at the top” set by senior management. The material weakness in our control
environment impacts the overall effectiveness of our internal controls over financial reporting.
Accounting for Leases – We did not design and maintain effective control over the accounting for leases,
and whether certain leases should be classified as operating leases or capital leases. We previously
determined that a significant number of such leases previously treated as operating leases should instead
be classified as capital leases and included in property, plant and equipment.
66
Advanced Drainage Systems, Inc.
•
•
•
•
Accounting for Inventory — We did not design and maintain effective control over the accounting for
inventory. We previously identified errors relating to the Company’s incorrect historical calculation of
inventory cost including the capitalization of raw material variances, excess capitalization of certain inter-
plant freight expense and other overhead costs as well as misclassification of certain other overhead costs.
Journal Entry and Account Reconciliation — We did not design and maintain effective control over access
within our information technology systems to control the ability of key accounting personnel to initiate,
modify and record transactions in our financial systems. It was determined that certain key accounting
personnel had the ability to both prepare and post manual journal entries without appropriate independent
review and approval. As these key accounting personnel are also reviewers of certain account
reconciliations, we also did not maintain appropriate segregation of duties. Also, management
expectations regarding the level of documentation necessary to support account balances, journal entries,
accrual calculations and management estimates were not adequate.
ADS Mexicana Control Environment — We did not maintain an effective control environment with
respect to certain aspects of the financial reporting of our consolidated joint venture affiliate, ADS
Mexicana, resulting in certain mischaracterized transactions.
ADS Mexicana Revenue Recognition Cut-Off Practices — We did not design and maintain effective
controls over our revenue recognition cut-off practices with respect to ADS Mexicana. We previously
identified instances where ADS Mexicana would recognize revenue, prior to the date of shipment or
transfer of title/ownership, which is not in accordance with GAAP.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of
our internal control over financial reporting as of March 31, 2017. Deloitte & Touche LLP’s opinion, as stated in
their report which appears on page F-2 of this Annual Report on Form 10-K, is consistent with management’s report
on internal control over financial reporting as set forth above.
Ongoing Remediation Process
Management is committed to achieving a strong control environment, high ethical standards and financial
reporting integrity. This commitment has continued to be communicated to all of our employees and is the
foundation of our remediation efforts.
While certain actions have been taken to enhance our internal control over financial reporting relating to
the material weaknesses, we are still in the process of implementing our comprehensive remediation plan.
Accordingly, the material weaknesses noted above cannot be considered remediated until each control has been
appropriately designed, has operated for a sufficient period of time, and management has concluded, through testing,
that the control is operating effectively.
We have categorized our remediation efforts into three separate initiatives which focus on people, process
and technology. As management continues to evaluate and execute towards improving its internal control
environment, it may be necessary to take on additional measures to fully remediate the existing material weaknesses.
Examples of the remediation efforts that have been instituted include:
PEOPLE
• Hiring of Key Positions
• Ongoing Training and Development
• Appointment of New Chief Financial Officer and Additional Finance Personnel
67
Advanced Drainage Systems, Inc.
• Use of Third-Party Consultants
PROCESS
•
•
•
•
•
•
Finance Organization Assessment
CEO Communications to Reinforce Compliance
Implementation and Enhancement of Entity Level Controls
Enhanced Reporting Line Procedures
Senior Executive Organizational Assessment
Enhanced Employee Outreach and Training on Public Company Culture
• Additional Training on Ethics, Compliance and Anti-Corruption
•
•
•
Establishment of Foreign Operations Committee
Enhancement of ADS Mexicana Control Environment
Establishment of a New Policy and Enhanced Internal Controls related to Cut-off / Revenue
Recognition Practices
TECHNOLOGY
• Assessment of User Access for Oracle R12 Including Journal Entries
•
System Approval Enhancement for Journal Entries
The status of our remediation plan is being, and will continue to be, reported by management to the Audit
Committee of the Board of Directors on a regular basis. In addition, we have assigned executive owners to oversee
the remedial changes to the overall design of our internal control environment and to address the root causes of our
material weaknesses. Remediation generally requires making changes to how controls are designed and then
adhering to those changes for a sufficient period of time such that the operating effectiveness of those changes can
be demonstrated through testing.
As we continue to evaluate and work to improve our internal control over financial reporting, we may take
additional measures to address control deficiencies or modify our previously disclosed remediation plan. We cannot
assure you, however, when we will fully remediate such weaknesses, nor can we be certain of whether additional
actions will be required. See above under “Item 1A. Risk Factors — We have identified material weaknesses in our
internal control over financial reporting which could, if not remediated, adversely affect our ability to report our
financial condition and results of operations in a timely and accurate manner, investor confidence in our Company
and, as a result, the value of our common stock.”
Changes in Internal Control over Financial Reporting
As of March 31, 2017, testing of both the design and operating effectiveness of new and improved controls
was completed related to Accounting for Stock-based Compensation, and management concluded that this material
weakness in internal controls over financial reporting has been fully remediated. Except for the changes described
above there were no changes in our internal control over financial reporting identified in management’s evaluation
pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended March 31, 2017 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
68
Advanced Drainage Systems, Inc.
Item 9B.
Other Information
None.
69
Advanced Drainage Systems, Inc.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information contained under the captions “EXECUTIVE OFFICERS”, “ELECTION OF
DIRECTORS” and “OTHER DIRECTOR INFORMATION, COMMITTEES OF DIRECTORS AND
CORPORATE GOVERNANCE INFORMATION” in our definitive Proxy Statement for the 2018 Annual
Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act
(the “Proxy Statement”), is incorporated herein by reference.
Item 11.
Executive Compensation
The information contained under the captions “COMPENSATION OF MANAGEMENT,” “OTHER
DIRECTOR INFORMATION, COMMITTEES OF DIRECTORS AND CORPORATE GOVERNANCE
INFORMATION”, “REPORT OF THE COMPENSATION COMMITTEE” and “COMPENSATION
DISCUSSION AND ANALYSIS" in the Proxy Statement is incorporated herein by reference. Notwithstanding the
foregoing, the information contained in the Proxy Statement under the caption “REPORT OF THE
COMPENSATION COMMITTEE” shall be deemed furnished, and not filed, in this Report on Form 10-K and
shall not be deemed incorporated by reference into any filing we make under the Securities Act of 1933, as
amended, or the Exchange Act.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information contained under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT” and "EQUITY COMPENSATION PLAN INFORMATION" in the Proxy
Statement is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information contained under the captions “CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS” and “OTHER DIRECTOR INFORMATION, COMMITTEES OF DIRECTORS AND
CORPORATE GOVERNANCE INFORMATION” in the Proxy Statement is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information contained under the caption “AUDIT AND OTHER SERVICE FEES” in the Proxy
Statement is incorporated herein by reference.
70
Advanced Drainage Systems, Inc.
Item 15.
Exhibits and Financial Statement Schedules
(a)1. Financial Statements. See “Table of Contents” on page F-1.
PART IV
(a)2. Financial Statement Schedules. Schedule II — Consolidated Valuation and Qualifying Accounts.
Other schedules are omitted because they are not required or applicable, or the required information is
included in our consolidated financial statements or related notes.
(a)3. Exhibits. See “Index to Exhibits.”
71
Advanced Drainage Systems, Inc.
Pursuant to the requirements of Section 13 or 15(d) 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: May 30, 2017
SIGNATURES
ADVANCED DRAINAGE SYSTEMS, INC.
By:
Name:
Title:
/s/ Joseph A. Chlapaty
Joseph A. Chlapaty
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Scott A. Cottrill
By:
Name: Scott A. Cottrill
Title: Chief Financial Officer (Principal
Financial Officer)
/s/ Tim A. Makowski
By:
Name: Tim A. Makowski
Title: Vice President, Controller and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons in their indicated capacities, on May 30, 2017.
Signature
/s/ Joseph A. Chlapaty
Joseph A. Chlapaty
/s/ Scott A. Cottrill
Scott A. Cottrill
/s/ Tim A. Makowski
Tim A. Makowski
/s/ Robert M. Eversole**
Robert M. Eversole
/s/ Alexander R. Fischer**
Alexander R. Fischer
/s/ Tanya Fratto**
Tanya Fratto
/s/ M.A. (Mark) Haney**
M.A. (Mark) Haney
/s/ C. Robert Kidder**
C. Robert Kidder
/s/ Richard A. Rosenthal**
Richard A. Rosenthal
/s/ Carl A. Nelson, Jr.**
Carl A. Nelson, Jr.
/s/ Abigail S. Wexner**
Abigail S. Wexner
Title
Chairman of the Board of Directors, Director, President
and Chief Executive Officer (Principal Executive Officer)
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer (Principal Financial Officer)
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
** The undersigned, by signing his name hereto, does hereby sign this report on behalf of each of the above-
indicated directors of the registrant pursuant to powers of attorney executed by such directors.
By:
/s/ Scott A. Cottrill
Scott A. Cottrill, Attorney-in-fact
72
Advanced Drainage Systems, Inc.
TABLE OF CONTENTS
Audited Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2017 and 2016
Consolidated Statements of Operations for the fiscal years ended March 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended March 31, 2017, 2016,
and 2015
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2017, 2016, and 2015
Consolidated Statements of Stockholders’ Equity (Deficit) and Mezzanine Equity for the fiscal years ended
March 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
Schedule II, Consolidated Valuation and Qualifying Accounts for the fiscal years ended March 31, 2017,
2016, and 2015
Page
F-2
F-5
F-6
F-7
F-8
F-9
F-15
F-63
F-1
Advanced Drainage Systems, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Advanced Drainage Systems, Inc. and subsidiaries
Hilliard, Ohio
We have audited the accompanying consolidated balance sheets of Advanced Drainage Systems Inc. and
subsidiaries (the "Company") as of March 31, 2017 and 2016, and the related consolidated statements of operations,
comprehensive income (loss), stockholders' equity (deficit) and mezzanine equity, and cash flows for each of the
three years in the period ended March 31, 2017. Our audits also included the financial statement schedule listed in
the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Advanced Drainage Systems Inc. and subsidiaries as of March 31, 2017 and 2016, and the results of their
operations and their cash flows for each of the three years in the period ended March 31, 2017, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the Consolidated Financial Statements, on April 1, 2016, the Company adopted the
new accounting guidance at ASU 2015-17 Balance Sheet Classification of Deferred Taxes on a prospective basis.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of March 31, 2017, based on the criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated May 30, 2017 expressed an adverse opinion on the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Columbus, Ohio
May 30, 2017
F-2
Advanced Drainage Systems, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Advanced Drainage Systems, Inc. and subsidiaries
Hilliard, Ohio
We have audited Advanced Drainage Systems, Inc. and subsidiaries' (the "Company's") internal control over
financial reporting as of March 31, 2017, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected
by the company's board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness 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 the company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The following material weaknesses have
been identified and included in management's assessment: an ineffective control environment, accounting for
inventory, accounting for leases, journal entry and account reconciliation, an ineffective control environment at ADS
Mexicana, and internal controls over financial reporting related to revenue recognition cut-off practices at ADS
Mexicana. These material weaknesses were considered in determining the nature, timing, and extent of audit tests
applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year
ended March 31, 2017, of the Company and this report does not affect our report on such consolidated financial
statements and financial statement schedule.
In our opinion, because of the effect of the material weaknesses identified above on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over financial reporting
F-3
Advanced Drainage Systems, Inc.
as of March 31, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and financial statement schedule as of and for the year ended
March 31, 2017, of the Company and our report dated May 30, 2017, expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule and included an explanatory paragraph regarding
the Company’s adoption on April 1, 2016 of the new accounting guidance at ASU 2015-17 Balance Sheet
Classification of Deferred Taxes on a prospective basis.
/s/ Deloitte & Touche LLP
Columbus, Ohio
May 30, 2017
F-4
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
ASSETS
Current assets:
Cash
Receivables (less allowance for doubtful accounts of $10,431 and $7,956, respectively)
Inventories
Deferred income taxes and other current assets
$
$
$
Total current assets
Property, plant and equipment, net
Other assets:
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations
Current maturities of capital lease obligations
Accounts payable
Current portion of liability-classified stock-based awards
Other accrued liabilities
Accrued income taxes
Total current liabilities
Long-term debt obligation (less unamortized debt issuance costs of $1,723 and $3,131,
respectively)
Long-term capital lease obligations
Deferred tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies (see Note 14)
Mezzanine equity:
Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized;
44,170 shares issued; 24,225 and 24,819 shares outstanding, respectively
Deferred compensation — unearned ESOP shares
Redeemable noncontrolling interest in subsidiaries
Total mezzanine equity
Stockholders’ equity:
Common stock: $0.01 par value; 1,000,000 shares authorized; 153,560
shares issued; 55,338 and 54,437 shares outstanding, respectively
Paid-in capital
Common stock in treasury, at cost
Accumulated other comprehensive loss
Retained deficit
Total ADS stockholders’ equity
Noncontrolling interest in subsidiaries
Total stockholders’ equity
Total liabilities, mezzanine equity and stockholders’ equity
$
As of March 31,
2017
2016
6,450 $
168,943
258,430
6,743
440,566
406,858
100,566
51,758
46,537
1,046,285 $
37,789 $
21,450
121,922
11,926
54,460
8,207
255,754
310,849
58,710
44,007
26,530
695,850
302,814
(198,216)
8,227
112,825
12,393
755,787
(436,984)
(24,815)
(83,678)
222,703
14,907
237,610
1,046,285 $
6,555
186,883
230,466
15,658
439,562
391,744
100,885
59,869
45,256
1,037,316
35,870
19,231
119,606
10,118
65,099
2,260
252,184
312,214
56,809
63,952
37,921
723,080
310,240
(205,664)
7,171
111,747
12,393
739,097
(440,995)
(21,261)
(101,778)
187,456
15,033
202,489
1,037,316
See accompanying notes to consolidated financial statements.
F-5
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling
General and administrative
Loss on disposal of assets and costs from exit and disposal
activities
Intangible amortization
Income from operations
Other expense:
Interest expense
Derivative (gains) losses and other (income) expense, net
Income before income taxes
Income tax expense
Equity in net loss of unconsolidated affiliates
Net income (loss)
Less net income attributable to noncontrolling interest
Net income (loss) attributable to ADS
Change in fair value of redeemable convertible preferred stock
Accretion of redeemable noncontrolling interest
Dividends to redeemable convertible preferred stockholders
Dividends paid to unvested restricted stockholders
Net income (loss) available to common stockholders and
participating securities
Undistributed income allocated to participating securities
Net income (loss) available to common stockholders
Weighted average common shares outstanding:
Basic
Diluted
Net income (loss) per share available to common stockholders:
$
$
$
Cash dividends declared per share
Basic
Diluted
$
Fiscal Year Ended March 31,
2016
1,290,678 $
1,005,326
285,352
2017
1,257,261 $
961,451
295,810
2015
1,180,073
974,960
205,113
91,475
110,950
88,478
92,504
8,509
8,548
76,328
17,467
(5,970)
64,831
24,615
4,308
35,908
2,958
32,950
—
(1,560)
(1,646)
(73)
812
9,224
94,334
18,460
16,575
59,299
23,498
5,234
30,567
5,515
25,052
—
(932)
(1,425)
(24)
29,671
(1,700)
27,971 $
22,671
(1,270)
21,401 $
$
80,481
75,855
362
9,754
38,661
19,368
14,370
4,923
6,284
2,335
(3,696)
4,131
(7,827)
(11,054)
—
(661)
(11)
(19,553)
—
(19,553)
54,919
55,624
53,978
55,176
51,344
51,344
0.51 $
0.50 $
0.24 $
0.40 $
0.39 $
0.20 $
(0.38)
(0.38)
0.08
See accompanying notes to consolidated financial statements.
F-6
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Net income (loss)
Other comprehensive loss:
Currency translation
Comprehensive income (loss)
Less other comprehensive loss attributable to noncontrolling
interest, net of tax
Less net income attributable to noncontrolling interest
Total comprehensive income (loss) attributable to ADS
Fiscal Year Ended March 31,
2016
2015
2017
$
35,908 $
30,567 $
(3,696)
(5,037)
30,871
(8,594)
21,973
(1,483)
2,958
29,396 $
(2,854)
5,515
19,312 $
$
(11,928)
(15,624)
(3,237)
4,131
(16,518)
See accompanying notes to consolidated financial statements.
F-7
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Fiscal Year Ended March 31,
2016
2015
2017
$
35,908 $
30,567 $
(3,696)
Depreciation and amortization
Deferred income taxes
Loss on disposal of assets and costs from exit and disposal
activities
ESOP, stock repurchase agreement and stock-based compensation
Amortization of deferred financing charges
Fair market value adjustments to derivatives
Loss on purchase of non-controlling interest
Equity in net loss of unconsolidated affiliates
Gain on bargain purchase of PTI acquisition
Other operating activities
Changes in working capital (see Note 22)
Net cash provided by operating activities
Cash Flows from Investing Activities
Capital expenditures
Proceeds from disposition of assets or businesses
Cash paid for acquisitions, net of cash acquired
Purchase of property, plant and equipment through financing
Investment in unconsolidated affiliates
Proceeds from note receivable to related party
Issuance of note receivable to related party
Other investing activities
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from Revolving Credit Facility
Payments on Revolving Credit Facility
Payments on Term Loan
Payments on Senior Notes
Proceeds from notes, mortgages, and other debt
Payments of notes, mortgages, and other debt
Payments on loans against CSV life insurance policies
Equipment financing loans
Payments on capital lease obligations
Payments for deferred initial public offering costs
Proceeds from initial public offering of common stock, net of
underwriter discounts and commissions
Cash dividends paid
Purchase of treasury stock — common
Proceeds from option exercises
Other financing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net change in cash
Cash at beginning of year
Cash at end of year
$
72,355
(8,971)
71,009
10,686
7,316
17,875
1,408
(10,921)
—
4,308
(609)
(5,871)
(8,559)
104,239
(46,676)
—
(8,573)
(4,620)
—
—
—
(1,390)
(61,259)
412,400
(382,600)
(10,000)
(25,000)
1,000
(870)
(6,823)
4,620
(21,760)
—
—
(16,820)
—
4,011
(983)
(42,825)
(260)
(105)
6,555
6,450 $
812
4,382
1,412
2,163
490
5,234
—
7,243
1,344
135,342
(44,942)
—
(3,188)
—
—
3,854
(3,854)
(888)
(49,018)
409,100
(448,200)
(8,750)
—
6,378
(7,208)
—
—
(19,780)
—
—
(16,240)
—
1,765
(29)
(82,964)
(428)
2,932
3,623
6,555 $
65,472
(18,762)
362
37,402
1,410
7,746
—
2,335
—
(1,062)
(16,828)
74,379
(32,080)
538
(36,385)
—
(7,566)
—
—
(600)
(76,093)
389,200
(432,200)
(6,250)
—
—
(4,903)
(872)
—
(9,278)
(6,479)
79,131
(7,869)
(3)
1,986
(672)
1,791
(385)
(308)
3,931
3,623
See accompanying notes to consolidated financial statements.
F-8
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2014
Net income (loss)
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($ 0.08 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Redemption of common shares to exercise stock
options
Tax benefit resulting from exercise of certain stock-
based compensation awards
Restricted stock awards
Initial Public Offering (IPO)
Purchase of common stock
ESOP distributions in common stock
Adjustments to redeemable convertible preferred
stock fair value measurement
Adjustments to redeemable common stock fair
value measurement
Termination of redemption feature upon IPO
Adjustments to redeemable common stock
agreements
Balance March 31, 2015
F
-
9
Common Stock
Paid-In
Common Stock
in Treasury
Shares
Amount
Capital
Shares
Amount
Accumulated
Other
Comprehensive
Income
Retained
(Deficit)
109,934 $ 11,957 $
—
—
—
—
—
—
—
—
—
—
8,369 100,810 $ (448,439) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,830) $ (36,680) $
(7,827)
—
(534)
(4,270)
—
—
(8,691)
—
—
—
Non-
controlling
Interest in
Subsidiaries
Total ADS
Stockholders’
Equity
(471,623) $
(7,827)
(8,691)
(534)
(4,270)
—
Total
Stockholders’
Equity
(453,039)
(3,696)
(11,928)
(534)
(4,270)
(3,065)
18,584 $
4,131
(3,237)
—
—
(3,065)
—
—
—
—
—
—
3,003
—
8,491
—
—
(235)
—
—
1,048
—
—
—
—
(127)
—
3,003
(127)
9,539
—
—
—
3,003
(127)
9,539
—
—
93
7
(93)
—
—
—
—
—
—
—
5,289
—
—
—
—
53
—
—
(4)
5,856
72,143
—
4,454
—
(167)
—
—
(377)
—
743
—
(3)
1,679
—
—
—
—
—
—
—
—
—
—
(4)
6,599
72,196
(3)
6,133
—
—
—
—
—
(4)
6,599
72,196
(3)
6,133
—
—
(13,077)
—
—
—
2,023
(11,054)
—
(11,054)
—
38,320
—
—
383 614,657
—
—
—
—
—
—
(65,921)
—
(65,921)
615,040
—
—
(65,921)
615,040
17
—
153,560 $ 12,393 $ 723,495 100,038 $ (445,065) $
19,510
—
—
—
(1,254)
(15,521) $ (114,590) $
18,256
160,712 $
—
16,413 $
18,256
177,125
See accompanying notes to consolidated financial statements.
