Fiscal Year 2018
Annual Report
Dear Fellow Shareholders,
We finished fiscal 2018 with strong financial performance. Net sales grew 6% to $1.3 billion and adjusted EBITDA grew 9%
to $210 million, both record levels for the Company. Our complete water management solutions and material conversion
strategies drove 500 basis points of above-market sales growth in our core domestic construction markets. This year’s
strong top line performance adds to our successful track record in outpacing market growth, which demonstrates our
strong position in the storm drainage market.
From a profitability standpoint, we executed on favorable pricing in the market to offset cost increases in resin due to
the hurricanes last September. We also drove improvements in manufacturing and transportation execution, took cost
containment actions and focused on improvements in our production and inventory planning. These actions contributed
to strong profitability in the second half of the year with adjusted EBITDA margin improving 420 basis points compared
to the prior year period. For the full year, adjusted EBITDA improved 40 basis points to 15.8%. I appreciate the hard work
of the ADS team and the support of the Board of Directors, which helped drive these strong results.
When I joined the Company last September, it was immediately clear to me that ADS has a strong culture and
commitment to integrity and values. This is a direct result of former CEO Joe Chlapaty’s passion for the Company and
its employees, entrepreneurship and vision. In the 24 years Joe led the Company, sales increased over $1 billion and ADS
became the market leader that it is today. I speak for all our employees in expressing our thanks to Joe for his dedication
to ADS and its employees past and present.
This strong culture underpins our highly relevant storm water market position. We operate a full complement of
manufacturing facilities across the Americas as well as a complex network of distribution sites, logistics functions and
transportation assets in the US and Canada. Our distribution customers and end users, such as developers, Departments
of Transportation, municipalities, counties, states and residences, rely on us for high quality, durable products and water
management solutions that are delivered safely, efficiently and on time. Our end users increasingly desire sustainable
solutions, including products manufactured from recycled materials that not only perform well but are better for the
environment. Our shareholders seek growing sales, profitability improvement and free cash flow which in turn increases
the value of their investment in ADS. It is our responsibility as management to ensure positive outcomes for
both parties.
As I move into my first full year as President and CEO at ADS, we will look to build on this strong foundation by focusing
on profitable growth and winning in the storm water drainage market in the Americas. Executing our market share
model, Approval – Acceptance – Coverage – Win Rate, will be the key to our success. Our market participation is strong in
many regions; however, looking forward we will have a keen focus on key geographies such as Florida, Texas, California
and other areas with growing demographics and construction profiles.
2 Equally important will be our programs to expand margins and improve working capital management. We have defined
important initiatives through our Superior Performance Program that will improve execution on sales and operations
planning, production planning, inventory management, and procurement, as well as drive cost reduction through
efficiency improvements. The Superior Performance Program will enable us to grow profitability and offset inflationary
cost pressure.
Moving Forward into Fiscal 2019
Looking forward into fiscal 2019, the current price and resin cost environment is stable, our order rate and backlog are
above prior year levels and we are optimistic about the health and strength of our underlying domestic construction
markets. Under new management, our ADS Mexicana joint venture is experiencing a healthy order trend and improved
year-over-year performance. These factors should bode well for continued top-line sales growth, which combined with
our water management solutions strategy and execution, should deliver profitable growth in fiscal 2019.
Capital allocation is also a key focus for us in fiscal 2019. Our capital allocation strategy is built on supporting organic
growth and profitability, finding the right acquisition opportunities and generating returns to shareholders through
dividends and share repurchases. Our capital allocation plans will follow this order of priority. Internally, we are building
an acquisition process based on strategic importance, qualitative characteristics, and financial attractiveness to identify
the right targets.
I am excited to be leading this talented group of people at ADS. Joe has been a tremendous partner during my
transition and the Board of Directors continues to provide outstanding support and counsel. I inherited a great business
with a talented workforce that has made our Company into what it is today. I look forward to building upon the ADS
legacy and delivering long-term shareholder value.
To our shareholders, I want to thank you for your continued support and confidence in our team.
Sincerely,
Scott Barbour
President and CEO
Dear Shareholders,
Fiscal 2018 was a transformative year for ADS. After 37 years of service, countless contributions and sincere dedication,
our former CEO Joe Chlapaty chose to begin his well-earned retirement. Joe’s passion for the business and his leadership
helped position ADS at the forefront of the markets we serve today, and we sincerely thank him for all that he has done
to make ADS a success story.