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2014
Net income (loss)
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($ 0.08 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Redemption of common shares to exercise stock options
Tax benefit resulting from exercise of
certain stock-based compensation awards
Restricted stock awards
Initial Public Offering (IPO)
Purchase of common stock
ESOP distributions in common stock
Adjustments to redeemable convertible
preferred stock fair value measurement
Adjustments to redeemable common stock
fair value measurement
Termination of redemption feature upon IPO
Adjustments to redeemable common stock agreements
Balance March 31, 2015
F
-
1
0
Redeemable
Common Stock
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
Shares
Amount
Reedemable
Non-
Controlling
Interest in
Subsidiaries
Amount
$
38,337
—
—
—
—
—
549,359
—
—
—
—
—
$
26,129
—
—
—
—
—
291,720
—
—
—
—
—
17,727
—
—
—
—
—
$
(197,888)
—
—
—
—
—
—
—
—
—
—
—
(38,320)
(17)
—
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(490)
—
—
—
—
—
—
—
—
(6,133)
—
34,903
(731)
(6)
—
—
—
—
—
—
—
—
65,921
(615,040)
(240)
—
—
—
—
25,639
$
—
—
—
320,490
—
—
—
16,990
$
(212,469)
See accompanying notes to consolidated financial statements.
$
Total
Mezzanine
Equity
643,191
—
—
—
—
—
9,141
127
—
—
—
—
—
—
(6,133)
11,054
65,921
(615,040)
(240)
108,021
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,141
127
—
—
—
—
—
—
—
(23,849)
—
—
—
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2015
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($ 0.20 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Tax benefit resulting from exercise of
certain stock-based compensation awards
ESOP distributions in common stock
Acquisition of redeemable noncontrolling interest
Accretion of redeemable noncontrolling interest
Balance March 31, 2016
F
-
1
1
Common Stock
Paid-In
Common Stock
in Treasury
Shares
Amount
Capital
Shares
Amount
Accumulated
Other
Comprehensive
Income
Retained
(Deficit)
Total ADS
Stockholders’
Equity
Non-
controlling
Interest in
Subsidiaries
Total
Stockholders’
Equity
153,560 $ 12,393 $ 723,495 100,038 $ (445,065) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(15,521) $ (114,590) $
25,052
—
(1,293)
(10,815)
—
—
(5,740)
—
—
—
160,712 $
25,052
(5,740)
(1,293)
(10,815)
—
16,413 $
5,080
(2,854)
—
—
(3,606)
177,125
30,132
(8,594)
(1,293)
(10,815)
(3,606)
—
—
—
—
—
—
—
—
3,577
—
4,379
582
—
—
(215)
(69)
—
—
954
309
—
—
—
—
—
(132)
—
—
3,577
(132)
5,333
891
—
—
—
—
3,577
(132)
5,333
891
—
—
—
—
194
7,443
—
(573)
153,560 $ 12,393 $ 739,097
—
—
—
—
—
(631)
—
—
—
2,807
—
—
99,123 $ (440,995) $
—
—
—
—
—
—
—
—
(21,261) $ (101,778) $
194
10,250
—
(573)
187,456 $
—
—
—
—
15,033 $
194
10,250
—
(573)
202,489
See accompanying notes to consolidated financial statements.
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2015
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($ 0.20 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Tax benefit resulting from exercise of certain
stock-based compensation awards
ESOP distributions in common stock
Acquisition of redeemable noncontrolling interest
Accretion of redeemable noncontrolling interest
Balance March 31, 2016
F
-
1
2
Redeemable
Common Stock
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
Shares
Amount
Reedemable
Non-
Controlling
Interest
in
Subsidiaries
Amount
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
25,639
—
—
—
—
—
320,490
—
—
—
—
—
—
—
—
—
—
(820)
—
—
24,819
$
—
—
—
—
—
(10,250)
—
—
310,240
$
16,990
—
—
—
—
—
(212,469) $
—
—
—
—
—
$
—
435
—
—
—
(526)
(534)
(8)
—
—
6,673
132
—
—
—
—
—
—
16,448
$
—
—
—
—
(205,664) $
—
—
—
—
—
—
6,330
932
7,171
$
Total
Mezzanine
Equity
108,021
435
—
—
—
(526)
6,673
132
—
—
—
(10,250)
6,330
932
111,747
See accompanying notes to consolidated financial statements.
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2016
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($ 0.24 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Equity classified stock-based compensation
expense before related tax effects
Tax benefit resulting from exercise of
certain stock-based compensation awards
Reclassification of liability-classified awards
ESOP distributions in common stock
Acquisition of redeemable noncontrolling interest
Accretion of redeemable noncontrolling interest
Balance March 31, 2017
F
-
1
3
Common Stock
Paid-In
Shares
Amount
Capital
153,560 $ 12,393 $ 739,097
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Common Stock
in Treasury
Shares
Amount
99,123 $ (440,995) $
—
—
—
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
Income
Retained
(Deficit)
Total ADS
Stockholders’
Equity
Non-
controlling
Interest in
Subsidiaries
Total
Stockholders’
Equity
(21,261) $ (101,778) $
32,950
—
(1,512)
(13,204)
—
—
(3,554)
—
—
—
187,456 $
32,950
(3,554)
(1,512)
(13,204)
—
15,033 $
2,236
(1,483)
—
—
(879)
202,489
35,186
(5,037)
(1,512)
(13,204)
(879)
—
—
—
—
—
—
—
—
2,254
—
6,571
2,926
—
—
(358)
(86)
—
—
1,595
383
—
—
—
—
—
(134)
—
—
2,254
(134)
8,166
3,309
—
—
—
—
2,254
(134)
8,166
3,309
—
—
139
—
—
—
—
139
—
139
—
—
—
—
—
439
220
5,393
—
(1,252)
153,560 $ 12,393 $ 755,787
—
—
—
—
—
—
—
(457)
—
—
—
—
2,033
—
—
98,222 $ (436,984) $
—
—
—
—
—
—
—
—
—
—
(24,815) $ (83,678) $
439
220
7,426
—
(1,252)
222,703 $
—
—
—
—
—
14,907 $
439
220
7,426
—
(1,252)
237,610
See accompanying notes to consolidated financial statements.
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2016
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($ 0.24 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Tax benefit resulting from exercise of certain
stock-based compensation awards
ESOP distributions in common stock
Acquisition of redeemable noncontrolling interest
Accretion of redeemable noncontrolling interest
Balance March 31, 2017
F
-
1
4
Redeemable
Common Stock
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
Shares
Amount
Reedemable
Non-
Controlling
Interest
in
Subsidiaries
Amount
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
24,819
—
—
—
—
—
310,240
—
—
—
—
—
$
16,448
—
—
—
—
—
(205,664) $
—
—
—
—
—
$
7,171
722
—
—
—
(1,226)
—
—
—
—
—
—
—
—
(585)
—
—
—
7,314
134
—
—
—
(594)
—
—
24,225
$
—
(7,426)
—
—
302,814
—
—
—
—
15,863
$
—
—
—
—
(198,216) $
—
—
—
—
—
—
—
1,560
8,227
$
Total
Mezzanine
Equity
111,747
722
—
—
—
(1,226)
7,314
134
—
—
—
(7,426)
—
1,560
112,825
See accompanying notes to consolidated financial statements.
Advanced Drainage Systems, Inc.
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Advanced Drainage Systems, Inc. and subsidiaries (collectively referred to as
“ADS” and the “Company”), incorporated in Delaware, designs, manufactures and markets high performance
thermoplastic corrugated pipe and related water management products, primarily in North and South America
and Europe. ADS’s broad product line includes corrugated high density polyethylene (or “HDPE”) pipe,
polypropylene (or “PP”) pipe and related water management products.
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, references to
“year” pertain to our fiscal year. For example, 2017 refers to fiscal 2017, which is the period from April 1,
2016 to March 31, 2017.
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, the Company executed a
4.707-for-one split of its common and its preferred stock. The effect of the stock split on outstanding shares
and earnings per share has been retroactively applied to all prior periods presented.
On July 25, 2014, ADS completed the IPO of its common stock, which resulted in the sale by the Company of
5.3 million shares of common stock. ADS received total proceeds from the IPO of $79.1 million after
excluding underwriter discounts and commissions of $5.5 million, based upon the price to the public of
$16.00 per share. After deducting other offering expenses of $6.9 million, the Company used the net proceeds
of $72.2 million to reduce the outstanding indebtedness under the revolving portion of its credit facility. The
common stock is listed on the New York Stock Exchange under the symbol “WMS.”
On August 22, 2014, an additional 0.6 million shares of common stock were sold by certain selling
stockholders of the Company as a result of the partial exercise by the underwriters of the over-allotment
option granted by the selling stockholders to the underwriters in connection with the IPO. The shares were
sold at the public offering price of $16.00 per share. The Company did not receive any proceeds from the sale
of such additional shares.
2014 Secondary Public Offering (“Secondary Public Offering”) - On December 9, 2014, the Company
completed a Secondary Public Offering of common stock, which resulted in the sale of 10.0 million shares of
common stock by a certain selling stockholder of the Company at a public offering price of $21.25 per share.
The Company did not receive any proceeds from the sale of shares by the selling stockholder.
On December 15, 2014, an additional 1.5 million shares of common stock were sold by a certain selling
stockholder of the Company as a result of the full exercise by the underwriters of the over-allotment option
granted by the selling stockholder to the underwriters in connection with the Secondary Public Offering. The
shares were sold at the public offering price of $21.25 per share. The Company did not receive any proceeds
from the sale of such additional shares.
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Advanced Drainage Systems, Inc.
Principles of Consolidation - The consolidated financial statements include the Company, its wholly owned
subsidiaries, its majority owned subsidiaries, and variable interest entities (“VIEs”) of which the Company is
the primary beneficiary. The Company uses the equity method of accounting for equity investments where it
exercises significant influence but does not hold a controlling financial interest. Such investments are recorded
in Other assets in the Consolidated Balance Sheets and the related equity in earnings from these investments
are included in Equity in net loss of unconsolidated affiliates in the Consolidated Statements of Operations.
All intercompany balances and transactions have been eliminated in consolidation.
Estimates - The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies and
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, the allowance for doubtful accounts, valuation of
inventory, useful lives of property, plant and equipment and amortizing intangible assets, determination of the
proper accounting for leases, valuation of equity method investments, goodwill, intangible assets and other
long-lived assets for impairment, accounting for stock-based compensation and the ESOP, valuation of the
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.
Receivables and Allowance for Doubtful Accounts - Receivables include trade receivables, refundable
income taxes and other miscellaneous receivables, net of an allowance for doubtful accounts. Receivables at
March 31, 2017 and 2016 are as follows:
(Amounts in thousands)
Trade receivables
Refundable income taxes
Other miscellaneous receivables
Receivables
2017
160,655 $
1,468
6,820
168,943 $
2016
158,664
19,783
8,436
186,883
$
$
Credit is extended to customers based on an evaluation of their financial condition and collateral is generally
not required. The evaluation of the customer’s financial condition is performed to reduce the risk of loss.
Accounts receivable are evaluated for collectability based on numerous factors, including the length of time
individual receivables are past due, past transaction history with customers, their credit worthiness and the
economic environment. This estimate is periodically adjusted when management becomes aware of a specific
customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in
historical collection patterns.
Inventories - Inventories are stated at the lower of cost or market value. The Company’s inventories are
maintained on the first-in, first-out (“FIFO”) method. Costs include the cost of acquiring materials, including
in-bound freight from vendors and freight incurred for the transportation of raw materials, tooling or finished
goods between the Company’s manufacturing plants and its distribution centers, direct and indirect labor,
factory overhead and certain corporate overhead costs related to the production of inventory. The portion of
fixed manufacturing overhead that relates to capacity in excess of our normal capacity is expensed in the
period in which it is incurred and is not included in inventory. Market value of inventory is established based
on the lower of cost or estimated net realizable value, with consideration given to deterioration, obsolescence,
and other factors. The Company periodically evaluates the carrying value of inventories and adjustments are
made whenever necessary to reduce the carrying value to net realizable value.
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Advanced Drainage Systems, Inc.
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:
Buildings
Machinery and equipment
Leasehold improvements
Years
40 — 45
3 — 18
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 on disposal of assets and costs from exit and disposal activities in our 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 $0.6
million, $0.4 million, and $0.5 million during the fiscal years ended March 31, 2017, 2016, and 2015,
respectively.
Goodwill - The Company records acquisitions resulting in the consolidation of an enterprise using the
acquisition method of accounting. Under this method, the Company records the assets acquired, including
intangible assets that can be identified, and liabilities assumed based on their estimated fair values at the date
of acquisition. The purchase price in excess of the fair value of the identifiable assets acquired and liabilities
assumed is recorded as goodwill.
Goodwill is reviewed annually for impairment as of March 31 or whenever events or changes in
circumstances indicate the carrying value may be greater than fair value. The goodwill impairment analysis is
comprised of two steps. The first step requires the comparison of the fair value of the applicable reporting unit
to its respective carrying value. If the fair value of the reporting unit exceeds the carrying value of the net
assets assigned to that unit, goodwill is not considered impaired and the Company is not required to perform
further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the
reporting unit, then the Company must perform the second step of the impairment test in order to determine
the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill
exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
With respect to this testing, a reporting unit is a component of the Company for which discrete financial
information is available and regularly reviewed by management. Implied fair value of goodwill is determined
by considering both the income and market approach. Determining the fair value of a reporting unit is
judgmental in nature and involves the use of significant estimates and assumptions. These estimates and
assumptions include revenue growth rates and operating margins used to calculate projected future cash flows,
risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market
comparables. The fair value estimates are based on assumptions management believes to be reasonable, but
are inherently uncertain. For the fiscal 2017, ADS completed a quantitative fair value assessment of the
International reporting unit and determined no impairment charge was required.
GAAP allows entities testing goodwill for impairment the option of performing a qualitative assessment
before calculating the fair value of a reporting unit for the goodwill impairment test. If the qualitative
assessment is performed, an entity is no longer required to calculate the fair value of a reporting unit unless
the entity determines that, based on that assessment, it is more likely than not that its fair value is less than its
carrying amount. ADS completed a quantitative fair value measurement of the Domestic reporting unit in
March 31, 2016. The test indicated that the fair value of the Domestic reporting unit exceeded the carrying
value, indicating that no impairment existed. ADS applied the qualitative assessment to the Domestic
reporting unit for the annual impairment test performed as of March 31, 2017. For the current year test, ADS
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Advanced Drainage Systems, Inc.
assessed various assumptions, events and circumstances that would have affected the estimated fair value of
the reporting unit as compared to its March 31, 2016 quantitative fair value measurement. The results of this
assessment indicated that it is not more likely than not that the reporting unit fair value is less than the
reporting unit carrying value. The Company did not incur any impairment charges for goodwill in the fiscal
years ended March 31, 2017, 2016, and 2015.
Intangible Assets
Intangible Assets — Definite-Lived- Definite-lived intangible assets are amortized using the straight-line
method over their estimated useful lives, and are tested for recoverability whenever events or changes in
circumstances indicate that carrying amounts of the asset group may not be recoverable. Asset groups are
established primarily by determining the lowest level of cash flows available. If the estimated undiscounted
future cash flows are less than the carrying amounts of such assets, an impairment loss is recognized to the
extent the fair value of the asset less any costs of disposition is less than the carrying amount of the asset.
Determining the fair value of these assets is judgmental in nature and involves the use of significant estimates
and assumptions.
Intangible Assets — Indefinite-Lived- 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. Determining the fair value of these assets is judgmental in nature and involves the use of significant
estimates and assumptions. The Company bases its fair value estimates on assumptions it believes to be
reasonable, but that are inherently uncertain. To estimate the fair value of these indefinite-lived intangible
assets, the Company uses an income approach, which utilizes a market derived rate of return to discount
anticipated performance. An impairment loss is recognized when the estimated fair value of the intangible
asset is less than the carrying value.
GAAP allows entities testing indefinite-lived intangible assets for impairment the option of performing a
qualitative assessment before calculating the fair value of the indefinite-lived intangible assets for the
impairment test. If the qualitative assessment is performed, an entity is no longer required to calculate the fair
value of an indefinite-lived intangible assets unless the entity determines that, based on that assessment, it is
more likely than not that its fair value is less than its carrying amount. ADS completed a quantitative fair
value measurement of indefinite-lived trademarks in March 31, 2016. The test indicated that the fair value of
the indefinite-lived trademarks substantially exceeded the carrying value, indicating that no impairment
existed.
ADS applied the qualitative assessment to specific trademarks for the annual impairment test performed as of
March 31, 2017. For the current year test, ADS assessed various assumptions, events and circumstances that
would have affected the estimated fair value of the reporting unit as compared to its March 31, 2016
quantitative fair value measurement. The results of this assessment indicated that it is not more likely than not
that the trademarks fair value is less than the reporting unit carrying value. The Company did not incur any
impairment charges for Intangible assets in the fiscal years ended March 31, 2017, 2016, and 2015.
Other Assets - Other assets include investments in unconsolidated affiliates accounted for under the equity
method, cash surrender value of officer life insurance on key senior management executives, capitalized
software development costs, deposits, Central parts, and other miscellaneous assets. The Company capitalizes
development costs for internal use software. Capitalization of software development costs begins in the
application development stage and ends when the asset is placed into service. The Company amortizes such
costs using the straight-line method over estimated useful lives of 2 to 10 years, which is included in General
and administrative expense, Selling expense or Cost of goods sold within the Consolidated Statements of
Operations depending on the nature of the asset and its intended use. Central parts represent spare production
equipment items which are used to replace worn or broken production equipment parts and help reduce the
risk of prolonged equipment outages. The cost of Central parts is amortized on a straight line basis over
estimated useful lives of 8 to 30 years.
The Company evaluates its investments in unconsolidated affiliates for impairment whenever events or
changes in circumstances indicate that the carrying amount might not be recoverable, and recognizes an
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Advanced Drainage Systems, Inc.
impairment loss when a decline in value below carrying value is determined to be other-than-temporary.
Under these circumstances, the Company would adjust the investment down to its estimated fair value, which
then becomes its new carrying value. For the fiscal years ended March 31, 2017 and 2016, the Company
recorded an impairment charge of $1.3 million and $4.0 million, respectively, related to its investment in the
South American Joint Venture. The impairment charge is included in Equity in net loss of unconsolidated
affiliates in the Consolidated Statements of Operations. See Note 10. Investment in Unconsolidated Affiliates.
Other assets as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Investments in unconsolidated affiliates
Cash surrender value of officer life insurance
Capitalized software development costs, net
Deposits
Central parts
Other
Total other assets
2017
2016
$
$
8,986 $
12,028
7,980
1,289
1,856
14,398
46,537 $
13,188
10,739
7,264
1,319
1,040
11,706
45,256
The following table sets forth amortization expense related to Other assets in each of the fiscal years ended
March 31:
(Amounts in thousands)
Capitalized software development costs
Central parts
Other
$
2017
2016
2015
3,372 $
54
1,689
3,872 $
362
1,898
3,550
55
1,977
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, the Company records 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, the Company
records rent expense over the lease term using the straight-line method.
Foreign Currency Translation - Assets and liabilities of foreign subsidiaries with a functional currency other
than the U.S. dollar are translated into U.S. dollars at the current rate of exchange on the last day of the
reporting period. Revenues and expenses are translated at a monthly average exchange rate and equity
transactions are translated using either the actual exchange rate on the day of the transaction or a monthly
average historical exchange rate. For the fiscal years ended March 31, 2017, 2016, and 2015, the Company’s
Accumulated other comprehensive loss (“AOCL”) consisted entirely of foreign currency translation gains and
losses.
Net Sales - The Company sells pipe products and related water management products. ADS ships products to
customers predominantly by internal fleet and to a lesser extent by third-party carriers. The Company does not
provide any additional revenue generating services after product delivery.
Sales, net of sales tax and allowances for returns, rebates and discounts are recognized from product sales
when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or
determinable and collectability is reasonably assured. ADS recognizes revenue when both persuasive
evidence of an arrangement and the price is fixed or determinable. Title to the products and risk of loss
generally passes to the customer upon delivery. ADS performs credit check procedures on all new
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Advanced Drainage Systems, Inc.
customers, establishes credit limits accordingly, and monitors the creditworthiness of existing customers,
which is the basis for concluding that collectability is reasonably assured.
Shipping Costs - Shipping costs are incurred to physically move raw materials, tooling and products between
manufacturing and distribution facilities and from production or distribution facilities to customers. Shipping
costs for the fiscal years ended March 31, 2017, 2016, and 2015 were $120.4 million, $120.5 million, and
$121.0 million, respectively, and are included in Cost of goods sold. In certain instances, the Company bills
shipping costs to customers. Shipping costs billed to customers were $5.5 million, $7.0 million, and $9.3
million during 2017, 2016 and 2015, respectively, and are included in Net sales.
Stock-Based Compensation - See Note 18. Stock-Based Compensation for information about our stock-based
compensation award programs and related accounting policies.
Advertising - The Company expenses advertising costs as incurred. Advertising costs are recorded in Selling
expenses in the Consolidated Statements of Operations. The total advertising costs were $3.1 million, $3.2
million, and $2.5 million for the fiscal years ended March 31, 2017, 2016, and 2015, respectively.
Self-Insurance - The Company is self-insured for short term disability and medical coverage it provides for
substantially all eligible employees. The Company is self-insured for medical claims up to the individual and
aggregate stop-loss coverage limits. The Company accrues for claims incurred but not reported based on an
estimate of future claims related to events that occurred prior to the fiscal year end if it has not met the
aggregate stop-loss coverage limit. Amounts expensed totaled $39.5 million, $37.5 million, and $32.0 million
for the fiscal years ended March 31, 2017, 2016, and 2015, respectively, of which employees contributed $5.1
million, $4.5 million, and $4.1 million, respectively.
ADS is also self-insured for various other general insurance programs to the extent of the applicable
deductible limits on the Company’s insurance coverage. These programs include primarily automobile,
general liability and employment practices coverage with deductibles ranging from $0.3 million to $0.5
million per occurrence or claim incurred. Amounts expensed during the period, including an estimate for
claims incurred but not reported at year end, were $1.8 million, $2.1 million, and $0.6 million, for the years
ended March 31, 2017, 2016, and 2015, respectively.
ADS is also self-insured for workers’ compensation insurance with stop-loss coverage for claims that exceed
$0.3 million per incident up to the respective state statutory limits. Amounts expensed, including an estimate
for claims incurred but not reported, were $2.1 million, $3.9 million, and $1.4 million for the fiscal years
ended March 31, 2017, 2016, and 2015, respectively.
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized and represent the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. They are
measured using the enacted tax rates expected to apply to taxable income in the years in which the related
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. The deferred
income tax provision represents the change during the reporting period in the deferred tax assets and deferred
tax liabilities. Penalties and interest recorded on income taxes payable are recorded as part of Income tax
expense.
The Company determines whether an uncertain tax position is more likely than not to be sustained upon
examination, including resolution of any related appeals or litigation process, based upon the technical merits
of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the
financial statements is the largest amount of tax benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement with the relevant taxing authority.
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Advanced Drainage Systems, Inc.
Fair Values -The fair value framework requires the categorization of assets and liabilities into three levels
based upon assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable
measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels
are defined as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 — Observable inputs other than those included in Level 1. For example, quoted prices for
similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive
markets.
Level 3 — Unobservable inputs reflecting management’s own assumptions about the inputs used in
pricing the asset or liability.
ADS’s policy for determining when transfers between levels have occurred is to use the actual date of the
event or change in circumstances that caused the transfer.
Concentrations of Risk - The Company has a large, active customer base of approximately twenty thousand
customers with two customers, Ferguson Enterprises and HD Supply Waterworks, each representing more
than 10% of annual net sales. Such customers accounted for 23.5%, 21.1%, and 20.3% of fiscal year 2017,
2016 and 2015 net sales, respectively. The Company’s customer base is diversified across the range of end
markets that it serves.
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally
of Receivables. The Company provides its 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. The Company performs ongoing credit evaluations of its
customers. The Company monitors the exposure for credit losses and maintains allowances for anticipated
losses. Concentrations of credit risk with respect to Receivables are limited due to the large number of
customers comprising the Company’s customer base and their dispersion across many different geographies.
One customer, Ferguson Enterprises, accounted for approximately 15.7% and 14.0% of Receivables at
March 31, 2017 and 2016, respectively.
Derivatives - The Company recognizes derivative instruments as either assets or liabilities and measure those
instruments at fair value. ADS uses interest rate swaps, commodity options in the form of collars and swaps,
and foreign currency forward contracts to manage various exposures to interest rate, commodity price, and
exchange rate fluctuations. These instruments do not qualify for hedge accounting treatment and therefore,
gains and losses from contract settlements and changes in fair value of the derivative instruments are
recognized in Derivative losses (gains) and other expense (income), net in the Consolidated Statements of
Operations. The Company’s policy is to present all derivative balances on a gross basis.
The Company also has forward purchase agreements in place with certain resin suppliers for virgin
polyethylene resin. The agreements specify a fixed amount of virgin resin material to be purchased at a fixed
price for a given period of time in quantities the Company will use in the normal course of business, and
therefore, are not subject to the guidance provided in Accounting Standards Codification (“ASC”) 810-15
Consolidation. The cost of such resin is recognized in Cost of goods sold in the Consolidated Statements of
Operations.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Consolidation — In February 2015, the Financial Accounting Standards Board (“FASB”) issued an
accounting standards update to make changes to consolidation guidance to address concerns of stakeholders
that current accounting for certain legal entities might require a reporting entity to consolidate another legal
entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily
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Advanced Drainage Systems, Inc.
on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the
reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. This update
is effective for annual periods beginning on or after December 15, 2015, and interim periods within those
years, with early adoption permitted. The Company adopted this standard effective April 1, 2016. The update
has had no effect on the consolidated financial statements.
Debt Issuance Costs — In April 2015, the FASB issued an accounting standards update that requires debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures
will include the face amount of the debt liability and the effective interest rate. The update requires
retrospective application and represents a change in accounting principle. In August 2015, the FASB issued an
additional accounting standards update that provided supplemental guidance that the SEC would not object to
an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any
outstanding borrowings on the line-of-credit arrangement. These updates are effective for annual periods
beginning after December 15, 2015, and interim periods within those years. Early adoption is permitted for
financial statements that have not been previously issued. The Company adopted this standard effective
April 1, 2016 on a retrospective basis. See Note 12. Debt for additional information about the impact of the
adoption of the updates.
Deferred Tax Assets and Liabilities — In November 2015, the FASB issued an accounting standards update
which requires entities to classify all deferred tax assets and liabilities, as well as any related valuation
allowance, as non-current, rather than separately record the current and non-current portions. This update is
effective for annual periods beginning on or after December 15, 2016, and interim periods within those years,
with early adoption permitted. The amendments in this update may be applied either prospectively to all
deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this
standard on April 1, 2016 on a prospective basis and prior periods have not been adjusted. The impact of the
adoption of this standard was a reduction to the net current deferred tax assets balance included in Deferred
income taxes and other current assets on the Consolidated Balance Sheets from $11.7 million as of March 31,
2016 to zero as of March 31, 2017, with all deferred tax assets and liabilities as of March 31, 2017 now being
classified as non-current. The update had no effect on the Company’s Consolidated Statements of Operations,
Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Cash Flows and
Consolidated Statements of Stockholders’ Equity and Mezzanine Equity.
Internal-Use Software – In April 2017 the FASB issued an accounting standards update to provide guidance to
customers concerning whether a cloud computing arrangement includes a software license. Under this new
standard, 1) if a cloud computing arrangement includes a software license, the software license element of the
arrangement should be accounted for in a manner consistent with the acquisition of other software licenses, or
2) if the arrangement does not include a software license, the arrangement should be accounted for as a service
contract. The standard will take effect for public companies for annual reporting periods beginning after
December 15, 2015, including interim reporting periods. The Company adopted the new standard on April 1,
2016 on a prospective basis. The update did not have a material impact on the consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
Revenue Recognition — In May 2014, the FASB 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 obligations and recognizing the revenue upon
satisfaction of performance obligations. In August 2015, the FASB issued an additional accounting standards
update that deferred the effective date of the new revenue standard for public entities to periods beginning
after December 15, 2017, with early adoption permitted but not earlier than the original effective date of
periods beginning after December 15, 2016. There have also been various additional accounting standards
updates issued by the FASB in 2016 that further amend this new revenue standard. The updated standard
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Advanced Drainage Systems, Inc.
permits the use of either the retrospective or cumulative effect transition method. The Company expects to
adopt this standard effective April 1, 2018. The Company has not yet selected a transition method and is
currently evaluating the impact of this amendment on the consolidated financial statements.
Measurement of Inventory — In July 2015, the FASB issued an accounting standards update which requires
entities to measure most inventory at the lower of cost and net realizable value, simplifying current guidance
under which an entity must measure inventory at the lower of cost or market. The determination of market
value, under current guidance, is considered unnecessarily complex as there are several potential outcomes
based on its definition as replacement cost, net realizable value, or net realizable value less an approximate
normal profit margin. Whereas net realizable value, under the update, is the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This
update is effective for annual periods beginning on or after December 15, 2016, and interim periods within
those years, with early adoption permitted. The Company expects to adopt this standard effective April 1,
2017. The Company does not expect the adoption of this new standard to have a material impact on the
consolidated financial statements.
Leases — In February 2016, the FASB issued an accounting standards update which amends the guidance for
leases. This amendment contains principles that will require an entity to recognize most leases on the balance
sheet by recording a right-of-use asset and a lease liability, unless the lease is a short-term lease that has an
accounting lease term of twelve months or less. The amendment also contains other changes to the current
lease guidance that may result in changes to how entities determine which contractual arrangements qualify as
a lease, the accounting for executory costs such as property taxes and insurance, as well as which lease
origination costs will be capitalizable. The new standard also requires expanded quantitative and qualitative
disclosures. This update is effective for fiscal years beginning after December 15, 2018, including interim
periods within those years, and early adoption is permitted. The updated standard requires the use of the
modified retrospective transition method, whereby the new guidance will be applied at the beginning of the
earliest period presented in the financial statements of the period of adoption. The modified retrospective
transition approach includes certain practical expedients that entities may elect to apply in transition. The
Company expects to adopt this standard effective April 1, 2019. The Company has not yet determined whether
to apply any of the available practical expedients. The Company has begun the process of reviewing contracts
under the new standard to determine the impact the new standard will have on the consolidated financial
statements. The Company is also in process of implementing a new software solution to improve the process
of accounting for leases under the current and new standard.
Stock-Based Compensation — In March 2016, the FASB issued an accounting standards update which is
intended to simplify certain aspects of the accounting for stock-based compensation. The Company will adopt
the standard on April 1, 2017. This update contains changes to the accounting for excess tax benefits, whereby
excess tax benefits will be recognized in the income statement rather than in additional paid-in capital on the
balance sheet. This standard is expected to result in increased volatility to the income tax expense in future
periods dependent upon the timing of employee exercises of stock options, the price of the Company's
common stock and the vesting of restricted stock awards. Excess tax benefits will now be classified as
operating cash flows rather than financing cash flows.
The amendment also contains potential changes to the accounting for forfeitures, whereby entities can elect to
either continue to apply the current GAAP requirement to estimate forfeitures when determining
compensation expense, or to alternatively reverse the compensation expense of forfeited awards when they
occur. The Company will account for forfeitures as they occur, which may result in expense volatility based
on the timing of forfeitures.
In addition, the amendment also modifies the net-share settlement liability classification exception for statutory
income tax withholdings, whereby the new guidance allows an employer with a statutory income tax withholding
obligation to withhold shares with a fair value up to the maximum statutory tax rate in the employee’s applicable
jurisdiction. The Company included this provision in awards issued in fiscal 2017 and modified previously issued
awards on April 1, 2017. See the note regarding Subsequent Events for further information on the modification.
F-23
Advanced Drainage Systems, Inc.
Measurement of Credit Losses — In June 2016, the FASB issued an accounting standards update which
provides amended guidance on the measurement of credit losses on financial instruments, including trade
receivables. This accounting standards update requires the use of an impairment model referred to as the
current expected credit loss model. This update is effective for fiscal years beginning after December 15,
2019, including interim periods within those years, and early adoption is permitted for fiscal years beginning
after December 15, 2018. The Company expects to adopt this standard effective April 1, 2020. The Company
is currently evaluating the impact of this standard on the consolidated financial statements.
Cash Flow Classification — In August 2016, the FASB issued an accounting standards update which provides
amended guidance on the classification of certain cash receipts and cash payments in the statement of cash
flows, including related to debt prepayment or debt extinguishment costs, contingent consideration payments
made after a business combination, proceeds from the settlement of insurance claims, proceeds from the
settlement of corporate-owned life insurance and distributions received from equity method investees. This
update is effective for fiscal years beginning after December 15, 2017, including interim periods within those
years, and early adoption is permitted. This amended guidance must be applied retrospectively to all periods
presented, but may be applied prospectively if retrospective application would be impracticable. The
Company expects to adopt this standard effective April 1, 2018. The Company is currently evaluating the
impact of this standard on the consolidated financial statements.
Definition of a Business – In January 2017, the FASB issued an accounting standards update to clarify the
definition of a business. The definition of a business affects many areas of accounting including acquisitions,
disposals, goodwill, and consolidation. The amendments are intended to help companies and other
organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or
businesses. The amendments provide a more robust framework to use in determining when a set of assets and
activities is a business. The amendments are effective for annual periods beginning after December 15, 2017,
including interim periods within those periods. The Company expects to adopt this standard effective April 1,
2018. The Company is currently evaluating the impact of this standard on the consolidated financial
statements.
Goodwill Impairment – In January 2017, the FASB issued an accounting standards update which removes the
requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the
goodwill impairment test. As a result, under the standards update, an entity should perform its annual, or
interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. The amendments are effect for annual periods beginning after December 15, 2019. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. The Company expects to adopt this standard effective April 1, 2020. The Company is currently
evaluating the impact of this standard on the consolidated financial statements.
With the exception of pronouncements described above, there have been no new accounting pronouncements
that have significance, or potential significance, to our consolidated financial statements.
2.
LOSS ON DISPOSAL OF ASSETS AND COSTS FROM EXIT AND DISPOSAL ACTIVITIES
Periodically, the Company will dispose of equipment, including equipment accounted for as capital leases.
The net loss on the disposition of the equipment was $8.5 million, $0.8 million, and $1.1 million during the
fiscal 2017, 2016 and 2015, respectively.
The Company recorded expenses related to three manufacturing facilities that were closed during fiscal 2017
of approximately $3.5 million. In addition, the Company accelerated depreciation of specifically identified
obsolete assets of approximately $3.0 million, and recorded $2.0 million of disposals and partial disposals of
fixed assets.
In the fourth quarter of fiscal 2015, the Company completed the sale of product-related intellectual property
rights that were not significant. The sales price was $0.8 million, consisting of a cash payment of $0.2 million
F-24
Advanced Drainage Systems, Inc.
plus other consideration in the form of a note receivable for $0.6 million. The sale did not involve any tangible
assets, and the related intellectual property rights had no net book value, resulting in a net gain recognized of
$0.8 million.
3.
ACQUISITIONS
Fiscal 2017 Acquisition of Plastic Tubing Industries
On February 6, 2017, ADS acquired Plastic Tubing Industries (“PTI”), a manufacturer of HDPE pipe and
related accessories. With the acquisition, ADS will increase its manufacturing footprint in Georgia and Texas,
while adding production capacity to the existing ADS manufacturing facilities in Florida, to better serve
growing demand in the region. The purchase price of PTI was $9.5 million, financed through the existing line
of credit facility. At the time of acquisition, $8.5 million was paid in cash; the remaining $1.0 million will be
paid on August 6, 2018. The results of operations of PTI are included in the Consolidated Statements of
Operations after February 6, 2017. The Net sales and Income before income taxes of PTI since the acquisition
date included in the Consolidated Statements of Operations for the fiscal year ended March 31, 2017 were
immaterial.
The fair value of the net assets acquired exceeded the purchase price. The difference was recognized as a gain
on bargain purchase in fiscal 2017. The purchase price allocation is as follows:
(Amounts in thousands)
Intangible assets
Inventory
Property, plant and equipment
Fair value of net assets acquired
Purchase price
Gain on bargain purchase
$
$
160
2,050
7,899
10,109
9,500
609
The acquired identifiable intangible assets represent trade name of $0.2 million (seven-year useful life). The
following table contains unaudited pro forma Consolidated Statements of Operations information assuming
the acquisition occurred on April 1, 2015 and includes adjustments for amortization of intangibles and
depreciation of fixed asset. This unaudited pro forma information is presented for illustrative purposes only
and is not indicative of what actual results would have been if the acquisition had taken place on April 1, 2015
or of future results. In addition, the unaudited pro forma consolidated results are not projections of future
results of operations of the combined company nor do they reflect the expected realization of any cost savings
or synergies associated with the acquisition.
(Amounts in thousands)
Net sales
Net income attributable to ADS
Proforma
2017
2016
$ 1,266,602 $ 1,302,120
25,100
33,634
Unaudited pro forma net income attributable to ADS for the fiscal years ended March 31, 2017 and 2016 has
been calculated after adjusting the combined results of the Company to reflect additional intangible asset
amortization expense, net of related income taxes, of less than $0.1 million, and depreciation expense, net of
related income taxes, of $0.6 million.
Fiscal 2016 Step Acquisition of BaySaver
On July 17, 2015, ADS Ventures, Inc. (“ADS/V”), a wholly-owned subsidiary of the Company, acquired an
additional 10% of the issued and outstanding membership interests in BaySaver, increasing the Company’s
total ownership interest in BaySaver to 65%, for a purchase price of $3.2 million, plus contingent
consideration with an initial estimated fair value of $0.8 million. Concurrent with the purchase of the
additional membership investment, the BaySaver joint venture agreement was amended to modify the
voting rights from an equal vote for each member to a vote based upon the ownership interest. As a result,
F-25
Advanced Drainage Systems, Inc.
the Company has accounted for this transaction as a business combination with BaySaver being
consolidated into the financial statements after July 17, 2015.
As the Company has accounted for the investment in BaySaver prior to the purchase of the 10% additional
membership interest under the equity method of accounting, the Company accounted for this business
combination as a step acquisition and recognized a loss of $0.5 million on remeasurement to fair value of the
previously held investment. The loss is included in Derivative losses and other expense, net in the
Consolidated Statements of Operations. The fair value of our BaySaver investment immediately before the
July 17, 2015 acquisition was measured based on a combination of the discounted cash flow and guideline
public company valuation methods and involves significant unobservable inputs (Level 3). These inputs
include projected sales, margin, required rate of return and tax rate for the discounted cash flow method, as
well as implied pricing multiples, and guideline public company group for the guideline public company
method.
The purchase price was determined as follows:
(Amounts in thousands)
Acquisition-date fair value of prior equity interest
Acquisition-date fair value of noncontrolling interest
Cash paid at acquisition date
Fair value of contingent consideration
Total purchase price
$
$
4,220
6,330
3,200
750
14,500
The purchase price has been allocated to the estimated fair values of acquired tangible and intangible assets,
assumed liabilities and goodwill. The fair value of identifiable intangible assets has been determined primarily
using the income approach, which involves significant unobservable inputs (Level 3 inputs). These inputs
include projected sales, margin, required rate of return and tax rate, as well as an estimated royalty rate in the
cases of the developed technology and trade name and trademark intangibles. The developed technology and
trade name and trademark intangibles are valued using a relief-from-royalty method.
Redeemable noncontrolling interest in subsidiaries is classified as mezzanine equity in the Consolidated
Balance Sheets due to a put option held by the joint venture partner, which may be exercised on or after
April 1, 2017. The redeemable noncontrolling interest balance will be accreted to the estimated redemption
value using the effective interest method until April 1, 2017.