Scott Barbour, appointed in September 2017 as our new CEO, is an ideal match for ADS. Scott is a well-rounded executive
whose leadership style and skill set aligns well with ADS’ culture and objectives to drive growth and operational
excellence. Already, his impact on the Company has been substantial.
Additionally, we expanded our Board of Directors this year adding two exceptional leaders, Ross M. Jones, Managing
Director at Berkshire Partners, and Michael B. Coleman an attorney at Ice Miller and former Mayor of Columbus. Both
directors bring over 25 years of experience and a commitment to building shareholder value. We are very pleased to
welcome them to the board.
With this strong leadership in place, I am confident in the future of ADS in fiscal 2019 and for many years to come. I look
forward to delivering on our commitments to you, our shareholders, and thank you for your continued support.
C. Robert Kidder
Chairman of the Board of Directors
3
Company Snapshot
From the U.S. introduction and championing of corrugated plastic drainage pipe to the development
of N-12 dual-wall pipe and HP storm and sanitary sewer pipe, ADS has been an industry leader for
more than 50 years. Our innovative storm water and sanitary products are used across a broad range
of end markets and applications. We have established a leading position in many of our domestic and
international end markets by leveraging our national sales and distribution platform, overall product
breadth and scale, and manufacturing excellence.
1st
in Corrugated
Plastic Pipe
$1.3+
billion
2018 Revenue
50+
Years of
Experience
Ticker:
WMS
Since 2014
350+
Total Number of
Products Offered
4,400+
Total Number
of Employees
8.5+
billion
Feet of ADS pipe
in service around
the world today
44 Key Financial Highlights
FY 2018 Revenue
(Figures in millions)
FY 2018 Adjusted EBITDA1*
(Figures in millions)
CAGR: 5.7%
CAGR: 8.6%
$1,068
$1,180
$1,291
$1,257
$1,330
$151
$144
$187
$193
$210
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
1 EBITDA adjustments exclude one-time transaction costs
and certain non-cash items.
FY 2018 Sales by Geography
FY 2018 Domestic Sales
by End Use
88%
Domestic
12%
International
59%
21%
10%
10%
Non-Residential
Residential
Infrastructure
Agriculture
Construction:
90%
FY 2018 Domestic Revenue Growth Vs. End Market
Non-Residential
Residential
Infrastructure
Agriculture
8%
3%
4%
11%
4%
0%
-7%
-7%
Market Growth2
ADS Growth
2 Based on management estimates.
*Non-GAAP. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the accompany-
ing Form 10-K for the definitions of non-GAAP measures and reconciliation of non-GAAP measures to GAAP measures.
55 Our Proven Sustainability Impact
At ADS, we develop solutions to make land more arable, cities more livable and the world a
greener place to live. We lead the industry in ensuring the materials that go into our products
are environmentally sustainable. Following are some examples of how our work is advancing
the sustainability goals of the communities we serve.
Solving the World’s Water Management Challenges
We work closely with cities, towns and rural communities around the world to provide solutions that
address their water management challenges and help advance their sustainability goals. It is a role we
take seriously, as we know that with each pipe, fitting and chamber shipped, we are helping to improve
the environments and lives of people everywhere. One example of this is our work in the city of Akron,
Ohio, on its Aqueduct Street Green Infrastructure Project.
Akron was originally laid out in 1825, and at that time it was common practice for cities to run storm
water and sanitary waste through the same pipe. Over time, cities like Akron discovered that this resulted
in pollution in rivers and streams during heavy rain events, and the infrastructure needed to change to
manage wet weather and reduce sewer overflows. To address this issue, Akron engaged community
stakeholders to implement a variety of projects, including its innovative Aqueduct Street Green
Infrastructure Project – a complete, livable and green street design that has helped the city introduce
infiltration to more efficiently and cost-effectively manage stormwater.
ADS worked closely with our partners at Environmental Design Group to use creative solutions to provide
a sustainable infrastructure for the city’s stormwater management. The StormTech® chambers capture
rainwater, mimicking the natural water cycle by infiltrating stormwater and eliminating runoff into the
nearby Little Cuyahoga River.
Since 2009, our StormTech chambers have managed the retention and detention of over 1.4
billion gallons of storm water run-off, protecting bodies of water, wetlands and shorelines.