The excess of the purchase price over the fair value of the net assets acquired of $2.5 million was allocated to
goodwill, assigned to the Domestic segment, and consists primarily of the acquired workforce and sales and
cost synergies the two companies anticipate realizing as a combined company. None of the goodwill is
deductible for tax purposes.
The purchase price allocation is as follows:
(Amounts in thousands)
Cash
Other current assets
Property, plant and equipment
Goodwill
Intangible assets
Other assets
Current liabilities
Total purchase price
$
$
12
2,262
164
2,495
10,800
152
(1,385)
14,500
F-26
Advanced Drainage Systems, Inc.
The acquired identifiable intangible assets represent customer relationships of $5.4 million, developed
technology of $4.0 million and trade name and trademark of $1.4 million, each of which have an estimated 10-
year useful life. Transaction costs were immaterial.
The net sales and income before income taxes of BaySaver since the acquisition date included in the
Consolidated Statements of Operations for the fiscal year ended March 31, 2016 were $10.2 million, and $1.2
million, respectively.
The following table contains unaudited pro forma Consolidated Statements of Operations information
assuming the acquisition occurred on April 1, 2014 and includes adjustments for amortization of intangibles,
interest expense and the prior equity method accounting for BaySaver. This unaudited pro forma information
is presented for illustrative purposes only and is not indicative of what actual results would have been if the
acquisition had taken place on April 1, 2014 or of future results. The unaudited pro forma consolidated results
are not projections of future results of operations of the combined company nor do they reflect the expected
realization of any cost savings or synergies associated with the acquisition.
(Amounts in thousands)
Net sales
Net income (loss) attributable to ADS
Proforma
2016
2015
$ 1,294,277 $ 1,190,749
(7,799)
25,090
Unaudited pro forma net income attributable to ADS has been calculated after adjusting the combined results
of the Company to reflect additional intangible asset amortization expense, net of related income taxes and
amounts related to the noncontrolling interest, of $0.1 million and $0.3 million, additional interest expense,
net of related income taxes and amounts related to the noncontrolling interest, of less than $0.1 million and
less than $0.1 million, and the impact of our prior equity method accounting of $0.1 million and $0.3 million,
net of related income taxes, for the year ended March 31, 2016 and 2015, respectively.
Fiscal 2015 Acquisition of Ideal Pipe
On January 30, 2015, Hancor of Canada, Inc., a wholly-owned subsidiary of the Company, acquired all issued
and outstanding shares of Ideal Drain Tile Limited and Wave Plastics Inc., the sole partners of Ideal Pipe
(together “Ideal Pipe”). Ideal Pipe designs, manufactures and markets high performance thermoplastic
corrugated pipe and related water management products used across a broad range of Canadian end markets
and applications, including nonresidential, residential, agriculture, and infrastructure applications. The
acquisition further strengthens the Company’s position in Canada by increasing its size and scale in the
market, as well as enhancing manufacturing, marketing and distribution capabilities. The purchase price of
Ideal Pipe was $43.8 million, financed through cash acquired and the existing line of credit facility. The
results of operations of Ideal Pipe are included in the Consolidated Statements of Operations after January 30,
2015. The Net sales and Income before income taxes of Ideal Pipe since the acquisition date included in the
Consolidated Statements of Operations for the fiscal year ended March 31, 2015 were immaterial.
The excess of the purchase price over the fair value of the net assets acquired of $10.7 million was allocated to
goodwill, assigned to the International segment, and consists primarily of the acquired workforce and
synergies the two companies anticipate realizing as a combined company. None of the goodwill is deductible
for tax purposes. The purchase price allocation is as follows:
(Amounts in thousands)
Cash
Other current assets
Property, plant and equipment
Goodwill and intangible assets
Current liabilities
Non-current liabilities
Total purchase price
F-27
$
$
7,443
9,036
27,258
18,890
(12,721)
(6,078)
43,828
Advanced Drainage Systems, Inc.
Transaction costs were immaterial. However, the Company did incur a loss on a currency hedge related to the
purchase of Ideal Pipe in the amount of $5.6 million which was recorded in Derivatives losses (gains) and
other expense (income), net in the Consolidated Statements of Operations. The Company used this currency
hedge to fix the purchase price which was denominated in Canadian dollars from the agreement date until the
transaction ultimately closed on January 30, 2015.
The acquired identifiable intangible assets represent customer relationships of $4.9 million (seven-year useful
life), trade name of $3.1 million (10-year useful life), and non-compete agreements of $0.3 million (three-year
useful life). The following table contains unaudited pro forma Consolidated Statements of Operations
information assuming the acquisition occurred on April 1, 2014 and includes adjustments for amortization of
intangibles, depreciation of fixed assets and interest expense. This unaudited pro forma information is
presented for illustrative purposes only and is not indicative of what actual results would have been if the
acquisition had taken place on April 1, 2013 or of future results. In addition, the unaudited pro forma
consolidated results are not projections of future results of operations of the combined company nor do they
reflect the expected realization of any cost savings or synergies associated with the acquisition.
(Amounts in thousands)
Net sales
Net (loss) income attributable to ADS
Proforma
2015
1,217,431
(6,118)
$
Unaudited pro forma net income attributable to ADS for the fiscal year ended March 31, 2015 has been
calculated after adjusting the combined results of the Company to reflect additional intangible asset
amortization expense, net of related income taxes, of $0.7 million, reduced depreciation expense, net of
related income taxes, of less than ($0.1) million and additional interest expense, net of related income taxes, of
$0.5 million.
4.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Land, buildings and improvements
Machinery and equipment
Construction in progress
Total cost
Less accumulated depreciation
Property, plant and equipment, net
2017
189,163 $
771,878
14,022
975,063
(568,205)
406,858 $
2016
178,189
730,791
14,902
923,882
(532,138)
391,744
$
$
The following table sets forth depreciation expense related to Property, plant and equipment in each of the
fiscal years ended March 31:
(Amounts in thousands)
Depreciation expense (inclusive of leased assets
depreciation)
2017
2016
2015
$
58,692 $
55,650 $
50,136
F-28
Advanced Drainage Systems, Inc.
5.
LEASES
Capital Leases - The Company leases certain buildings and transportation equipment including its fleet of
trucks and trailers, under capital lease agreements.
Leased assets included in Property, plant and equipment consisted of the following:
(Amounts in thousands)
Buildings and improvements
Machinery and equipment
Total cost
Less accumulated depreciation
Leased assets in Property, plant and
equipment, net
$
2017
6,044 $
199,813
205,857
(108,144)
2016
6,131
186,258
192,389
(102,572)
$
97,713 $
89,817
The following sets forth the interest and depreciation expense related to capital leases recorded in each fiscal
year ended March 31:
(Amounts in thousands)
Lease interest expense
Depreciation of leased assets
2017
2016
2015
$
3,864 $
17,415
3,367 $
15,782
2,249
13,943
The following is a schedule by year of future minimum lease payments under capital leases and the present
value of the net minimum lease payments as of March 31, 2017:
(Amounts in thousands)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments(a)
Less: amount representing interest(b)
Present value of net minimum lease payments
Current maturities of capital lease obligations
Long-term capital lease obligations
Total lease obligation
$
$
$
$
24,329
19,784
15,681
12,521
9,271
6,072
87,658
7,498
80,160
21,450
58,710
80,160
(a)
Excludes contingent rentals which may be paid. Contingent rentals amounted to $0.6 million, $0.1 million and
$0.8 million for the years ended March 31, 2017, 2016 and 2015, 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.
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.
F-29
Advanced Drainage Systems, Inc.
Operating leases - The Company leases certain real estate and office equipment under various cancellable and
non-cancellable operating lease agreements that expire at various dates through fiscal year 2037.
Future minimum rental commitments under non-cancellable operating leases as of March 31, 2017, are
summarized below (amounts in thousands):
Future operating lease payments
$ 3,004 $ 2,531 $ 1,921 $ 1,381 $
2018
2019
2020
2021
2022
Thereafter
3,100
755 $
Total rent expense was $6.6 million, $6.3 million, and $4.0 million in the fiscal years ended March 31, 2017,
2016, and 2015, respectively.
6.
INVENTORIES
Inventories as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Raw materials
Finished goods
Total Inventories
2017
52,746 $
205,684
258,430 $
2016
46,604
183,862
230,466
$
$
The Company had no work-in-process inventories as of March 31, 2017 and 2016.
During fiscal years ended March 31, 2017 and 2016, the Company incurred production-related general and
administrative costs included in the cost of finished goods inventory of $21.2 million and $18.0 million,
respectively, of which $6.3 million and $5.3 million remained in inventory at March 31, 2017 and 2016,
respectively.
7.
GOODWILL AND INTANGIBLE ASSETS
Goodwill - The carrying amount of goodwill by reportable segment is as follows:
(Amounts in thousands)
Balance at April 1, 2015
Acquisition
Currency translation
Balance at March 31, 2016
Currency translation
Balance at March 31, 2017
Domestic International
$
87,507 $
2,495
—
90,002 $
—
90,002 $
11,172 $
—
(289)
Total
98,679
2,495
(289)
10,883 $ 100,885
(319)
10,564 $ 100,566
(319)
$
$
F-30
Advanced Drainage Systems, Inc.
Intangible Assets - Intangible assets as of March 31, 2017 and 2016 consisted of the following:
(Amounts in thousands)
Definite-lived intangible assets
Developed technology
Customer relationships
Patents
Non-compete and other contractual
agreements
Trademarks and tradenames
Total definite-lived intangible assets
Indefinite-lived intangible assets
Trademarks
Total Intangible assets
Gross
Intangible
2017
Accumulated
Amortization
Net
Intangible
Gross
Intangible
2016
Accumulated
Amortization
Net
Intangible
$ 27,580 $ (14,888) $ 12,692 $ 44,579 $ (29,371) $ 15,208
(22,646) 18,086
40,767
2,881
(4,167)
7,512
(26,768) 13,999 40,732
7,048
2,744
(4,768)
1,242
15,741
92,842
(1,102)
1,242
140
(5,465) 10,276 15,563
(52,991) 39,851 109,164
(842)
400
(4,195) 11,368
(61,221) 47,943
11,907
— 11,926
— 11,907 11,926
$104,749 $ (52,991) $ 51,758 $121,090 $ (61,221) $ 59,869
The gross intangible asset value of developed technology decreased due to write-offs of fully amortized
intangible assets in fiscal 2017.
The following table presents the weighted average amortization period for definite-lived intangible assets at
March 31, 2017:
Developed technology
Customer relationships
Patents
Non-compete and other contractual agreements
Trademarks and tradenames
Weighted
Average
Amortization
Period
(in years)
11.0
8.5
8.3
5.1
13.5
The following table presents the future intangible asset amortization expense based on existing intangible
assets at March 31, 2017:
(Amounts in thousands)
Amortization expense
2018
7,847 $
$
2019
7,692 $
Fiscal Year
2020
6,006 $
2021
5,865 $
8.
FAIR VALUE MEASUREMENT
2022
4,224 $
Thereafter
Total
8,217 $ 39,851
When applying fair value principles in the valuation of assets and liabilities, the Company is required to
maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not
changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during
the fiscal years presented. The fair value estimates take into consideration the credit risk of both the Company
and its counterparties.
When active market quotes are not available for financial assets and liabilities, ADS uses industry standard
valuation models. Where applicable, these models project future cash flows and discount the future amounts to
a present value using market-based observable inputs including credit risk, interest rate curves, foreign
currency rates and forward and spot prices for currencies. In circumstances where market-based observable
inputs are not available, management judgment is used to develop assumptions to estimate fair value.
Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future
cash flows based on internal and external inputs.
F-31
Advanced Drainage Systems, Inc.
Recurring Fair Value Measurements
The assets, liabilities and mezzanine equity carried at fair value as of the fiscal years ended March 31 were as
follows:
(Amounts in thousands)
Assets:
Derivative assets — diesel fuel contracts
$
Total assets at fair value on a recurring basis $
179 $
179 $
Liabilities:
Derivative liability - diesel fuel contracts
Contingent consideration for acquisitions
Total liabilities at fair value on a recurring
basis
$
142 $
1,348
March 31, 2017
Total
Level 1
Level 2
Level 3
— $
— $
—
$
—
179 $
179 $
—
—
142
$
—
—
1,348
$
1,490 $
— $
142 $
1,348
(Amounts in thousands)
Assets:
Derivative assets — currency forward contracts
$
Total assets at fair value on a recurring basis $
Liabilities:
Derivative liability — interest rate swaps
Derivative liability — diesel fuel contracts
Derivative liability — propylene swaps
Contingent consideration for acquisitions
Total liabilities at fair value on a recurring
basis
Total
Level 1
Level 2
Level 3
March 31, 2016
11 $
11 $
252 $
2,615
8,027
2,858
— $
— $
— $
—
—
—
11 $
11 $
—
—
252 $
2,615
8,027
—
—
—
—
2,858
$
$
13,752 $
— $
10,894 $
2,858
Quantitative Information about Level 3 Fair Value Measurements
(Amounts in thousands)
Liabilities & Mezzanine Equity
Contingent consideration for
acquisitions
Liabilities & Mezzanine Equity
Contingent consideration for
acquisitions
Fair Value
at 3/31/17
$
1,348
Fair Value
at 3/31/16
$
2,858
Valuation
Technique(s)
Discounted
cash flow
Valuation
Technique(s)
Discounted
cash flow
Unobservable Input
Weighted Average Cost of Capital
(“WACC”)(a)
Unobservable Input
Weighted Average Cost of Capital
(“WACC”)(a)
Quantifiable
Input
9.50%
Quantifiable
Input
9.75%-10%
(a)
Represents discount rates or rates of return estimates and assumptions that the Company believes would be
used by market participants when valuing these liabilities.
F-32
Advanced Drainage Systems, Inc.
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3)
for the fiscal years ended March 31, 2017 and 2016 were as follows:
Balance at March 31, 2015
Acquisition
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2016
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2017
Contingent
consideration
2,444
750
371
(707)
2,858
(266)
(1,244)
1,348
$
$
$
There were no transfers in or out of Levels 1, 2 and 3 for the fiscal years ended March 31, 2017 and 2016.
Valuation of Contingent Consideration for Acquisitions - The fair values of the contingent consideration
payables for acquisitions were calculated based on a discounted cash flow model, whereby the probability-
weighted future payment value is discounted to the present value using a market discount rate. The method
used to price these liabilities is considered Level 3, due to the subjective nature of the unobservable inputs
used to determine the fair value.
Valuation of Redeemable Common Stock and Executive Stock Repurchase Agreements Obligations - The
redemption feature of our redeemable common stock allowing the holder to put its shares to ADS for cash, as
discussed in the previous paragraph, became unenforceable upon effectiveness of the IPO on July 25, 2014.
As a result, the redeemable common stock was recorded at fair value through the effective date of the IPO and
was subsequently reclassified at that fair value to stockholders’ equity. See Note 1. Background and Summary
of Significant Accounting Policies for more information on the IPO.
The liability associated with the executive stock repurchase agreements was valued on the same basis as the
redeemable common stock, and as such is also considered a Level 3 measurement. The executive stock
repurchase agreements were terminated upon the IPO. As a result, this liability was recorded at fair value
through the effective date of the IPO and was subsequently reclassified at that fair value to stockholders’
equity. See Note 16. Stockholders’ Equity for more information on the executive stock repurchase agreements.
Valuation of Debt - The carrying amounts of current financial assets and liabilities approximate fair value
because of the immediate or short-term maturity of these items, or in the case of derivative instruments,
because they are recorded at fair value. The carrying and fair value of the Company’s Senior Notes (discussed
in Note 12. Debt) were $75.0 million and $75.9 million, respectively, as of March 31, 2017 and $100.0
million and $101.2 million, respectively, at March 31, 2016. The fair value of the Senior Notes was
determined based on a comparison of the interest rate and terms of such borrowings to the rates and terms of
similar debt available for the period. The Company believes the carrying amount on the remaining long-term
debt, including the Secured Bank Term Loans, is not materially different from its fair value as the interest
rates and terms of the borrowings are similar to currently available borrowings. The categorization of the
framework used to evaluate this debt is considered Level 2.
F-33
Advanced Drainage Systems, Inc.
Non-recurring Fair Value Measurements
Valuation of Investment in the South American Joint Venture - During the fourth quarter of the fiscal years
ended March 31, 2017 and 2016, the Company recorded an impairment charge related to its investment in the
South American Joint Venture equal to the difference between the fair value of the investment and the
carrying value. The method used to value the investment is considered Level 3 due to the subjective nature of
the unobservable inputs used to determine the fair value. In the determination of fair value of its investment,
the Company used a weighted income approach, based on internal forecasts of expected future cash flows, and
market approach, based on comparable public companies. Significant unobservable inputs included the
WACC used to discount the future cash flows, which were between 9.3% and 16.5%, based on the markets in
which the South American Joint Venture conducts business. See Note 10. Investment in Unconsolidated
Affiliates.
9.
INVESTMENT IN CONSOLIDATED AFFILIATES
ADS participates in two consolidated joint ventures, ADS Mexicana, which is 51% owned by the Company’s
wholly-owned subsidiary ADS Worldwide, Inc., and BaySaver, which is 65% owned by the Company’s
wholly-owned subsidiary ADS Ventures, Inc. In each case, the equity owned by the Company’s joint venture
partner is shown as either Noncontrolling interest in subsidiaries (in the case of ADS Mexicana) or
Redeemable noncontrolling interest in subsidiaries (in the case of BaySaver) in the Consolidated Balance
Sheets and the joint venture partner’s portion of net income is shown as Net income attributable to
noncontrolling interest in the Consolidated Statements of Operations.
ADS Mexicana - ADS participates in joint ventures from time to time for the purpose of expanding upon the
growth of manufacturing and selling HDPE corrugated pipe in emerging markets. ADS 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. The Company owns a 51% equity interest in
ADS Mexicana. The Company 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. The Company has concluded that it holds a
variable interest in and is the primary beneficiary of ADS Mexicana based on the power to direct the most
significant activities of ADS Mexicana and the obligation to absorb losses and the right to receive benefits that
could be significant to ADS Mexicana. As the primary beneficiary, the Company is required to consolidate the
assets and liabilities of ADS Mexicana.
The table below includes the assets and liabilities of ADS Mexicana that are consolidated as of March 31,
2017 and 2016. The balances exclude intercompany transactions that are eliminated upon consolidation.
(Amounts in thousands)
Assets
Current assets
Property, plant and equipment, net
Other noncurrent assets
Total assets
Liabilities
Current liabilities
Noncurrent liabilities
Total liabilities
2017
2016
$
$
$
$
24,952 $
19,262
2,269
46,483 $
11,042 $
2,961
14,003 $
27,650
17,461
1,742
46,853
10,769
5,390
16,159
BaySaver - BaySaver was established in July 2013 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’s original investment represented a
55% equity interest and a 50% voting interest in BaySaver. On July 17, 2015, the Company acquired an
additional 10% of the issued and outstanding membership interests in the BaySaver joint venture. Concurrent
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Advanced Drainage Systems, Inc.
with the additional investment in July 2015, the Company also entered into an amendment to the BaySaver
joint venture agreement to change the voting rights from an equal vote for each member to a vote based upon
the ownership interest. As a result, the Company increased its ownership interest to 65% of the issued and
outstanding membership interests in BaySaver and obtained the majority of the voting rights.
As such, while the Company had previously accounted for its investment in BaySaver under the equity
method of accounting, the Company has concluded that the additional investment results in a step acquisition
of BaySaver that will be treated as a business combination. As a result, the consolidated financial statements
include the consolidation of BaySaver’s financial statements beginning on July 17, 2015. See Note 3.
Acquisitions for additional information.
The table below includes the assets and liabilities of BaySaver that are consolidated as of March 31, 2017 and
2016. The balances exclude intercompany transactions that are eliminated upon consolidation.
(Amounts in thousands)
Assets
Current assets
Property, plant and equipment, net
Other noncurrent assets
Total assets
Liabilities
Current liabilities
Total liabilities
2017
2016
$
$
$
$
2,572 $
111
11,568
14,251 $
3,121
140
12,668
15,929
1,344 $
1,344 $
1,696
1,696
10.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company participates in two unconsolidated joint ventures, South American Joint Venture, which is 50%
owned by the Company’s wholly-owned subsidiary ADS Chile, and Tigre-ADS USA, Inc. (“Tigre-ADS
USA”), which is 49% owned by the Company’s 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 the Company’s share of the income or loss of the joint venture is reported in the Consolidated
Statements of Operations under Equity in net loss (income) of unconsolidated affiliates and the Company’s
investment in the joint venture is included in Other assets in the Consolidated Balance Sheets.
South American Joint Venture - The Company’s investment in this unconsolidated joint venture was formed
for the purpose of expanding upon the 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. The
Company is not required to consolidate the South American Joint Venture as it is not the primary beneficiary,
although the Company does hold a significant variable interest in the South American Joint Venture through
the equity investment and debt guarantee.
Summarized financial data as of the fiscal years ended March 31 for the South American Joint Venture is as
follows:
(Amounts in thousands)
Investment in South American Joint Venture
Net Receivable from South American Joint Venture
$
2017
2016
6,559 $
3,639
10,256
3,201
During the fourth quarter of the fiscal years ended March 31, 2017 and 2016, the Company determined there
was an other-than-temporary decline in the fair value of its investment in the South American Joint Venture,
resulting from a further decline of unfavorable regional economic conditions. Accordingly, the Company
recorded an impairment charge of $1.3 million and $4.0 million, respectively, reducing the carrying value of
the investment to its fair value. The impairment charge resulted in a basis difference between the cost of the
investment and the amount of underlying equity in net assets of the South American Joint Venture of $4.9
million and $4.0 million as of March 31, 2017 and 2016 respectively. The basis difference will be amortized
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Advanced Drainage Systems, Inc.
over the estimated remaining useful life of the underlying fixed assets, 9 years. The Company recognized $0.4
million and less than $0.1 million of amortization of the basis difference in fiscal 2017 and 2016, respectively.
The impairment charge is included in Equity in net loss of unconsolidated affiliates in the Consolidated
Statements of Operations.
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 joint venture, Tigre-ADS
USA. The 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-ADS USA for $3.6 million. The joint venture represents a
continuation of the existing activities of Tigre-ADS USA through its Janesville, Wisconsin manufacturing
facility. The Company is not required to consolidate Tigre-ADS USA as it is not the primary beneficiary,
although the Company does hold a significant variable interest in Tigre-ADS USA through the equity
investment.
Summarized financial data as of the fiscal years ended March 31 for the Tigre-ADS USA joint venture is as
follows:
(Amounts in thousands)
Investment in Tigre-ADS USA
Receivable from Tigre-ADS USA
$
2017
2016
2,427 $
9
2,932
45
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 fiscal years ended March 31, 2017, 2016, and 2015,
ADS Mexicana compensated certain shareholders and former shareholders of Grupo Altima, the joint venture
partner of ADS Mexicana, for consulting services related to the operations of the business and a noncompete
arrangement, respectively. These cash payments totaled $0.2 million, $0.2 million, and $0.5 million for the
fiscal years ended March 31, 2017, 2016, and 2015, respectively.
Occasionally, ADS and ADS Mexicana jointly enter into agreements for pipe sales with their related parties
which totaled $0, $0, and $3.8 million in the years ended March 31, 2017, 2016, and 2015, respectively.
Outstanding receivables related to these sales were $0.2 million and $0.3 million at March 31, 2017 and 2016,
respectively.
In February 2015, ADS Mexicana loaned $5.0 million to an entity owned by a Grupo Altima shareholder and
such loan was repaid the same month. The applicable interest rate for the loan was 2.35%.
In April 2015, ADS Mexicana borrowed $3.0 million under a revolving credit facility arrangement with Scotia
Bank and loaned that amount to ADS. The loan was repaid in May 2015. In June 2015, ADS Mexicana
borrowed $3.9 million under the Scotia Bank credit facility and loaned it to an entity owned by a Grupo
Altima shareholder, and such loan was repaid in July 2015. The applicable interest rate for the loans was
4.81%. ADS does not guarantee the borrowings from this facility, and therefore does not anticipate any
required contributions related to the balance of this credit facility.
The Company is the guarantor of 100% of the ADS Mexicana Revolving Credit Facility, and the maximum
potential payment under this guarantee totals $12.0 million. See Note 12. Debt.
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Advanced Drainage Systems, Inc.
South American Joint Venture -The Company’s South American Joint Venture manufactures and sells
HDPE corrugated pipe in the South American market. ADS is 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. The
maximum potential obligation under this guarantee totals $11.0 million as of March 31, 2017. The maximum
borrowing permitted under the South American Joint Venture’s credit facility is $22.0 million. This credit
facility allows borrowings in either Chilean pesos or US dollars at a fixed interest rate determined at inception
of each draw on the facility. The guarantee of the South American Joint Venture’s debt expires on
December 31, 2020. ADS does not anticipate any required contributions related to the balance of this credit
facility. As of March 31, 2017 and 2016, the outstanding principal balance of the credit facility including
letters of credit was $16.0 million and $16.7 million, respectively. As of March 31, 2017, there were no U.S.
dollar denominated loans. The weighted average interest rate as of March 31, 2017 was 6.58% 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. Occasionally, the South American Joint Venture enters into agreements for
pipe sales with ADS and its other related parties, which were $1.3 million and $1.2 million in the fiscal years
ended March 31, 2017 and 2016, respectively. ADS pipe sales to the South American Joint Venture were $0.9
million and $1.8 million in the fiscal years ended March 31, 2017 and 2016, respectively.
BaySaver - BaySaver is a joint venture that was established to produce and distribute water quality filters and
separators used in the removal of sediment and pollution from storm water. ADS owns 65% of the outstanding
stock of BaySaver and consolidates its interest in BaySaver. BaySaver may at times provide short-term
financing to ADS to enhance liquidity. As of March 31, 2015, BaySaver held unsecured, interest-free, notes
receivable from ADS of $0.5 million, which were fully paid in fiscal year 2016.
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.
Tigre-ADS USA - Tigre-ADS USA is a joint venture established to manufacture and sell PVC fittings for
waterworks, plumbing, and HVAC applications primarily in the United States and Canadian markets. ADS
owns 49% of the outstanding shares of capital stock of Tigre-ADS USA. The joint venture represents a
continuation of the existing activities of Tigre-ADS USA through its Janesville, Wisconsin manufacturing
facility.
ADS purchased $1.6 million, $0.7 million and $0.1 million of Tigre-ADS USA manufactured products for use
in the production of ADS products during fiscal years 2017, 2016 and 2015, respectively.
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Advanced Drainage Systems, Inc.
12. DEBT
The adoption on April 1, 2016 of the accounting standard updates relating to debt issuance costs required
retrospective presentation, which led the Company to reduce its Other assets and its Long-term debt obligation
on its Consolidated Balance Sheet as of March 31, 2016 by $3.1 million. The updates had no effect on the
Company’s Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income
(Loss), Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity and
Mezzanine Equity.
Long-term debt as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Secured Bank Term Loans
Revolving Credit Facility — ADS
Revolving Credit Facility — ADS Mexicana
Term Note
Senior Notes payable
Industrial revenue bonds
Equipment financing
ADS Mexicana Scotia Bank revolving credit facility
Total
Unamortized debt issuance costs
Current maturities
Long-term debt obligations
2017
2016
$
$
194,300 $
1,500
72,500
75,000
1,845
4,216
1,000
350,361
(1,723)
(37,789)
310,849 $
166,000
—
82,500
100,000
2,715
—
—
351,215
(3,131)
(35,870)
312,214
Secured Bank Term Loans - The Secured Bank Term Loans include a Revolving Credit Facility with
borrowing capacity of $325.0 million for ADS, Inc., a Revolving Credit Facility for ADS Mexicana with
borrowing capacity of $12.0 million (“the Revolving Credit Facilities”) and a $100.0 million term note (“Term
Note”). The Revolving Credit Facilities expire and the Term Note is due in June 2018. Principal payments of
$2.5 million per quarter are due on the Term Note throughout the remaining term. 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
Inter-Bank Offered Rate (“LIBOR”) or alternate base rate (“Prime Rate”) at the Company’s option. The
average rates were 2.61%, 2.70%, and 2.64% at March 31, 2017, 2016, and 2015, respectively. The Secured
Bank Term Loans are secured by a lien on a significant majority of the Company’s assets. Letters of credit
outstanding at March 31, 2017 amounted to $10.6 million and reduce the availability of the Revolving Credit
Facilities. The amount available for borrowing for ADS, Inc. and ADS Mexicana was $120.1 million and
$10.5 million, respectively at March 31, 2017.
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 $100.0 million. During fiscal 2010, the Company issued $75.0 million 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 the
calculated leverage ratio exceeds 3 to 1 at the end of a fiscal quarter. A principal payment of $25.0 million
was made in fiscal 2017 and additional payments are due in both fiscal 2018 and 2019.
In July 2013, ADS issued an additional $25.0 million of Senior Notes. Interest for the additional $25.0 million
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 $25.0
million is due in September of fiscal year 2020.
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Advanced Drainage Systems, Inc.
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 and one of the
bonds was retired in fiscal 2015. The remaining bond requires quarterly principal payments until it matures in
February 2019 and has a variable interest rate based on the Securities Industry and Financial Markets
Association (SIFMA) municipal swap index rate which is computed weekly. The rate on this bond at
March 31, 2017, was 3.75%, including a letter of credit fee of 2.75%. Land and buildings with a net book
value of approximately $9.4 million at March 31, 2017, collateralize the bonds. These bonds are not
considered auction rate securities.
ADS Mexicana Scotia Bank Revolving Credit Facility - On December 11, 2014, ADS’s joint venture, ADS
Mexicana, entered into a credit agreement with Scotia Bank. The credit agreement provides for revolving
loans up to a maximum aggregate principal amount of $5.0 million. The proceeds of the revolving credit
facility have primarily been used for short term investments and are available for working capital needs. The
interest rates of the revolving credit facilities are determined by LIBOR rates, Tasa de Interes Interbancaria de
Equilibrio (TIIE) or the Costos de Captacion rates, plus an applicable margin. The Scotia Bank revolving
credit facility matures on December 11, 2017. The obligations under the revolving credit facility are not
guaranteed by ADS. As of March 31, 2017, there was $1.0 million of outstanding principal drawn on the
Scotia Bank revolving credit facility, which bears interest at the LIBOR, plus 1.60%. The outstanding
principal drawn is due in May 2017.
On May 27, 2016, ADS Mexicana obtained a waiver on a covenant from Scotia Bank relating to ADS
Mexicana failing to notify Scotia Bank of changes in legal organizational structure and payment of dividends.
Debt Covenants and Dividend Restrictions - The Secured Bank Term Loans and the Senior Notes require,
among other provisions, that the Company (1) maintains a 1.25 to 1 minimum fixed charge coverage ratio;
(2) maintains a maximum leverage ratio of 4 to 1; and (3) establishes 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 the Company is not in
compliance with the debt covenants. In any fiscal year, if the Company is 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
$50.0 million.
In addition, according to the terms of the ADS Mexicana Revolving Credit Facility, ADS Mexicana is not
permitted to make loans to ADS, Inc.
Principal Maturities - Maturities of long-term debt (excluding interest and deferred financing costs) as of
March 31, 2017 are summarized below:
Fiscal Years Ending March 31,
(Amounts in thousands)
Principal maturities
2018
2020
$37,789 $285,145 $25,935 $ 960 $ 532 $
2019
2021 2022 Thereafter Total
— $350,361
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Advanced Drainage Systems, Inc.
Fiscal Year 2016 Amendments and Consents Related to the Secured Bank Term Loans and Senior Notes -
From July 2015 through February 2016, the Company amended the Secured Bank Term Loans and Senior
Notes and also obtained various consents from those lenders. These amendments and consents had the effect
of: i) extending the time for delivery of the Company’s fiscal 2015 audited financial statements and first,
second and third quarter fiscal 2016 quarterly financial information to April 1, 2016, whereby an event of
default was waived as long as those items were delivered by that date without regard to any grace period, ii)
modified certain definitions applicable to the Company’s affirmative and negative financial covenants,
including the negative covenant on indebtedness, to accommodate the Company’s treatment of its
transportation and equipment leases as capital leases rather than operating leases and to accommodate the
treatment of the costs related to the Company’s restatement, and iii) permitted the Company’s payment of
quarterly dividends on common shares in June, August and December 2015, as well as the annual dividend of
$0.0195 per share to be paid on shares of preferred stock in March 2016.
Fiscal Year 2017 Amendments and Consents Related to the Secured Bank Term Loans and Senior Notes -
In July 2016, the Company obtained consents from the lenders of the Secured Bank Term Loans and Senior
Notes. These consents had the effect of extending the time for delivery of the Company’s fiscal 2016 audited
financial statements to August 31, 2016 and first quarter fiscal 2017 quarterly financial information to
October 15, 2016, whereby an event of default was waived as long as those items are delivered within a 15
day grace period after those dates. The fiscal 2016 audited financial statements were delivered within the
grace period. In addition, the consents also permitted the Company’s payment of quarterly dividends of $0.06
per share on common shares in each of June and September 2016, as well as the annual dividend of $0.0195
per share to be paid on shares of preferred stock in March 2017.
In October 2016, the Company obtained additional consents from the lenders of the Secured Bank Term Loans
and Senior Notes. These consents had the effect of extending the time for delivery of the Company’s first
quarter fiscal 2017 quarterly financial information to November 30, 2016 and the Company’s second quarter
fiscal 2017 quarterly financial information to December 31, 2016, whereby an event of default was waived as
long as those items are delivered within a 30 day grace period after those dates. In addition, the consents also
permitted the Company’s payment of a quarterly dividend of $0.06 per share on common shares in December
2016, as well as the annual dividend of $0.0195 per share to be paid on shares of preferred stock in March
2017.
In December 2016, the Company obtained additional consents from lenders of the Secured Bank Term Loans
and Senior Notes. These consents had the effect of extending the time and delivery of the Company’s first
quarter fiscal 2017 quarterly financial information to January 31, 2017.
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 foreign
currency exchange rate fluctuations. For interest rate swaps, gains and losses resulting from the difference
between the spot rate and applicable base rate is recorded in interest expense. For collars, commodity swaps
and foreign exchange forward contracts, contract settlement gains and losses are recorded in the Consolidated
Statements of Operations in Derivative (gains) losses and other expense (income), net. Gains and losses
related to mark-to-market adjustments for changes in fair value of the derivative contracts are also recorded in
the Consolidated Statements of Operations in Derivative (gains) losses and other expense (income), net.
A summary of the fair values for the various derivatives at March 31, 2017 and 2016 is presented below:
2017
Assets
Liabilities
(Amounts in thousands)
Diesel fuel option collars and swaps
Receivables Other assets
$
149 $
30 $
Other accrued
liabilities
Other
liabilities
(122) $
(20)
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Advanced Drainage Systems, Inc.
(Amounts in thousands)
Interest rate swaps
Diesel fuel option collars and swaps
Propylene swaps
2016
Assets
Liabilities
Receivables Other assets
— $
$
—
—
— $
11
—
Other accrued
liabilities
Other
liabilities
(252) $
(2,609)
(8,027)
—
(6)
—
The Company recorded net losses and net (gains) on mark-to-market adjustments for changes in the fair value
of derivative contracts as well as net losses and net (gains) on the settlement of derivative contracts as follows:
(Amounts in thousands)
Interest rate swaps
Foreign exchange forward contracts
Diesel fuel option collars
Propylene swaps
Total net unrealized mark to market losses (gains)
$
Net Unrealized Mark to Market Losses (Gains)
2016
2015
2017
$
(252) $
—
(2,642)
(8,027)
(10,921) $
(513) $
28
(237)
2,885
2,163 $
(236)
(28)
2,841
5,169
7,746
(Amounts in thousands)
Foreign exchange forward contracts
Diesel fuel option collars
Propylene swaps
Total net realized losses (gains)
Total realized and unrealized losses
(gains) included in Derivative losses
(gains) and other expense (income), net(1)
Net Realized Losses (Gains)
2016
2015
2017
$
$
— $
1,893
6,671
8,564 $
(150) $
3,142
11,742
14,734 $
5,636
736
1,333
7,705
$
(2,357) $
16,897 $
15,451
(1)
The total balance in Derivative losses (gains) and other expense (income), net in the Consolidated Statements
of Operations also includes other income items of ($3.6) million, ($0.3) million, and ($1.1) million for the
fiscal years ended March 31, 2017, 2016, and 2015, respectively.
14. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company secures supplies of resin raw material by agreeing to purchase quantities during a future given
period at a fixed price. These purchase contracts typically range from 1 to 12 months and occur in the ordinary
course of business. Under such purchase contracts in place at March 31, 2017, the Company has agreed to
purchase resin over the period April 2017 through December 2017 at a committed purchase cost of $18.1
million.
Litigation
On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all others
similarly situated v. Advanced Drainage Systems, Inc., et al. (Case No. 1:15-cv-05955-KPF), was commenced in
the U.S. District Court for the Southern District of New York (the “District Court”), naming the Company, along
with Joseph A. Chlapaty, the Company’s Chief Executive Officer, and Mark B. Sturgeon, the Company’s former
Chief Financial Officer, as defendants and alleging violations of the federal securities laws. An amended
complaint was filed on April 28, 2016. The amended complaint alleges that the Company made material
misrepresentations and/or omissions of material fact in its public disclosures during the period from July 25,
2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder. On March 10, 2017, the District Court dismissed
Plaintiff’s claims against all defendants in their entirety and with prejudice. Plaintiff has appealed the District
Court’s order to the United States Court of Appeals for the Second Circuit, and the appeal is pending.
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Advanced Drainage Systems, Inc.
On August 12, 2015, the SEC Division of Enforcement (“Enforcement Division”) informed the Company that
it was conducting an informal inquiry with respect to the Company. As part of this inquiry, the Enforcement
Division requested the voluntary production of certain documents generally related to the Company’s
accounting practices. Subsequent to the initial voluntary production request, the Company received document
subpoenas from the Enforcement Division pursuant to a formal order of investigation. The Company has from
the outset cooperated with the Enforcement Division’s investigation and intends to continue to do so. While it
is reasonably possible that this investigation ultimately could be resolved unfavorably to the Company, the
Company is currently unable to estimate the range of possible losses, but they could be material.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of
our business, including but not limited to commercial disputes, environmental matters, employee related
claims, intellectual property disputes and litigation in connection with transactions including acquisitions and
divestitures. The Company does not believe that such litigation, claims, and administrative proceedings will
have a material adverse impact on our financial position or our results of operations. The Company records a
liability when a loss is considered probable, and the amount can be reasonably estimated.
15. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (ESOP) - The Company established the Advanced Drainage Systems, Inc.
ESOP (the “ESOP” or the “Plan”) effective April 1, 1993. The Plan was funded through a transfer of assets
from our tax-qualified profit-sharing retirement plan, as well as a 30-year term loan from ADS. The Plan
operates as a tax-qualified leveraged ESOP and was designed to enable eligible employees to acquire stock
ownership interest in ADS. Employees of ADS who have reached the age of 18 are generally eligible to
participate in the Plan on March 31 after six months of service. Upon retirement, disability, death, or vested
terminations, (i) a participant or designated beneficiary may elect to receive the amount in their account
attributable to the 1993 transfer of assets from our tax-qualified profit sharing retirement plan in the form of
cash or ADS stock with any fractional shares paid in cash; (ii) stock credited to the participants’ ESOP stock
account resulting from the ESOP’s loan repayments are distributed in the form of ADS stock, and
(iii) amounts credited to the participants’ ESOP cash account are distributed in the form of cash. Upon
attainment of age 50 and seven years of participation in the Plan, a participant may elect to diversify specified
percentages of the number of shares of ADS stock credited to the participant’s ESOP stock account in
compliance with applicable law.
The Company is obligated to make contributions to the Plan, which, when aggregated with the Plan’s
dividends, equal the amount necessary to enable the Plan to make its regularly scheduled payments of
principal and interest due on its term loan to ADS. As the Plan makes annual payments of principal and
interest, an appropriate percentage of preferred stock is allocated to ESOP participants’ accounts in
accordance with plan terms that are compliant with applicable Internal Revenue Code and regulatory
provisions.
The carrying 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 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 the average annual fair value. Deferred compensation —
unearned ESOP shares is relieved at fair value, with any difference between the annual average fair value and the
carrying value of shares when allocated being added to Additional paid in capital. The fair value of the shares
allocated was $16.80, $16.35, and $22.05 per share of redeemable convertible preferred stock at March 31, 2017,
2016, and 2015, respectively, resulting in an average annual fair value per share of $16.58, $19.20, and $16.61
per share for the fiscal years ended March 31, 2017, 2016, and 2015, respectively. During the fiscal years ended
March 31, 2017, 2016, and 2015, the Company recognized compensation expense of $9.6 million, $10.3 million,
and $12.1 million, respectively, related to allocation of ESOP shares to participants.