6
StormTech retention system
installation in Akron, OH
6 Delivering Innovative Solutions to Efficiently and Safely
Manage Storm Water
The LaGuardia Airport rebuild, which commenced in 2017, is another example of critical work we are doing
in communities across the country. ADS was engaged to support the underground work as part of the
$8 billion airport rebuild, which is being managed by development and construction group Skanksa Walsh
and scheduled to be completed by 2022. As part of this complex project, ADS’ supported the construction
of an underground stormwater drainage system using approximately 50,000 feet (about 10 miles) of two
types of thermoplastic pipe. Skanksa
elected to use 23,000+ feet of ADS
HP Storm pipe for the airside and
approximately 25,000 feet of ADS
N-12 corrugated HDPE pipe ranging
in diameter from 12 to 60 inches on
the landside.
innovative
technology has
ADS’
generated efficiencies across key
aspects of the project, including time
and cost savings. ADS’ lighter, less
expensive and nimble thermoplastic
pipe cut the time necessary to
complete the job with RCP by 50
percent. ADS’ easily-nestled pipe cut
the number of truck deliveries by two
compared with RCP, which has also
helped save time and money, while
complying with security standards.
Additionally, the innovative design
and high strength-to-weight ratio
of the N-12 and HP Storm pipes can
help LaGuardia achieve LEED Gold
certification for sustainable design.
Large diameter HP pipe installation at LaGuardia Airport
77 Partnering for a Greener Bottom Line
We lead the industry in ensuring the materials that go into
our products are environmentally sustainable. In fact, we
are one of the top five largest recyclers in the United States.
Through our Green Line Polymers recycling subsidiary, we
purchase and self-process reusable high-density polyethylene
(HDPE) from households and industrial operations, and then turn it into high-quality storm water
management pipe that will last a century.
®
This process is good for the environment and our business for the following reasons:
• Non-virgin plastic reduces our costs
• Saves more than 400 million pounds of plastic from ending up in landfills each year
• Results in virtually no waste for ADS to dispose
• Makes us a net positive recycler
Approximately 27% of all recycled HDPE pigmented bottles
in the United States are repurposed in ADS products
+
255
million pounds of
post-consumer
plastic
150
million pounds of
post-industrial
plastic
ADS high
performing pipe
88 Sustainability By-The-Numbers
Our commitment to advancing sustainable business practices isn’t just a trend or a means to
“check a box,” it is at the core of who we are and what we do. We are proud of the important
work we are doing to have a positive environmental, operational and social impact.
1 of the Top 5 Largest
Recycling
Companies
in North America
>400M
pounds
of plastic is kept from landfills
each year because of ADS
6%
improvement
3%
decrease
in our vehicle fleet’s fuel
economy since 2015
in our vehicle fleet’s empty
miles since 2015
Introduced compressed
natural gas-fueled trucks
into our vehicle fleet
400+
employees have
participated in
leadership training
>40%
Our MEGA GREEN™ pipe
contains > 40% recycled
HDPE materials
ntal
e
m
n
o
r
i
v
n
E
24%
56%
Increase in the percentage of
HDPE recycled
plastics
used in our plastic pipe
manufacturing over
the past decade
O
p
e
r
a
t
i
o
n
a
l
Our
Sustainability
Impact
Social & Gov e r n a n c
e
5,000
employees have received ethics
and anti-corruption training
since 2015
2,300
hours of ethics and anti-corruption training
have been delivered since 2015
We’ve increased our fleet’s
average miles per gallon each
year since 2015
New style aluminum drop
side trailers being introduced
to improve fuel efficiency
30incidents
Number of near-misses
for employee incidents
dropped by 30 in 2017
compared to 2016
Donated more than
$820,000
to charitable organizations in 2017
Supported
4 Industry
research studies
in 2017
4
Industry organization
memberships
9 Board of Directors
Executive Officers
Scott Barbour
Director, President and
Chief Excutive Officer
Scott A. Cottrill
Executive Vice President,
Chief Financial Officer, Secretary
Ronald R. Vitarelli
Executive Vice President,
Engineering and Business Development
Robert M. Klein
Executive Vice President, Sales
Kevin C. Talley
Executive Vice President and
Chief Administrative Officer
Ewout Leeuwenburg
Senior Vice President, International
Chairman Emeritus
Joe Chlapaty
Chairman Emeritus,
Retired Chairman, Chief Executive Officer,
President
Advanced Drainage Systems
Chlapaty Investments LLC
Robert Kidder
Chairman
Scott Barbour
Director, President and
Chief Excutive Officer
Michael B. Coleman
Partner
Ice Miller LLP
Robert M. Eversole
Principal
Stonehenge Partners, Inc.