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Advanced Drainage Systems, Inc.
Required dividends on allocated shares are generally passed through and paid in cash to the participants and
required dividends on unallocated shares are paid in cash to the Plan and generally used to service the Plan’s
debt.
In the fiscal years ended March 31, 2017 and 2016, the ESOP committee directed the Plan trustee to retain
$2.9 million and $2.5 million, respectively, in dividends on unallocated ADS shares rather than to service the
Plan’s debt. These dividends were allocated to participants based on the total shares in their account in relation
to total shares allocated at March 31, 2017 and 2016.
In the fiscal years ended March 31, 2017 and 2016, 0.6 million and 0.5 million shares of redeemable
convertible preferred stock, respectively, were allocated to the ESOP participants, including, in addition to the
cash dividends, less than 0.1 million and less than 0.1 million preferred shares allocated as dividends,
respectively. See Note 17. Mezzanine Equity for further details on the shares of Redeemable convertible
preferred stock held by the ESOP.
Executive Termination Payments - ADS has employment agreements with certain executives that include
potential payments to be made to those executives upon termination. The terms of the termination payments
vary by executive, but are generally based on current base salary and bonus levels at the time of termination.
The contractual termination payments vest upon either (1) certain contingent occurrences terminating
employment such as death, disability, layoff, the executive voluntarily quitting due to a breach of covenants
by the Company or for other “good reason” or (2) the executive reaching a specified retirement age while still
working for the Company, as defined in the individual employee agreement.
The Company accrues a liability from the effective date of the executive’s employment agreement to the date
the executive reaches the required retirement age while working for the Company, which is considered the
service period for this obligation. The liability is estimated based on each executive’s current base salary and
bonus levels. Because the executives vest in the termination payments equally over the relevant service period,
the Company recognizes the related compensation expense based on the straight-line method over the service
period. If an executive terminates their employment prior to reaching the required retirement age, no payment
is required and the previously-recorded compensation expense for that executive is reversed and recorded as a
benefit to compensation expense in the period the executive terminates employment.
The compensation expense (benefit) recorded related to the executive termination payments for the fiscal
years ended March 31, 2017, 2016, and 2015 was $1.1 million, ($0.3) million and $0.3 million, respectively,
and is included in General and administrative expenses in the Consolidated Statements of Operations. As of
March 31, 2017 and 2016, the executive termination payment obligation was $5.1 million and $4.0 million,
respectively, and is included in Other accrued liabilities and Other liabilities in the Consolidated Balance
Sheets.
Profit-Sharing Plan - The Company has a tax-qualified profit-sharing retirement plan with a 401(k) feature
covering substantially all U.S. eligible employees. The Company did not make employer contributions to this
plan in the fiscal years ended March 31, 2017, 2016, and 2015. The Company has a defined contribution
postretirement benefit plan covering Canadian employees. The Company recognized costs of $0.8 million,
$0.6 million and $0.5 million in the fiscal years ended March 31, 2017, 2016 and 2015.
16.
STOCKHOLDERS’ EQUITY
During the fiscal years ended March 31, 2017 and 2016, there were no purchases of common stock. During
the fiscal year ended March 31, 2015, the Company purchased a negligible amount of fractional shares
subsequent to the IPO at a price of $17.21 per share.
See Note 12. Debt for a description of restrictions on the payment of dividends imposed under the Secured
Bank Term Loans and Senior Notes agreements.
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Advanced Drainage Systems, Inc.
Executive Stock Repurchase Agreements - In fiscal 2007, the Company entered into stock repurchase
agreements with certain executives, whereby the Company was required to repurchase shares of the
Company’s common stock held by the executive at the current fair market value upon the executive’s death or
certain events of termination, as defined. The amount of shares required to be repurchased by the Company
from the executive and which the executive or the executive’s heir or estate was obligated to sell to the
Company, was limited to the anticipated proceeds from life insurance policies held by the Company (referred
to as a mandatorily redeemable obligation). In the case where shares were not repurchased due to the fair
value of the shares exceeding the life insurance proceeds, the executive or the executive’s heir or estate had a
put right up to a set dollar amount allowing the common stock to be put to the Company at the current fair
market value (referred to as an executive’s put right). The stock repurchase agreements included termination
clauses such that they would automatically terminate if a change in control event or an IPO occurred prior to
the executive’s death.
Prior to the termination of the stock repurchase agreements upon the IPO in July 2014, the Company classified
all shares subject to the mandatorily redeemable obligation as liabilities and all shares subject to an
executive’s put rights as mezzanine equity. For those shares classified as liabilities, changes in the fair value
of the shares were recognized as compensation expense. The related compensation expense for the fiscal year
ended March 31, 2015 was $1.0 million, and is included in General and administrative expenses in the
Consolidated Statements of Operations. For those shares classified as mezzanine equity, the balance was
recorded in Redeemable common stock and changes in the fair value of the shares were recorded as
adjustments to Retained deficit and Paid-in capital. The changes in fair value recorded as adjustments to
Retained deficit was $(1.3) million for the fiscal year ended March 31, 2015.
After the termination of the stock repurchase agreements upon the IPO in July 2014, the Company reclassified
the carrying amount of the mandatorily redeemable obligation portion of the shares of $18.2 million and the
executive put right portion of the shares of $1.5 million to Paid-in capital in the Consolidated Balance Sheets.
17. MEZZANINE EQUITY
Redeemable Common Stock - Prior to the July 2014 IPO, one of the Company’s minority equity owners along
with other shareholders who hold ownership in ADS of at least 15% (referred to as “Major Shareholders”)
entered into an agreement which provided the Major Shareholders the right to put their common stock to the
Company at fair value if, following the fifth anniversary of the recapitalization that occurred during 2010, a
Major Shareholder demands that the Company effect an IPO covering the registration of at least $50.0 million
of securities, and either the Company advises the Major Shareholder that ADS will not begin preparations for
an IPO within 180 days after delivery, or after such preparations have begun they are discontinued (the “Major
Shareholders’ Put Right”). As the Major Shareholders’ Put Right was a redemption right which prior to the
IPO was outside the control of ADS, the Company classified common stock held by the Major Shareholders in
the mezzanine equity section of the Consolidated Balance Sheets at its fair value, and changes in fair value
were recorded in Retained earnings.
The redemption feature of the Redeemable common stock allowing the holder to put its shares to the
Company for cash, as discussed in the previous paragraph, became unenforceable upon effectiveness of the
IPO on July 25, 2014. As a result, the Redeemable common stock was recorded 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. As a result
of the IPO, there are 10.1 million shares of common stock held by Major Shareholders, which are now
classified in stockholders’ equity.
In addition, stock repurchase agreements with certain executives provided the executive or the executive’s heir
or estate with put rights up to a set dollar amount allowing their common stock to be put to the Company.
Prior to the termination of the stock repurchase agreements upon the IPO in July 2014, the Company classified
all shares subject to the executive’s put rights as Redeemable common stock. After the termination of the
stock repurchase agreements upon the IPO, the Company reclassified the carrying amount of the shares
subject to the executive put rights to Paid-in capital in the Consolidated Balance Sheets. See Note 16.
Stockholders’ Equity for further discussion.
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Advanced Drainage Systems, Inc.
Redeemable Convertible Preferred Stock - The Trustee of the Company’s ESOP has the ability to put shares
of the redeemable convertible preferred stock to the Company. The Redeemable convertible preferred stock
has a required cumulative 2.5% dividend (based on the issue price of $0.781 per share) and is convertible at a
rate of 0.7692 shares of common stock for each share of Redeemable convertible preferred stock. ADS
guarantees the value of the redeemable convertible preferred stock at $0.781 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 or its trading has been restricted. Therefore, the holders of Redeemable
convertible preferred stock have a put right to require the Company to repurchase such shares in the event that
the 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. As of March 31, 2017, the applicable redemption value was
$0.781 per share as there were no unpaid cumulative dividends.
Given that the event that may trigger redemption of the Redeemable convertible preferred stock (the listing or
quotation on a market more senior than the OTC Bulletin Board) is not solely within the Company’s control,
the redeemable convertible preferred stock is presented in the mezzanine equity section of the Consolidated
Balance Sheets.
As of March 31, 2017, the Company did not adjust the carrying value of the redeemable convertible preferred
stock to its redemption value or recognize any changes in fair value as the Company did not consider it
probable that the Redeemable convertible preferred stock would become redeemable.
The Board of Directors approved the 2.5% annual dividend to be paid March 31 of each fiscal year to the
stockholders of record as of March 15, 2017, 2016 and 2015. The annual dividend was paid in cash and stock
on the allocated shares. During the first quarter of 2017, the Board of Directors approved the 2.5% annual
dividend to be paid on March 31, 2017 to stockholders of record as of March 1, 2017.
Cash and stock dividends on allocated Redeemable convertible preferred stock for the fiscal years ended
March 31, 2017 and 2016, respectively, are summarized in the following table. For additional information on
dividends paid to the unallocated Redeemable convertible preferred stock, please refer to Note 15. Employee
Benefit Plans.
(Amounts in thousands)
Quarterly cash dividends
Annual cash dividends
Total cash dividends
Annual stock dividend
Annual cash dividend
Total ESOP required dividends
Allocated shares
Required dividend per share
Required dividends
2017
2016
$
$
$
$
1,494 $
18
1,512 $
134
18
152 $
7,779
0.0195
152 $
1,272
21
1,293
132
21
153
7,831
0.0195
153
Redeemable Noncontrolling Interest in Subsidiaries - On July 17, 2015, the Company acquired an additional
10% of the issued and outstanding membership interests in BaySaver’s issued and outstanding membership
interests, increasing the Company’s total ownership to 65%. Concurrent with the Company’s purchase of the
additional membership investment, the BaySaver joint venture agreement was amended to change the voting
rights from an equal vote for each member to a vote based upon the ownership interest. As a result, the
Company has accounted for this transaction as a business combination and BaySaver is consolidated into our
financial statements after July 17, 2015.
The membership interests held by the joint venture partner are presented in Redeemable noncontrolling interest
in subsidiaries in the Consolidated Balance Sheets, which is classified as mezzanine equity, due to a put option
held by the joint venture partner which may be exercised on or after April 1, 2017. The Redeemable
F-45
Advanced Drainage Systems, Inc.
noncontrolling interest in subsidiaries balance will be accreted to the redemption value using the effective interest
method until April 1, 2017. See Note 3. Acquisitions for further discussion of the BaySaver transaction.
18.
STOCK-BASED COMPENSATION
The Company has several programs for stock-based payments to employees and directors, including stock
options and restricted stock. Stock-based compensation expense is recorded in General and administrative
expenses, Selling expenses and Cost of goods sold in the Consolidated Statements of Operations.
The Company recognized stock-based compensation expense (benefit) in the following line items on the
Consolidated Statements of Operations for the fiscal years ended March 31, 2017, 2016, and 2015:
(Amounts in thousands)
Component of income before income taxes:
Cost of goods sold
Selling expenses
General and administrative expenses
2017
2016
2015
$
177 $
177
7,953
(300) $
(500)
(5,068)
1,100
1,500
21,647
Total stock-based compensation expense
(benefit)
$
8,307 $
(5,868) $
24,247
The following table summarizes stock-based compensation expense (benefit) by award type for the fiscal
years ended March 31, 2017, 2016, and 2015:
(Amounts in thousands)
Stock-based compensation expense (benefit):
2017
2016
2015
Liability-classified Stock Options
Equity-classified Stock Options
Restricted Stock
Non-Employee Director
Total stock-based compensation expense
(benefit)
$
4,936 $
108
1,945
1,318
(6,784) $
—
916
—
21,666
—
1,681
900
$
8,307 $
(5,868) $
24,247
Stock Options
Liability-Classified Options – Prior to fiscal 2017, the Company permitted employees to satisfy their personal
tax liability associated with the exercise of the stock options through the net settlement of shares in excess of
the minimum tax withholding required by law. In addition, prior to the Company’s initial public offering in
fiscal 2015, the Company had periodically repurchased shares resulting from option exercises within six
months of the exercise date. As such, the Company accounts for all 2000 Plan and 2013 Plan awards issued
prior to fiscal 2017 as liability-classified awards.
Liability-classified stock option awards are re-measured at fair value at each relevant reporting date, and the pro-rata
vested portion of the award is recognized as a liability. The stock-based compensation liability associated with stock
options expected to vest within the next twelve months is recorded in Current portion of liability-classified stock-
based awards, with the portion related to those expected to vest beyond twelve months recorded in Other liabilities
in the Consolidated Balance Sheets. When stock options are exercised, the liability is reclassified to additional paid
in capital at fair value. The proceeds from the exercise are also recorded as additional paid in capital.
F-46
Advanced Drainage Systems, Inc.
Compensation expense for stock options is recognized on a straight-line basis over the employee’s requisite
service period, which is generally the vesting period of the grant. For liability-classified options, the Company
estimates the fair value of stock options using a Black-Scholes option-pricing model at the end of each period.
The following table summarizes the assumptions used in estimating the fair value of liability-classified stock
options:
Common stock price
Expected stock price volatility
Risk-free interest rate
Weighted-average expected
option life (years)
Dividend yield
2017
2016
$18.70 - $28.17 $18.34 - $33.03 $14.33 - $29.94
29.6% - 33.0% 31.1% - 39.3% 28.2% - 51.0%
0.1% - 1.8%
0.5% - 1.5%
0.9% - 1.9%
2015
0.5 – 5.1
0.9%
0.5 – 6.2
0.9%
0.5 - 7.2
0.5%
2000 Plan - The Company’s 2000 stock option plan (“2000 Plan”) provides for the issuance of statutory and
non-statutory stock options to management based upon the discretion of the Board of Directors. The plan
generally provides for grants with the exercise price equal to fair value on the date of grant, which vest in
three equal annual amounts beginning in year five and expire after approximately 10 years from issuance. The
Company had approximately 1.1 million shares available for grant under the 2000 Plan as of March 31, 2017.
The stock option activity for the fiscal year ended March 31, 2017 is summarized as follows:
(Share amounts in thousands)
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Vested at end of year
Unvested at end of year
Fair value of options granted during the year
All outstanding options are expected to vest.
Weighted
Average
Exercise
Price
Number
of Shares
Weighted
Average
Remaining
Contractual
Term (in
years)
515 $
—
(292)
(28)
195
136
59
$
11.82
—
10.63
12.50
13.31
12.26
15.74
—
4.2
—
—
—
5.4
4.7
7.0
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2017:
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Forfeitures
Unvested at end of year
Number
of Shares
Weighted
Average Grant
Date Fair Value
6.76
—
—
6.76
6.76
76 $
—
—
(17)
59 $
As of March 31, 2017, there was a total of $0.3 million of unrecognized compensation expense related to
unvested stock option awards under the 2000 plan that will be recognized as an expense as the awards vest
over the remaining weighted average service period of 1.3 years.
F-47
Advanced Drainage Systems, Inc.
The total fair value of liability-classified options issued under the 2000 Plan that vested during the fiscal year
ended March 31, 2015 was $8.1 million. No options vested during the fiscal years ended March 31, 2017 and
2016. The weighted average grant date fair value of stock options granted during the fiscal year ended
March 31, 2015 was $6.76. No options were granted during the fiscal years ended March 31, 2017 and 2016.
The aggregate intrinsic value for options outstanding and currently exercisable as of March 31, 2017 was $1.7
million and $1.3 million, respectively. The total intrinsic value of options exercised during the fiscal years
ended March 31, 2017, 2016, and 2015 were $3.7 million, $3.7 million and $3.4 million, respectively.
2013 Plan - The Company’s 2013 stock option plan (“2013 Plan”) provides for the issuance of non-statutory
common stock options to management subject to the Board’s discretion. The plan generally provides for
grants with the exercise price equal to fair value on the date of grant. The grants generally vest in five equal
annual amounts beginning in year one and expire after approximately 10 years from issuance. Options issued
to the Chief Executive Officer vest equally over four years and expire after approximately 10 years from
issuance.
In May 2014, the Board of Directors approved the increase of shares available for granting under the 2013
plan to 1.4 million shares. The Company had 1.0 million shares available for grant under the 2013 Plan as of
March 31, 2017.
The liability-classified stock option activity for the fiscal year ended March 31, 2017 is summarized as
follows:
(Share amounts in thousands)
Outstanding at beginning of year
Issued
Exercised
Forfeited
Outstanding at end of year
Vested at end of year
Unvested at end of year
Fair value of options granted during the year
All outstanding options are expected to vest.
Weighted
Average
Exercise
Price
Number
of Shares
Weighted
Average
Remaining
Contractual
Term (in
years)
1,911 $
—
(66)
(99)
1,746
1,125
621
$
13.64
—
13.64
13.64
13.64
13.64
13.64
—
7.4
—
—
—
6.0
6.0
6.0
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2017:
(Share amounts in thousands)
Unvested at beginning of year
Vested
Forfeited
Unvested at end of year
Number
of Shares
Weighted
Average Grant
Date Fair Value
6.22
—
6.22
6.22
1,095 $
(375)
(99)
621 $
As of March 31, 2017, there was a total of $3.6 million of unrecognized compensation expense related to
unvested stock option awards under the 2013 Plan that will be recognized as an expense as the awards vest
over the remaining weighted average service period of 1.1 years.
The aggregate intrinsic value for options outstanding and currently exercisable as of March 31, 2017 was
$14.4 million and $9.3 million, respectively. The total fair value of options that vested during the fiscal years
F-48
Advanced Drainage Systems, Inc.
ended March 31, 2017, 2016, and 2015 were $3.4 million, $3.6 million, and $7.2 million, respectively. The
total intrinsic value of options exercised during the fiscal year ended March 31, 2017 was $0.8 million.
Equity-Classified Options - The Company accounts for awards under the 2013 Plan granted during the fiscal
year ended March 31, 2017 as equity-classified awards as employees are no longer permitted to satisfy their
personal tax liability in excess of the minimum statutory withholding. Equity-classified stock option awards
are measured based on the grant-date estimated fair value of each award. Compensation expense for stock
options is recognized on a straight-line basis over the employee’s requisite service period, which is generally
the vesting period of the grant. The Company determines the fair value of the options based on the Black-
Scholes option pricing model at the grant date. This methodology requires significant inputs including the
price of the Company’s common stock, risk-free interest rate, dividend yield and expiration date. The
following table summarizes the assumptions used in estimating the fair value of the equity-classified stock
options:
Common stock price
Expected stock price volatility
Risk-free interest rate
Weighted-average expected
option life (years)
Dividend yield
2017
$24.20
31.5% - 35.6%
2.0% - 2.2%
4.9 – 6.1
1.0%
The equity-classified stock option activity for the fiscal year ended March 31, 2017 is summarized as follows:
(Share amounts in thousands)
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Vested at end of year
Unvested at end of year
Fair value of options granted during the year
Weighted
Average
Exercise
Price
Number
of Shares
Weighted
Average
Remaining
Contractual
Term (in
years)
—
514 $
—
—
514
15
499
$
—
24.20
—
—
24.20
24.20
24.20
7.81
—
—
—
9.0
9.0
9.0
All outstanding options are expected to vest except options granted to an executive with a planned retirement.
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2017:
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Forfeited
Unvested at end of year
Number
of Shares
Weighted
Average Grant
Date Fair Value
—
7.81
6.72
—
7.84
—
514 $
(15)
—
499 $
As of March 31, 2017, there was a total of $2.6 million of unrecognized compensation expense related to
unvested equity-classified stock option awards that will be recognized as an expense as the awards vest over
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Advanced Drainage Systems, Inc.
the remaining weighted average service period of 2.9 years. The weighted average grant fair value of stock
options granted during the fiscal years ended March 31, 2017, 2016, and 2015 were $7.81, $0.00, and $0.00,
respectively. The total fair value of options that vested during the fiscal years ended March 31, 2017, 2016,
and 2015 were $0.1 million, less than $0.1 million, and less than $0.1 million, respectively. There were no
options exercised during the fiscal years ended March 31, 2017, 2016, and 2015.
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.
Prior to the Company’s initial public offering in fiscal 2015, the Company periodically repurchased shares
from employees within six months of the shares vesting. As such, for the periods prior to the Company’s
initial public offering, the restricted stock awards were accounted for as liability-classified awards. In the
periods subsequent to the initial public offering, the Company discontinued repurchasing employee held
restricted shares due to the existence of a public market for the shares. Accordingly, upon the initial public
offering the Company has modified the restricted stock awards from being accounted for as liability-classified
to equity-classified awards and reclassified the carrying amount of the awards of $4.8 million to Paid-in
capital in the Consolidated Balance Sheets. The restricted stock has been accounted for as equity-classified
awards for the periods subsequent to the initial public offering. The fair value of restricted stock is based on
the fair value of the Company’s common stock. Compensation expense is recognized on a straight-line basis
over the employee’s requisite service period, which is generally the vesting period of the grant.
The Company had approximately 0.2 million shares available for grant under this plan as of March 31, 2017.
The information about the unvested restricted stock grants as of March 31, 2017 is as follows:
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Forfeited
Unvested at end of year
Number
of Shares
Weighted
Average
Grant Date
Fair Value
112 $
191
(49)
—
254 $
12.65
24.20
16.15
21.92
The Company expects all restricted stock grants to vest.
At March 31, 2017, there was approximately $3.5 million of unrecognized compensation expense related to
the restricted stock that will be recognized over the weighted average remaining service period of 2.4 years.
During the fiscal year ended March 31, 2017, the weighted average grant date fair value of restricted stock
granted was $24.20. No restricted stock was granted during the fiscal years ended March 31, 2016 and 2015.
During the fiscal years ended March 31, 2017, 2016, and 2015 the total fair value of restricted stock that
vested was $1.2 million, $1.1 million and $1.9 million, respectively.
Non-Employee Director Compensation Plan
On June 18, 2014, the Company amended its then-existing Stockholders’ Agreement to authorize 0.3 million
shares of restricted stock to be granted to non-employee members of its Board of Directors. The shares
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Advanced Drainage Systems, Inc.
typically will 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.
The Company has determined that the restricted stock granted to directors should be accounted for as equity-
classified awards. The Company had approximately 0.2 million and 0.2 million shares available for grant
under this plan as of March 31, 2017 and 2016.
The following table summarizes information about the unvested Non-Employee Director Compensation stock
grants as of March 31, 2017 :
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Unvested at end of year
2017
Weighted
Average
Grant
Date Fair
Value
Number
of Shares
—
77 $
(37)
40 $
—
24.20
24.20
24.20
As of March 31, 2017, there was approximately $0.5 million of unrecognized compensation expense related to
this restricted stock that will be recognized over the weighted average remaining service period of 0.6 years.
19.
INCOME TAXES
The components of Income before income taxes for the fiscal years ended March 31 are as follows:
(Amounts in thousands)
United States
Foreign
Total
2017
59,543 $
5,288
64,831 $
2016
45,159 $
14,140
59,299 $
2015
(4,381)
9,304
4,923
$
$
The components of Income tax expense for the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Current:
Federal
State and local
Foreign
Total current tax expense
Deferred:
Federal
State and local
Foreign
2017
2016
2015
$
24,318 $
4,652
3,040
32,010
6,889 $
2,126
3,791
12,806
20,592
3,655
831
25,078
(5,887)
(1,297)
(211)
(7,395)
24,615 $
10,019
1,431
(758)
10,692
23,498 $
(16,270)
(2,626)
102
(18,794)
6,284
Total deferred tax expense (benefit)
Total Income tax expense
$
F-51
Advanced Drainage Systems, Inc.
For the fiscal years ended March 31, the effective tax rate varied from the statutory Federal income tax rate as
a result of the following factors:
Federal statutory rate
Redeemable convertible preferred stock dividend
ESOP stock appreciation
ESOP compensation for Special Dividend on
unallocated shares
Effect of tax rate of foreign subsidiaries
State and local taxes—net of federal income
tax benefit
Stock-based compensation
Uncertain tax position change
Qualified production activity credit
Executive repurchase agreement
Closure of Puerto Rico
Other
Effective rate
2017
2016
2015
35.0%
(0.8)
4.9
35.0%
(0.8)
5.8
—
1.3
—
0.8
4.1
0.3
(1.1)
(3.3)
—
(4.2)
1.8
38.0%
4.3
(1.8)
(3.6)
(0.9)
—
—
0.8
39.6%
35.0%
(3.8)
82.3
0.2
(9.3)
19.7
64.7
(35.2)
(37.1)
7.2
—
3.9
127.6%
The Company’s effective tax rate will vary based on factors, including but not limited to, overall profitability,
the geographical mix of income before taxes and discrete events. The fiscal 2015 effective tax rate exceeded
the federal statutory rate due in part to the significant permanent differences associated with non-deductible
ESOP stock appreciation and stock-based compensation expense, the effect of which was increased by the
near break-even amount of pre-tax income, whereas the fiscal year 2017 and 2016 effective tax rates more
closely approximate a normal effective tax rate for the Company.
F-52
Advanced Drainage Systems, Inc.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at March 31 were comprised of:
(Amounts in thousands)
Deferred tax assets:
State income taxes
ESOP loan repayment
Receivable and other allowances
Derivatives
Inventory
Non-qualified stock options
Executive termination payments (Note 15)
Accrued Expenses
Worker’s compensation
Contingent consideration
Foreign net operating losses
Other
Total deferred tax assets
Less: valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Intangible assets
Property, plant and equipment
Leases
Capitalized software costs
Goodwill
Other
Total deferred tax liabilities
Net deferred tax liability
2017
2016
1,474 $
1,363
2,660
(15)
5,820
6,052
2,044
411
1,323
91
2,223
2,856
26,302
(2,223)
24,079
7,214
51,599
724
3,200
3,886
761
67,384
43,305 $
1,927
1,390
2,150
4,397
1,433
4,309
1,852
1,378
1,390
533
1,507
2,491
24,757
(1,507)
23,250
8,882
52,115
6,059
2,935
3,643
1,867
75,501
52,251
$
$
Net deferred tax assets are included in Deferred income taxes and other current assets and Other assets on the
Consolidated Balance Sheets. The related balances at March 31 were as follows:
(Amounts in thousands)
Net current deferred tax assets
Net non-current deferred tax assets
Net non-current deferred tax liabilities
$
2017
2016
— $
702
44,007
11,701
—
63,952
The Company has not provided for U.S. federal income taxes or foreign withholding taxes on approximately
$28.0 million of undistributed earnings of its foreign subsidiaries at March 31, 2017 because such earnings are
intended to be reinvested indefinitely with the exception of cash dividends paid by our ADS Mexicana joint
venture. It is not practicable to estimate the amount of U.S. tax that might be payable on the eventual
remittance of such earnings.
F-53
Advanced Drainage Systems, Inc.
Accounting for Uncertain Tax Positions
As of March 31, 2017, the Company had unrecognized tax benefit of $6.2 million, which if resolved
favorably, would reduce income tax expense by $6.2 million. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits for the years ended March 31, 2017, 2016, and 2015 is as follows:
(Amounts in thousands)
Balance as of March 31, 2014
Decreases in tax positions for prior years
Increases in tax positions for prior years
Settlements
Lapse of statute of limitations
Balance as of March 31, 2015
Tax positions taken in current year
Decreases in tax positions for prior years
Increases in tax positions for prior years
Settlements
Lapse of statute of limitations
Balance as of March 31, 2016
Tax positions taken in current year
Decreases in tax positions for prior years
Increases in tax positions for prior years
Settlements
Lapse of statute of limitations
Balance as of March 31, 2017
$
$
$
$
12,855
(672)
336
—
(2,067)
10,452
917
(599)
358
—
(3,130)
7,998
—
(1,786)
80
—
(96)
6,196
The unrecognized tax benefits are primarily recorded in Other liabilities in the Company’s Consolidated
Balance Sheets. These amounts include potential accrued interest and penalties of $1.8 million and $2.7
million at March 31, 2017 and 2016, respectively.
It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the
next twelve months due to activities of the IRS or other taxing authorities, including proposed assessments of
additional tax, possible settlement of audit issues, or the expiration of applicable statutes of limitation.
The Company is currently open to audit under the statute of limitations by the IRS for the fiscal years ended
March 31, 2014 through March 31, 2017. The majority of the Company’s state income tax returns are open to
audit under the statute of limitations for the years ended March 31, 2014 through March 31, 2017. The foreign
income tax returns are open to audit under the statute of limitations for the years ended March 31, 2013
through March 31, 2017.
20. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing the Net income (loss) available to common
stockholders by the weighted-average number of common shares outstanding during the period, without
consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the
Net income (loss) available to common stockholders by the weighted-average number of common stock
equivalents outstanding for the period.
Holders of unvested restricted stock have non-forfeitable rights to dividends when declared on common stock,
and holders of redeemable convertible preferred stock participate in dividends on an as-converted basis when
declared on common stock. As a result, unvested restricted stock and redeemable convertible preferred stock
meet the definition of participating securities, which requires us to apply the two-class method to compute
both basic and diluted net income (loss) per share. The two-class method is an earnings allocation formula that
treats participating securities as having rights to earnings that would otherwise have been available to common
stockholders.
F-54
Advanced Drainage Systems, Inc.
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 stockholders 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 the Company has the choice of settling in cash or
shares and it has 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
March 31, 2017, 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.
F-55
Advanced Drainage Systems, Inc.
The following table presents information necessary to calculate net income (loss) per share for the fiscal years
ended March 31, 2017, 2016, and 2015, 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:
(Amounts in thousands, except per share data)
NET INCOME (LOSS) PER SHARE — BASIC:
Net income (loss) attributable to ADS
$
Adjustment for:
2017
2016
2015
32,950 $
25,052 $
(7,827)
Change in fair value of redeemable convertible
preferred stock
Accretion of redeemable noncontrolling interest
in subsidiaries
Dividends paid to redeemable convertible
preferred stockholders
Dividends paid to unvested restricted
stockholders
Net income (loss) available to common stockholders
and participating securities
Undistributed income allocated to participating
securities
Net income (loss) available to common
stockholders — Basic
Weighted average number of common shares
outstanding — Basic
Net income (loss) per common share —
Basic
NET INCOME (LOSS) PER SHARE —
DILUTED:
Net income (loss) available to common
stockholders — Diluted
Weighted average number of common shares
outstanding — Basic
Assumed exercise of stock options
Weighted average number of common shares
outstanding — Diluted
Net income (loss) per common share —
Diluted
Potentially dilutive securities excluded as anti-
dilutive
—
—
(11,054)
(1,560)
(932)
—
(1,646)
(1,425)
(661)
(73)
(24)
(11)
29,671
22,671
(19,553)
(1,700)
(1,270)
—
27,971
21,401
(19,553)
54,919
53,978
51,344
$
0.51 $
0.40 $
(0.38)
27,971
21,401
(19,553)
54,919
705
53,978
1,198
51,344
—
55,624
55,176
51,344
$
0.50 $
0.39 $
(0.38)
6,228
6,383
5,395
21. BUSINESS SEGMENT INFORMATION
ADS operates its business in two distinct operating and reportable segments based on the markets it serves:
“Domestic” and “International.” The Chief Operating Decision Maker (“CODM”) evaluates segment
reporting based on Net sales and Segment Adjusted EBITDA. The Company calculates Segment Adjusted
EBITDA as net income or loss before interest, income taxes, depreciation and amortization, stock-based
compensation expense, non-cash charges and certain other expenses.
Domestic
The Company’s Domestic segment manufactures and markets products throughout the United States. The
Company maintains and serves these markets through product distribution relationships with many of the
largest national and independent waterworks distributors, major national retailers as well as an extensive
network of hundreds of small to medium-sized distributors across the U.S. The Company also sells through a
broad variety of buying groups and co-ops in the United States. Products include single wall pipe, N-12 HDPE
F-56
Advanced Drainage Systems, Inc.
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.
The Company’s Domestic segment sales are diversified across all regions of the country.
International
The Company’s International segment manufactures and markets products in certain regions outside of the
United States, with a growth strategy focused on Company owned facilities in Canada and through the
Company’s joint-ventures with local partners in Mexico and South America. The Company’s joint venture
strategy provides it with local and regional access to new markets such as Brazil, Chile, Argentina, Peru and
Colombia. The Company’s Mexican joint venture (ADS Mexicana) primarily serves the Mexican and Central
American markets, while its South American Joint Venture (Tigre-ADS) is the primary channel to serve the
South American markets. The Company’s International product 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 in each of the fiscal years ended March 31:
2017
2016
2015
$ 786,546 $ 812,071 $ 771,214
256,719
1,102,236 1,113,796 1,027,933
301,725
315,690
122,384
32,641
155,025
125,407
26,733
152,140
$1,257,261 $1,290,678 $1,180,073
139,731
37,151
176,882
(Amounts in thousands)
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
F-57
Advanced Drainage Systems, Inc.
The following sets forth certain additional financial information attributable to the reportable segments for the
fiscal years ended March 31.
(Amounts in thousands)
Segment Adjusted EBITDA
2017
2016
2015
Domestic
International
Total
Interest expense
Domestic
International
Total
Income tax expense
Domestic
International
Total
Depreciation and amortization
Domestic
International
Total
Equity in net (loss) income of unconsolidated
affiliates
Domestic
International
Total
Capital expenditures
Domestic
International
Total
$ 175,676 $ 162,875 $ 128,973
14,904
$ 193,371 $ 187,340 $ 143,877
17,695
24,465
$
$
$
$
$
$
$
$
$
$
17,049 $
418
17,467 $
17,908 $
552
18,460 $
19,308
60
19,368
21,786 $
2,829
24,615 $
20,465 $
3,033
23,498 $
5,351
933
6,284
63,747 $
8,608
72,355 $
62,625 $
8,384
71,009 $
59,397
6,075
65,472
(505) $
(3,803)
(4,308) $
181 $
(5,415)
(5,234) $
289
(2,624)
(2,335)
39,642 $
7,034
46,676 $
37,242 $
7,700
44,942 $
29,345
2,735
32,080
The following sets forth certain additional financial information attributable to the reportable segments as of
March 31:
2017
2016
$
$
2,427 $
6,559
8,986 $
2,932
10,256
13,188
$
917,006 $
134,987
(5,708)
949,286
147,814
(59,784)
$ 1,046,285 $ 1,037,316
(Amounts in thousands)
Investments in unconsolidated affiliates
Domestic
International
Total
Total identifiable assets
Domestic
International
Eliminations
Total
F-58
Advanced Drainage Systems, Inc.
Reconciliation of Segment Adjusted EBITDA to Net income
(Amounts in thousands)
Net income (loss)
Depreciation and amortization
Interest expense
Income tax expense
Segment EBITDA
Derivative fair value adjustments
Foreign currency transaction (gains) losses
Loss (gain) on sale of business or disposal of
assets
Unconsolidated affiliates interest, taxes,
depreciation and amortization (a)
Contingent consideration remeasurement
Stock-based compensation expense (benefit)
ESOP deferred stock-based compensation
Expense (benefit) related to executive
termination payments
Expense related to executive stock
repurchase agreements
Loss related to BaySaver step acquisition
Inventory step up related to PTI acquisition
Bargain purchase gain on PTI acquisition
Restatement-related costs (b)
Impairment on investment in unconsolidated
affiliate
Transaction costs (c)
Segment Adjusted EBITDA (d)
2015
2017
2016
Domestic International Domestic International Domestic International
5,747
$ 35,118 $
6,075
63,747
60
17,049
21,786
933
12,815
137,700
(28)
(10,921)
(232)
—
5,692 $ (9,443) $
8,384 59,397
552 19,308
3,033
5,351
17,661 74,613
7,774
5,636
790 $ 24,875 $
8,608 62,625
418 17,908
2,829 20,465
12,645 125,873
2,139
—
—
(1,629)
24
697
4,793
3,716
892
(80)
257
105
1,088
(265)
8,307
9,568
1,052
1,663
371
—
(5,868)
—
— 10,250
1,341
2,163
—
174
— 24,247
— 12,144
2,244
—
—
—
1,092
—
(294)
—
328
—
—
525
(609)
24,026
—
—
490
—
—
—
—
—
— 27,970
—
—
—
—
—
1,011
—
—
—
—
—
—
—
—
—
—
—
372
$175,676 $
1,300
—
—
—
17,695 $162,875 $
4,000
—
—
1,448
24,465 $128,973 $
—
—
14,904
(a)
Includes the Company’s proportional share of interest, income taxes, depreciation and amortization related to
its South American Joint Venture and its Tigre-ADS USA Joint Venture, which are accounted for under the
equity method of accounting. In addition, these amounts include the Company’s proportional share of interest,
income taxes, depreciation and amortization related to its BaySaver Joint Venture prior to the step acquisition
of BaySaver on July 17, 2015, which was previously accounted for under the equity method of accounting.
(b) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
(c)
with the restatement of the prior period financial statements as reflected in the fiscal year 2015 Form 10-K and
fiscal year 2016 Form 10-K/A.
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with the debt refinancing, the IPO and secondary public offering and asset acquisitions and dispositions.
(d) A portion of the reduction in International EBITDA is related to transfer pricing. The reduction is fully offset
by an increase in Domestic EBITDA.
F-59
Advanced Drainage Systems, Inc.
Geographic Sales and Assets Information
Net sales are attributed to the geographic location based on the location of the customer. The table below
represents the Net sales and long-lived asset information by geographic location for each of the fiscal years
ended March 31:
(Amounts in thousands)
Net Sales
North America
Other
Total
(Amounts in thousands)
Long-Lived Assets (a)
North America
Other
Total
2017
2016
2015
$1,243,074 $1,274,700 $1,161,909
18,164
$1,257,261 $1,290,678 $1,180,073
15,978
14,187
2017
2016
$
$
411,752 $
6,559
418,311 $
395,716
10,256
405,972
(a)
For segment reporting purposes, long-lived assets include Investments in unconsolidated affiliates, Central
parts and Property, plant and equipment.
22.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The increase (decrease) in cash due to the changes in working capital accounts for the fiscal years ended
March 31, were as follows:
(Amounts in thousands)
Changes in working capital:
2017
2016
2015
Receivables
Inventories
Prepaid expenses and other current assets
Accounts payable, accrued expenses, and other
liabilities
Total
$
15,055 $ (37,788) $ (10,351)
(7,663)
28,330
(27,917)
1,953
646
(2,548)
6,851
(8,559) $
10,156
(767)
1,344 $ (16,828)
$
F-60
Advanced Drainage Systems, Inc.
Supplemental disclosures of cash flow information for the fiscal years ended March 31 were as follows:
(Amounts in thousands)
Supplemental disclosures of cash flow
information — cash paid during years:
Interest
Income taxes
(Amounts in thousands)
Supplemental schedule of noncash investing and
financing activities:
2017
2016
2015
$
17,273 $
13,525
18,352 $
32,175
18,709
28,503
2017
2016
2015
Redeemable convertible preferred stock dividend $
Redemption of common stock to exercise stock
options
Purchases of plant, property, and equipment
included in accounts payable
Receivable recorded for sale of businesses
ESOP distributions in common stock
Assets acquired and obligation incurred under
capital lease
Lease obligation retired upon disposition of
leased assets
Reclassification of liability-classified stock
options and restricted stock to equity
Reclassification of stock repurchase agreement
liability and mezzanine equity to equity
Payable recorded for business acquisition
Reclassification of deferred public offering cost
asset upon initial public offering
134 $
132 $
127
—
—
93
2,549
—
7,425
1,165
150
10,250
124
600
6,133
26,276
34,207
24,047
390
134
779
4,147
3,702
12,141
—
950
—
—
19,729
—
—
—
456
F-61
Advanced Drainage Systems, Inc.
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth certain historical unaudited consolidated condensed quarterly financial
information for each of the quarters during the years ended March 31, 2017 and 2016. In the Company’s
opinion, the unaudited quarterly financial information reflects all normal and recurring accruals and
adjustments necessary for a fair presentation of net income for interim periods.
Fiscal Year 2017
For the Three Months Ended
(in thousands, except per share amounts)
Net sales
Gross profit
Net (loss) income
Net (loss) income attributable to ADS
Net (loss) income per share
Basic (1)
Diluted (1)
(in thousands, except per share amounts)
Net sales
Gross profit
Net (loss) income
Net (loss) income attributable to ADS
Net (loss) income per share
Basic (1)
Diluted (1)
$
March 31,
2017
244,184 $
39,251
(18,052)
(18,110)
December
31, 2016
September
30, 2016
294,716 $
69,441
10,258
9,053
360,785 $
90,512
24,281
23,734
June 30,
2016
357,576
96,606
19,421
18,273
$
$
(0.34) $
(0.34) $
0.14 $
0.14 $
0.38 $
0.38 $
0.29
0.29
Fiscal Year 2016
For the Three Months Ended
$
March 31,
2016
245,398 $
49,504
(11,085)
(12,119)
December
31, 2015
September
30, 2015
312,827 $
74,842
12,942
13,131
383,329 $
86,529
15,928
12,346
June 30,
2015
349,124
74,477
12,782
11,694
$
$
(0.24) $
(0.24) $
0.21 $
0.21 $
0.20 $
0.19 $
0.19
0.19
(1) The earnings per share calculations for each quarter are based upon the applicable weighted average shares
outstanding for each period and may not necessarily be equal to the full year share amount.