Alexander R. Fischer
President and Chief Excutive Officer
Columbus Partnership
Tanya Fratto
Retired President and Chief Excutive Officer
General Electric Superabrasives
M.A. (Mark) Haney
Retired Excutive Vice President of Olefins
and Polyolefins
Chevron Phillips Chemical Company LP
Ross M. Jones
Managing Director
Berkshire Partners
Carl A. Nelson, Jr.
Retired Managing Partner
Arthur Andersen
Richard A. Rosenthal
Retired Chairman and Chief Excutive Officer
St. Joseph Bancorp
Abigail S. Wexner
Chairman and Chief Excutive Officer
Whitebarn Associates
10 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, 2018
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:3) No (cid:4)
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)
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)
Accelerated Filer
Smaller Reporting Company
(cid:4)
(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 $899 million as of September 30, 2017, 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, 2017.
As of May 21, 2018, the registrant had 56,562,490 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 21, 2018, 191,791 shares of unvested restricted common stock were
outstanding and 23,298,404 shares of ESOP preferred stock, convertible into 17,921,132 shares of common stock, were outstanding. As of May
21, 2018, 74,675,413 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 24, 2018.
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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30
30
31
32
33
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62
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64
65
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65
65
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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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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;
our ability to achieve the acquisition component of our growth strategy;
the risk associated with manufacturing processes;
1
Advanced Drainage Systems, Inc.
(cid:129)
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(cid:129)
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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;
fluctuations in our effective tax rate, including from the recently enacted Tax Cuts and Jobs Act;
changes to our operating results, cash flows and financial condition attributable to the recently enacted
Tax Cuts and Jobs Act;
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.
2
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 2018, we generated net sales of $1.3 billion, net
income of $64.8 million and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted
EBITDA”) of $210.2 million and, as of March 31, 2018, we had $300.8 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 December 25, 2017 ranking by Plastics News of Pipe, Profile & Tubing
Extruders, recently had estimated sales of $135 million, or approximately ten times less than our net sales in fiscal
2018.
3
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 2018 Revenue
FY2018 Sales by Geography
FY2018 Domestic Sales by End Use
International
12%
Agriculture
10%
Infrastructure
11%
Domestic
88%
Residential
21%
Non-
Residential
58%
Construction: 88%
SEGMENT INFORMATION
For a discussion of segment and geographic information, see “Note 20. 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 57 manufacturing plants and 32 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 expected growth.
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.
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.
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Advanced Drainage Systems, Inc.
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 in Mexico and South America through joint
ventures with local partners. Our joint venture strategy has provided us with local and regional access to key markets
such as Mexico, Brazil, Chile, Argentina, and Peru. Our international joint ventures produce pipe and related
products to be sold in their respective regional markets. We also have wholly-owned subsidiaries that distribute our
pipe and related products in Europe and the Middle East. Combining local partners’ 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 profitable 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 11% 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 1,200 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.
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
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Advanced Drainage Systems, Inc.
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
2018
2017
2016
72%
28%
72%
28%
74%
26%
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.
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
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Advanced Drainage Systems, Inc.
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.
Allied Products
We produce a range of additional water management products (“Allied Products”) that are complementary to
our pipe 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
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.
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Advanced Drainage Systems, Inc.
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 460 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 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 has been
expanded during fiscal 2018 primarily as a result of the new supplies of natural gas liquids being produced through
sustained oil and gas exploration and production. Additional design capacity should be achieved during fiscal 2019.
Polypropylene capacity expansion projects are projected to be available in the second half of fiscal 2019.
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
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 2018, 98% of our non-virgin HDPE raw material
needs were internally processed (enhanced) through our GLP operations.
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Advanced Drainage Systems, Inc.
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 2018 net sales. Ferguson Enterprises (“Ferguson”) accounted for 13.4% and Core and Main
accounted for 12.0% of fiscal 2018 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, Core
and Main 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 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 400 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
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.
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Advanced Drainage Systems, Inc.
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 many
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
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.
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Advanced Drainage Systems, Inc.