24.
SUBSEQUENT EVENTS
Dividends on Common Stock - During the first quarter of fiscal 2018, the Company declared a quarterly cash
dividend of $0.07 per share of common stock. The dividend is payable on June 15, 2017 to stockholders of
record at the close of business on June 5, 2017.
Liability-classified stock awards – On April 1, 2017, the Company modified all outstanding awards to remove
the provision that permitted employees to satisfy their personal tax liability with the net settlement of shares in
excess of minimum tax withholding. Consistent with the accounting standard update in Note 1, employees can
now withhold shares with a fair value up to the maximum statutory rate.
Revolving Credit Facility Waiver – On May 19, 2017, the Company obtained a waiver from the lenders of the
Revolving Credit Facility regarding an event of default. A material domestic subsidiary failed to join as a
guarantor resulting in default. The lenders agreed to waive the default if the material domestic subsidiary joins
as a guarantor by July 31, 2017.
* * * * * *
F-62
Advanced Drainage Systems, Inc.
SCHEDULE II
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Valuation and Qualifying Accounts for the Fiscal Years Ended March 31, 2017,
Allowance for Doubtful Accounts:
2016 and 2015 (in thousands):
Year ended March 31,
2017
2016
2015
Balance at
beginning
of period
Charged to
costs and
expenses
Charged to
other
accounts (1) Deductions
Balance at
end of
period
$
7,956 $
5,423
4,490
2,940 $
3,542
1,914
(13) $
(81)
(291)
(452) $ 10,431
7,956
(928)
5,423
(690)
(1) Amounts represent the impact of foreign currency translation.
F-63
Advanced Drainage Systems, Inc.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.1A
10.1B
10.1C
10.1D
10.2
INDEX TO EXHIBITS
Description
Amended and Restated Certificate of Incorporation of Advanced Drainage Systems, Inc. (incorporated
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed
with the Securities and Exchange Commission on July 30, 2014).
Second Amended and Restated Bylaws of Advanced Drainage Systems, Inc. (incorporated by reference
to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the
Securities and Exchange Commission on July 30, 2014).
Form of Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 5 to
the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities
and Exchange Commission on July 14, 2014).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 5 to
the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities
and Exchange Commission on July 14, 2014).
Registration Rights Agreement, dated as of July 30, 2014, by and among Advanced Drainage Systems,
Inc. and the stockholders from time to time party thereto (incorporated by reference to Exhibit 4.1 to
the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and
Exchange Commission on July 30, 2014).
Form of 5.60% Senior Series A Secured Notes due September 24, 2018 (incorporated by reference to
Exhibit 4.5 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-
194980) filed with the Securities and Exchange Commission on June 20, 2014).
Form of 4.05% Senior Series B Secured Notes due September 24, 2019 (incorporated by reference to
Exhibit 4.6 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-
194980) filed with the Securities and Exchange Commission on June 20, 2014).
Amended and Restated Credit Agreement, dated as of June 12, 2013, by and among Advanced
Drainage Systems, Inc., as borrower, the guarantors from time to time party thereto, the lenders from
time to time party thereto, PNC Bank, National Association, as administrative agent for the lenders
party thereto, and the other parties thereto (incorporated by reference to Exhibit 10.1 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the
Securities and Exchange Commission on June 6, 2014).
First Amendment to Amended and Restated Credit Agreement, dated as of December 20, 2013
(incorporated by reference to Exhibit 10.1A to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Second Amendment to Amended and Restated Credit Agreement, dated as of August 21, 2015
(incorporated by reference to Exhibit 10.1 of Form 8-K filed August 26, 2015).
Third Amendment to Amended and Restated Credit Agreement, dated as of December 28, 2015
(incorporated by reference to Exhibit 10.1 of Form 8-K filed December 31, 2015).
Fourth Amendment to Amended and Restated Credit Agreement dated February 17, 2016 (incorporated
by reference to Exhibit 10.1 of Form 8-K filed December 31, 2015).
Second Amended and Restated Credit Agreement, dated as of June 12, 2013, by and among ADS
Mexicana, S.A. de C.V., as borrower, the lenders party thereto, PNC Bank, National Association, as
administrative agent for the lenders party thereto, and the other parties thereto (incorporated by
reference to Exhibit 10.2 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
(File No. 333-194980) filed with the Securities and Exchange Commission on June 6, 2014).
Advanced Drainage Systems, Inc.
Exhibit
Number
10.2A
10.2B
10.2C
10.2D
10.2E
Description
First Amendment to Second Amended and Restated Credit Agreement, dated as of December 20, 2013
(incorporated by reference to Exhibit 10.2A to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Second Amendment to Second Amended and Restated Credit Agreement, dated as of August 21, 2015
(incorporated by reference to Exhibit 10.2 of Form 8-K filed August 26, 2015)
Third Amendment to Second Amended and Restated Credit Agreement, dated as of November 30,
2015 (incorporated by reference to Exhibit 10.1 of Form 8-K filed December 4, 2015.
Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of December 28,
2015 (incorporated by reference to Exhibit 10.2 of Form 8-K filed December 31, 2015).
Fifth Amendment to Second Amended and Restated Credit Agreement, dated as of February 17, 2016
(incorporated by reference to Exhibit 10.2 of Form 8-K filed February 17, 2016).
10.2F
Sixth Amendment to Second Amended and Restated Credit Agreement, dated as of March 15, 2017. #
10.3
10.3A
10.3B
10.3C
10.3D
10.3E
10.3F
Amended and Restated Private Shelf Agreement, dated as of September 24, 2010, by and among
Advanced Drainage Systems, Inc., as seller, the guarantors from time to time party thereto, Prudential
Investment Management, Inc., as a purchaser, and the other purchasers from time to time party thereto
(incorporated by reference to Exhibit 10.3 to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 1 to Amended and Restated Private Shelf Agreement, dated as of December 12, 2011
(incorporated by reference to Exhibit 10.3A to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 2 to Amended and Restated Private Shelf Agreement, dated as of March 9, 2012
(incorporated by reference to Exhibit 10.3B to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 3 to Amended and Restated Private Shelf Agreement, dated as of March 30, 2012
(incorporated by reference to Exhibit 10.3C to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 4 to Amended and Restated Private Shelf Agreement, dated as of April 26, 2013
(incorporated by reference to Exhibit 10.3D to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 5 to Amended and Restated Private Shelf Agreement, dated as of June 16, 2013
(incorporated by reference to Exhibit 10.3E to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Supplement to Amendment No. 5 to Amended and Restated Private Shelf Agreement, dated as of
June 24, 2013 (incorporated by reference to Exhibit 10.3F to Amendment No. 2 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 6, 2014).
Advanced Drainage Systems, Inc.
Exhibit
Number
10.3G
10.3H
10.3I
10.3J
Description
Amendment No. 6 to Amended and Restated Private Shelf Agreement, dated as of September 23, 2013
(incorporated by reference to Exhibit 10.3G to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 7 to Amended and Restated Private Shelf Agreement, dated as of December 31, 2013
(incorporated by reference to Exhibit 10.3H to Amendment No. 2 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 6, 2014).
Amendment No. 8 to Amended and Restated Private Shelf Agreement, dated as of August 21, 2015
(incorporated by reference to Exhibit 10.3 to Form 8-K filed August 26, 2015).
Amendment No. 9 and Consent to Amended and Restated Private Shelf Agreement, dated as of
December 28, 2015 (incorporated by reference to Exhibit 10.3 to Form 8-K filed December 31, 2015).
10.3K
Amendment No. 10 and Consent to Amended and Restated Private Shelf Agreement, dated as of
February 17, 2016 (incorporated by reference to Exhibit 10.3 to Form 8-K filed February 17, 2016).
10.4
10.5
10.6
10.7
10.8†
10.9†
Amended and Restated Security Agreement, dated as of June 12, 2013, by and among Advanced
Drainage Systems, Inc., as borrower, the guarantors from time to time party thereto, and PNC Bank,
National Association, as collateral agent for certain secured parties (incorporated by reference to
Exhibit 10.1A to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
(File No. 333-194980) filed with the Securities and Exchange Commission on June 6, 2014).
Amended and Restated Pledge Agreement, dated as of June 12, 2013, by Advanced Drainage Systems,
Inc. and certain other parties thereto, as pledgors, in favor of PNC Bank, National Association, as
collateral agent for certain secured parties (incorporated by reference to Exhibit 10.5 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the
Securities and Exchange Commission on June 6, 2014).
Amended and Restated Intercompany Subordination Agreement, dated as of June 12, 2013, by and
among Advanced Drainage Systems, Inc., the guarantors from time to time party thereto, and PNC
Bank, National Association, as administrative agent for certain lenders (incorporated by reference to
Exhibit 10.6 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
(File No. 333-194980) filed with the Securities and Exchange Commission on June 6, 2014).
Amended and Restated Inter-creditor and Collateral Agency Agreement, dated as of June 12, 2013, by
and among PNC Bank, National Association, as collateral agent for certain secured parties, PNC Bank,
National Association, as administrative agent for certain lenders, and certain noteholders (incorporated
by reference to Exhibit 10.7 to Amendment No. 2 to the Registrant’s Registration Statement on Form
S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on June 6, 2014).
Advanced Drainage Systems, Inc. Non-Employee Director Compensation Plan (incorporated by
reference to Exhibit 10.8 to Amendment No. 4 to the Registrant’s Registration Statement on Form S-
1 (File No. 333-194980) filed with the Securities and Exchange Commission on July 2, 2014).
Advanced Drainage Systems, Inc. Amended 2000 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.9 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1
(File No. 333-194980) filed with the Securities and Exchange Commission on June 20, 2014).
10.9A† First Amendment to Amended 2000 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the
Securities and Exchange Commission on August 15, 2014).
10.10† Advanced Drainage Systems, Inc. 2008 Restricted Stock Plan. (incorporated by reference to
Exhibit 10.10 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1
(File No. 333-194980) filed with the Securities and Exchange Commission on June 20, 2014).
Advanced Drainage Systems, Inc.
Exhibit
Number
Description
10.10A† First Amendment to the 2008 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to Form
8-K filed February 10, 2017).
10.11† Advanced Drainage Systems, Inc. 2013 Stock Option Plan (incorporated by reference to Exhibit 10.11
to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980)
filed with the Securities and Exchange Commission on June 20, 2014).
10.11A† First Amendment to 2013 Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange
Commission on August 15, 2014).
10.11B† Form of Amendment to Pre-2017 Stock Option Agreements. #
10.12† Amended and Restated Executive Employment Agreement, dated as of June 20, 2014, by and between
Advanced Drainage Systems, Inc. and Joseph A. Chlapaty (incorporated by reference to Exhibit 10.12
to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980)
filed with the Securities and Exchange Commission on June 20, 2014).
10.12A† First Amendment to Amended and Restated Executive Employment Agreement, by and between the
Company and Joseph A. Chlapaty (incorporated by reference to Exhibit 10.1 to Form 8-K filed
February 10, 2017).
10.13† Amended and Restated Executive Employment Agreement, dated as of June 20, 2014, by and between
Advanced Drainage Systems, Inc. and Thomas M. Fussner (incorporated by reference to Exhibit 10.14
to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980)
filed with the Securities and Exchange Commission on June 20, 2014).
10.14† Amended and Restated Executive Employment Agreement, dated as of June 20, 2014, by and between
Advanced Drainage Systems, Inc. and Ronald R. Vitarelli (incorporated by reference to Exhibit 10.15
to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980)
filed with the Securities and Exchange Commission on June 20, 2014).
10.15† Amended and Restated Executive Employment Agreement, dated as of June 20, 2014, by and between
Advanced Drainage Systems, Inc. and Robert M. Klein (incorporated by reference to Exhibit 10.16 to
Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed
with the Securities and Exchange Commission on June 20, 2014).
10.16†
10.17†
Form of Indemnification Agreement. (incorporated by reference to Exhibit 10.6 to Amendment No. 2 to
the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities
and Exchange Commission on June 6, 2014).
Form of Incentive Stock Option Agreement pursuant to 2000 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.18 to Amendment No. 3 to the Registrant’s Registration Statement on Form
S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on June 20, 2014).
10.17A† Form of Incentive Stock Option Agreement (post-IPO) pursuant to 2000 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.18A to Form 10-K for the year ended March 31, 2015 filed
with the Securities and Exchange Commission on March 29, 2016).
10.18†
Form of Non-Qualified Stock Option Agreement (other than for Joseph A. Chlapaty) pursuant to 2013
Stock Option Plan (incorporated by reference to Exhibit 10.19 to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 20, 2014).
10.18A† Form of Non-Qualified Stock Option Agreement (for Joseph A. Chlapaty) pursuant to 2013 Stock
Option Plan (incorporated by reference to Exhibit 10.19A to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 20, 2014).
Advanced Drainage Systems, Inc.
Exhibit
Number
10.19†
Description
Form of Restricted Stock Agreement (other than for Joseph A. Chlapaty) pursuant to 2008 Restricted
Stock Plan (incorporated by reference to Exhibit 10.20 to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 20, 2014).
10.19A† Form of Restricted Stock Agreement (for Joseph A. Chlapaty) pursuant to 2008 Restricted Stock Plan
(incorporated by reference to Exhibit 10.20A to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 20, 2014).
10.20†
10.21
10.22
Form of Director Stock Agreement (incorporated by reference to Exhibit 10.21 to Amendment No. 4 to
the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities
and Exchange Commission on July 2, 2014).
Participation Agreement, dated as of July 17, 2000, by and between ADS Worldwide, Inc., Grupo
Altima S.A. de C.V., and ADS Mexicana, S.A. de C.V. (formerly known as Sistemas Ecologicos de
Drenaje, S.A. de C.V.), as amended on April 19, 2010, May 19, 2011, May 24, 2011, April 26, 2013
and January 31, 2014 (incorporated by reference to Exhibit 10.22 to Amendment No. 2 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and
Exchange Commission on June 6, 2014).
Interestholders Agreement, dated as of June 5, 2009, by and among Tubos y Plasticos ADS Chile
Limitada, Tigre Chile S.A., and Tuberias T-A Limitada, joined by Advanced Drainage Systems, Inc.
and Tigre S.A. — Tubos e Conexoes, as amended on July 31, 2009, October 2009, December 15,
2009, May 18, 2010, August 10, 2010, April 1, 2011 and January 25, 2012, with First Addendum to
Interestholders Agreement, dated as of June 27, 2011 (incorporated by reference to Exhibit 10.23 to
Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed
with the Securities and Exchange Commission on June 20, 2014).
10.22A Second Addendum to Interestholders Agreement, dated as of December 1, 2013 but entered into on
September 30, 2014, by and among Tubos y Plasticos ADS Chile Limitada, Tigre Chile S.A., Tuberias
Tigre-ADS Limitada, Advanced Drainage Systems, Inc. and Tigre S.A. — Tubos e Conexoes
(incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 001-36557) filed with the Securities and Exchange Commission on November 10, 2014).
10.23
Limited Liability Company Agreement, dated July 15, 2013, by and among ADS Ventures, Inc.,
BaySaver Technologies, Inc. and Mid-Atlantic Storm Water Research Center, Inc. formerly known as
Sistemas Ecologicos de Drenaje, S.A. de C.V.), as amended on April 19, 2010, May 19, 2011, May 24,
2011, April 26, 2013 and January 31, 2014 (incorporated by reference to Exhibit 10.24 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the
Securities and Exchange Commission on June 6, 2014).
10.23A Amendment No. 1 to BaySaver Technologies, LLC Limited Liability Company Agreement dated as of
July 17, 2015 by and among ADS Ventures, Inc., BaySaver Technologies, Inc. and Mid-Atlantic Storm
Water Research Center, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K filed July 20,
2015)
10.23B Sale and Assignment of Ownership Interest dated as of July 17, 2015 by and among ADS Ventures,
Inc., BaySaver Technologies, Inc. and Mid-Atlantic Storm Water Research Center, Inc. (incorporated
by reference to Exhibit 10.1 to Form 8-K filed July 20, 2015)
10.24
USA Shareholders Agreement, dated as of April 7, 2014, by and among Tigre-ADS USA Inc., ADS
Ventures, Inc. and Tigre S.A. — Tubos e Conexoes (incorporated by reference to Exhibit 10.25 to
Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed
with the Securities and Exchange Commission on July 2, 2014).
10.25† Executive Employment Agreement dated November 9, 2015, by and between the Company and
Scott A. Cottrill (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 9, 2015).
Advanced Drainage Systems, Inc.
Exhibit
Number
Description
10.26†
Form of Restricted Stock Agreement (for Joseph A. Chlapaty) pursuant to 2008 Restricted Stock Plan
(incorporated by reference to Exhibit 10.3 to Form 8-K filed February 10, 2017).
10.27†
Form of Restricted Stock Agreement (other than for Joseph A. Chlapaty) pursuant to 2008 Restricted
Stock Plan (incorporated by reference to Exhibit 10.4 to Form 8-K filed February 10, 2017).
10.28
Form of Non-Qualified Stock Option Agreement pursuant to 2013 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to Form 8-K filed February 10, 2017).
21.1
23.1
24.1
31.1
31.2
32.1
32.2
List of Subsidiaries. #
Consent of Deloitte & Touche LLP. #
Power of Attorney. #
Certification of President and Chief Executive Officer of Advanced Drainage Systems, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. #
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. #
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. #
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.INS XBRL Instance Document. #
101.SCH XBRL Taxonomy Extension Schema. #
101.CAL XBRL Taxonomy Extension Calculation Linkbase. #
101.DEF XBRL Taxonomy Extension Definition Linkbase. #
101.LAB XBRL Taxonomy Extension Label Linkbase. #
101.PRE XBRL Taxonomy Extension Presentation Linkbase. #
†
#
Management contract or compensatory plan.
Filed herewith.
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Board of Directors
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Joseph A. Chlapaty
(cid:42)(cid:79)(cid:72)(cid:80)(cid:89)(cid:84)(cid:72)(cid:85)(cid:19)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)
Joseph A. Chlapaty
(cid:42)(cid:79)(cid:72)(cid:80)(cid:89)(cid:84)(cid:72)(cid:85)(cid:19)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)
C. Robert Kidder
Lead Independent Director
Robert M. Eversole
Principal
Stonehenge Partners, Inc.
Alexander R. Fischer
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Columbus Partnership
Scott A. Cottrill
(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:45)(cid:80)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)(cid:19)
Secretary and Treasurer
Thomas M. Fussner
Executive Vice President and Co-Chief
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Ronald R. Vitarelli
Executive Vice President and Co-Chief
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Tanya Fratto
(cid:57)(cid:76)(cid:91)(cid:80)(cid:89)(cid:76)(cid:75)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)(cid:3)
General Electric Superabrasives
Robert M. Klein
Executive Vice President, Sales
Kevin C. Talley
(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:40)(cid:75)(cid:84)(cid:80)(cid:85)(cid:80)(cid:90)(cid:91)(cid:89)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)
Ewout Leeuwenburg
Senior Vice President, International
M.A. (Mark) Haney
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(cid:72)(cid:85)(cid:75)(cid:3)(cid:55)(cid:86)(cid:83)(cid:96)(cid:86)(cid:83)(cid:76)(cid:196)(cid:85)(cid:90)
Chevron Phillips Chemical Company LP
Carl A. Nelson, Jr.
Retired Managing Partner
Arthur Andersen
Richard A. Rosenthal
(cid:57)(cid:76)(cid:91)(cid:80)(cid:89)(cid:76)(cid:75)(cid:3)(cid:42)(cid:79)(cid:72)(cid:80)(cid:89)(cid:84)(cid:72)(cid:85)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)(cid:3)
St. Joseph Bancorp
Abigail S. Wexner
(cid:42)(cid:79)(cid:72)(cid:80)(cid:89)(cid:84)(cid:72)(cid:85)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89)(cid:3)
Whitebarn Associates
Why use the ticker symbol WMS?
ADS is the only company capable of providing a national, comprehensive
suite of water management solutions (WMS) using HDPE and PP pipe; we are
proud to reflect this unique position using the ticker symbol WMS.
Advanced Drainage System, Inc.
4640 Trueman Blvd.
Hilliard, OH 43026
www.ads-pipe.com