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, 2018, in our domestic and international operations the Company and its consolidated and
unconsolidated joint ventures had approximately 4,400 employees, consisting of approximately 3,000 hourly
personnel and approximately 1,400 salaried employees. As of March 31, 2018, approximately 350 hourly personnel
in our Mexican and South American joint ventures 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
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.
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Advanced Drainage Systems, Inc.
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
these websites are intended to be inactive textual references only.
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
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Advanced Drainage Systems, Inc.
March 31, 2016, 2015 and 2014 as well as each of the quarters in fiscal 2016 and 2015 (the “Stock-Based
Compensation Restatement”). 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 2018, 2017 and 2016 as a result of the Prior Restatements were approximately $4 million, $24 million and
$28 million, respectively. We have also incurred significant expenses in connection with the remediation of the
weaknesses in our internal control over financial reporting as further described below.
While we have remediated previously identified material weaknesses in our internal control over financial
reporting related to the Prior Restatement, we may identify other material weaknesses in the future 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. We had previously identified certain material weaknesses in our internal control
over financial reporting that related to the matters associated with the Prior Restatement, which material weaknesses
have been remediated. 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.
While we have remediated those previously identified material weaknesses, there can be no assurances that
our controls will remain adequate. 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.
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 Prior Restatement of our previously issued financial results has resulted in an ongoing investigation by the
SEC as well as private litigation, 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.
As further described below under “Item 3. Legal Proceedings,” the accounting errors and internal control
problems disclosed in the Prior Restatement have been the subject of a formal investigation by the SEC’s Division
of Enforcement (“Enforcement Division”). The Company has continued to cooperate with the SEC investigation and
recently has engaged in discussions with the staff of the Enforcement Division about a potential resolution. As part
of settlement discussions the Company has submitted a formal offer of settlement to the Enforcement Division. The
accounting errors and internal control problems disclosed in the Prior Restatement were also the subject of a putative
class action lawsuit filed in the U.S. District Court for the Southern District of New York. While the United States
Court of Appeals for the Second Circuit denied a petition for rehearing on an order affirming dismissal of the class
action on November 28, 2017 (and the plaintiff did not seek Supreme Court review), we could become subject to
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Advanced Drainage Systems, Inc.
additional litigation or government investigations and enforcement actions arising out of the Prior Restatement, the
Stock-Based Compensation Restatement, as well as any 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. The terms of the SEC settlement offer described above remain subject to approval of the Commission and
there can be no assurance that our efforts to resolve the SEC’s investigation will be successful or that the settlement
amount will be as anticipated, and we cannot predict the ultimate timing or outcome of the Commission’s
consideration. Although we maintain insurance that may provide coverage for some of these expenses (excluding
any civil monetary penalties that may be imposed by the Commission as part of its investigation as referenced
above), 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 2018 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 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
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.
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Advanced Drainage Systems, Inc.
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. 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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
The volatility of the United States economy in general can have an adverse effect on our sales that are
dependent on the non-residential construction market. Continued uncertainty about current economic
conditions 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 after its peak in 2005. While new housing
starts demonstrated a compounded annual growth rate of 9.0% from 2012 to 2017, current levels remain
below the long-term average of 1.4 million starts since the U.S. Census Bureau began reporting the data
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.
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 88.3%, 7.1% and 3.5%, respectively, of our net sales for fiscal 2018 and collectively
represented approximately 98.9% of our net sales for fiscal 2018.
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
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,
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Advanced Drainage Systems, Inc.
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.
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. 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. We anticipate that fluctuations of our operations
results from period to period due to seasonality will continue in the future.
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Advanced Drainage Systems, Inc.
The loss of any of our significant customers could adversely affect our business, financial condition, results of
operations and cash flows.
Our ten largest customers generated approximately 40% of our net sales in fiscal 2018. 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,
including recent changes in U.S. tax laws, 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
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
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Advanced Drainage Systems, Inc.
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. 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 resulted in a determination of material weakness, which
material weaknesses have been remediated, 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, 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 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 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
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Advanced Drainage Systems, Inc.
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 are 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
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.
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Advanced Drainage Systems, Inc.
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. Consequently, a 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 fixed 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, 2018 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
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
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Advanced Drainage Systems, Inc.
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.
In addition, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) significantly changes how
the U.S. taxes corporations. The Tax Cuts and Jobs Act requires complex computations to be performed that were
not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the
Tax Cuts and Jobs Act and significant estimates in calculations, and the preparation and analysis of information not
previously relevant or regularly produced. The U.S. Treasury Department, the Internal Revenue Service (the “IRS”),
and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Cuts and Jobs Act
will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of
the Tax Cuts and Jobs Act, collect and prepare necessary data, and interpret any additional guidance, we may make
adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes
in the period in which the adjustments are made.
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 profit 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
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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.
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-
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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
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. Inability 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
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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 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.
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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
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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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, 2018, we had an aggregate principal amount of $300.8 million of outstanding debt. In fiscal
year 2018, we incurred $11.2 million of interest expense, net of the impact of interest rate swaps, 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 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 $550.0 million. As of
March 31, 2018, we had an additional $365.5 million of availability under the Revolving Credit Facility. Our
subsidiary ADS Mexicana had $12.0 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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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 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 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
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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, 2018, we have 56.9 million outstanding shares of common stock, including 0.2 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. We have 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, 2018, there were stock options outstanding to purchase a total of approximately
1.8 million shares of our common stock. In addition, approximately 3.3 million shares of common stock are
available for grant under our 2017 Omnibus 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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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, 2018, there
were approximately 23.3 million shares of convertible preferred stock held by our ESOP, which in aggregate could
be converted into approximately 17.9 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 21, 2018, our directors, officers and principal stockholders and their affiliates collectively own
approximately 49.2% 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 21, 2018 is approximately
64.0%, 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
29
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.
Item 2. Properties
Property
We have a network of 57 manufacturing plant locations and 32 distribution centers, summarized in the
following table:
United States
Canada
Mexico (1)
South America (1)(2)
Netherlands
Total
Manufacturing
Plants
45
5
4
3
—
57
Distribution
Centers
20
5
—
6
1
32
Total
65
10
4
9
1
89
(1) Manufacturing plants and distribution centers in Mexico and South America are owned or leased by our
joint ventures.
30
Advanced Drainage Systems, Inc.
(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 75 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 57 manufacturing plants consist of 45 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
32 distribution centers consisted of 1 owned and 31 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.
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, 2018, our in-house fleet consist of approximately 700 tractors and approximately 1,200
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 former Chief Executive Officer, and Mark B. Sturgeon,
the Company’s former Chief Financial Officer, as defendants and alleging violations of the federal securities laws.
31
Advanced Drainage Systems, Inc.
An amended complaint was filed on April 28, 2016. The amended complaint alleged that the Company made
material misrepresentations and/or omissions of material fact in its public disclosures during the period from July
25, 2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder. On March 10, 2017, the District Court dismissed Plaintiff’s
claims against all defendants in their entirety and with prejudice. Plaintiff appealed to the United States Court of
Appeals for the Second Circuit, and on October 13, 2017 the District Court’s judgment was affirmed by the Second
Circuit. On October 27, 2017, Plaintiff filed a petition for rehearing with the Second Circuit. The Second Circuit
denied the petition for rehearing on November 28, 2017. The plaintiff did not seek Supreme Court review and
therefore the matter is closed.
On August 12, 2015, the SEC’s Division of Enforcement (the “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 continued
to cooperate with the Enforcement Division’s investigation and recently has engaged in discussions with the staff of
the Enforcement Division about a potential resolution. As part of settlement discussions the Company has submitted
a formal offer of settlement to the Enforcement Division for consideration by the Commission. The terms of the
settlement offer remain subject to approval by the Commission. Accordingly, there can be no assurance that the
Company’s efforts to resolve the investigation will be successful or that the settlement amount will be as anticipated,
and the Company cannot predict the ultimate timing or outcome of the Commission’s consideration.
In May 2017, a former employee filed a class action complaint against the Company in Superior Court for
the State of California, County of Kern (the “Hayes matter”), alleging that the Company violated certain California
wage and hour laws for missed meal and rest periods and other wage and hour claims. In June 2017, the Company
removed the case to the United States District Court for the Eastern District of California. The plaintiffs were
seeking to recover, on their own behalf and on behalf of a putative class of all non-exempt ADS employees in the
State of California from December 16, 2012 through present, damages resulting from missed rest breaks, missed
meal periods, unpaid minimum wage, straight-time and overtime pay, improper wage statements, non-payment of
wages at termination, and attorneys’ fees and costs. On January 24, 2018, the parties attended mediation and entered
into a settlement agreement to resolve the class action for $1.8 million. As part of the parties’ agreement, ADS
consented to have the case remanded back to Kern County Superior Court for approval of the class settlement.
Thereafter, during the fourth quarter of fiscal 2018, the parties agreed to amend their existing Hayes
settlement agreement (i) to expand the settlement class to include temporary employees assigned to work at ADS
locations in California and (ii) to increase the settlement amount from $1.8 million to $2.0 million. The parties
stipulated to the filing of an Amended Complaint to add a California Private Attorneys General Act (“PAGA”)
claim, as well as a joint employer claim on behalf of temporary employees assigned to work at ADS locations in
California. Pursuant to the settlement, the Company would pay approximately $2.0 million, which includes
payments to class members in resolution of all claims, attorneys’ fees, and settlement fund claims administration
fees. The settlement is subject to court approval and approval by the California Labor and Workforce Development
Agency; these approvals are pending.
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.
32
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 2018 and 2017:
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
Stock Prices
High
Low
Dividends Paid
Per Share
$
$
$
$
$
$
$
$
23.42 $
22.65 $
24.50 $
28.15 $
27.74 $
28.49 $
24.12 $
26.29 $
18.85 $
18.40 $
17.90 $
21.70 $
$
20.98 $
22.64 $
18.60 $
20.00 $
$
0.07
0.07
0.07
0.07
0.28
0.06
0.06
0.06
0.06
0.24
During each quarter of fiscal 2017, the Board of Directors approved a quarterly cash dividend of $0.06 per
share to all common stockholders. In addition, during each quarter of fiscal 2018, the Board of Directors approved a
quarterly cash dividend of $0.07 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 2019, the Company declared a quarterly cash dividend of $0.08 per share of
common stock. The dividend is payable on June 15, 2018 to stockholders of record at the close of business on June
5, 2018.
Holders of Record
As of May 21, 2018, we had 321 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.
33
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, 2018 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 investment 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. During fiscal 2018, we repurchased 400,000 shares of common stock at a
cost of $7.9 million.
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.
34
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
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 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 of unconsolidated
affiliates
Net income (loss)
Less: net income attributable to noncontrolling
interest
Net income (loss) attributable to ADS
Weighted average common shares outstanding:
Basic
Diluted
Net income (loss) per share
Basic
Diluted
Cash dividends declared per share
2018
2017
2016
2015
2014
$1,330,354 $1,257,261 $1,290,678 $1,180,073 $1,067,780
875,232
1,027,873
192,548
302,481
74,042
92,764
62,897
98,392
961,451 1,005,326
285,352
295,810
88,478
91,475
92,504
110,950
974,960
205,113
80,481
75,855
15,003
8,068
88,254
15,262
(3,950)
76,942
11,411
8,509
8,548
76,328
17,467
(5,970)
64,831
24,615
812
9,224
94,334
18,460
16,575
59,299
23,498
362
9,754
38,661
19,368
14,370
4,923
6,284
739
64,792
4,308
35,908
5,234
30,567
2,335
(3,696)
2,785
62,007
2,958
32,950
5,515
25,052
4,131
(7,827)
(2,863)
10,145
48,327
18,807
(1,177)
30,697
19,637
3,086
7,974
3,593
4,381
55,696
56,334
54,919
55,624
53,978
55,176
51,344
51,344
47,277
47,277
$
1.00 $
0.99
0.28
0.51 $
0.50
0.24
0.40 $
0.39
0.20
(0.38) $
(0.38)
0.08
(0.21)
(0.21)
1.68
35
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)
2018
2017
2016
2015
2014
$
3,623 $
17,587 $
237,210
6,555 $
187,378
6,450 $
184,812
3,931
228,947 226,535
1,043,242 1,046,285 1,037,316 1,033,581 977,164
385,772 436,926
34,366
45,503
748,435 787,012
108,021 643,191
177,125 (453,039)
310,849
58,710
695,850
112,825
237,610
312,214
56,809
723,080
111,747
202,489
270,900
59,963
609,433
109,550
324,259
$ 137,120 $ 104,239 $ 135,342 $
(49,018)
(61,259)
(30,445)
74,379 $ 72,410
(38,712)
(76,093)
(94,953)
(42,825)
(82,964)
1,791
(31,109)
$ 210,230 $ 193,371 $ 187,340 $ 143,877 $ 151,333
40,933
31,477
44,942
90,400
32,080
42,299
46,676
57,563
41,709
95,411
(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 9. Investment in Consolidated Affiliates,” 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 8. Fair Value
Measurement” regarding the accounting treatment for our mezzanine equity post-IPO.
Non-GAAP Measures
EBITDA and Adjusted EBITDA – EBITDA and Adjusted EBITDA, non-GAAP financial measures, have been
presented in this Annual Report on Form 10-K as supplemental measures of financial performance that are not
required by, or presented in accordance with GAAP. We calculate EBITDA as net income before interest, income
taxes and depreciation and amortization. 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.
EBITDA and Adjusted EBITDA are included in this Annual Report on Form 10-K because they are a key
metric used by management and our Board of Directors to assess our financial performance. EBITDA and Adjusted
EBITDA are frequently used by analysts, investors and other interested parties to evaluate companies in our
industry. In addition to covenant compliance and executive performance evaluations, we use EBITDA and 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.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance and should not be
considered as alternatives to net income as measures 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. EBITDA and Adjusted EBITDA contain
36
Advanced Drainage Systems, Inc.
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 EBITDA and 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. Management compensates for these limitations by relying on our GAAP
results in addition to using EBITDA and adjusted EBITDA supplementally. Our measure of EBITDA and adjusted
EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different
methods of calculation.
The following table presents a reconciliation of EBITDA and 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)
Executive retirement expense (benefit)(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)
Legal Settlement (j)
Impairment of investment in unconsolidated
affiliate (k)
Transaction costs (l)
Adjusted EBITDA
2018
2017
2016
72,355
17,467
24,615
75,003
15,262
11,411
$ 64,792 $ 35,908 $ 30,567 $
71,009
18,460
23,498
166,468 150,345 143,534
2,163
697
(10,921)
(1,629)
(443)
(1,748)
2014
2015
(3,696) $
65,472
19,368
6,284
7,974
63,674
18,807
19,637
87,428 110,092
(53)
845
7,746
5,404
15,003
8,509
812
362
(2,863)
2,692
—
39
2,751
—
(265)
3,215
—
371
3,585
—
174
2,845
25,134
738
7,121
8,307
(5,868)
24,247
4,338
11,724
1,473
9,568
1,092
10,250
(294)
12,144
328
7,891
737
—
—
—
—
4,227
2,000
—
—
525
(609)
24,026
—
—
490
—
—
27,970
—
1,011
—
—
—
—
—
69
—
—
—
—
—
312
1,362
—
1,560
$ 210,230 $ 193,371 $ 187,340 $ 143,877 $ 151,333
—
1,448
1,300
372
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.
(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.
37
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 2014
includes our proportionate share of an asset impairment of $1.0 million recorded by our South American joint
venture. Our use of non-GAAP measures that are subject to our unconsolidated affiliates’ adjustments is not
intended to imply that we have control over the operations and resulting revenues and expenses of our
unconsolidated affiliates
(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 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
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. Fiscal 2018 expenses relate to the ongoing SEC
Enforcement Division’s investigation and related shareholder litigation.
Represents settlement agreement to resolve the Hayes matter, as further discussed in “Note 14. Commitments
and Contingencies” to the Consolidated Financial Statements.
(i)
(j)
(k) Represents an other-than-temporary impairment of our investments in Tigre-ADS USA and the South
(l)
American Joint Venture.
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 as well as expenses related to both
successful and unsuccessful potential 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
2018
2017
2016
$ 137,120 $ 104,239 $ 135,342 $ 74,379 $ 72,410
(40,933)
$ 95,411 $ 57,563 $ 90,400 $ 42,299 $ 31,477
(32,080)
(44,942)
(41,709)
(46,676)
2015
2014
38
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, 2018 refers to fiscal 2018, which is the period from April 1, 2017 to March 31,
2018.
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.
39
Advanced Drainage Systems, Inc.
Restructuring Activities
In fiscal 2018, we initiated restructuring activities designed to improve our cost structure, including closing
four underutilized manufacturing facilities, reducing headcount and eliminating nonessential costs. The following
table summarizes the restructuring activity included in Loss on disposal of assets and costs from exit and disposal
activities recorded during the fiscal year ended March 31, 2018:
(Amounts in thousands)
Accelerated depreciation
Plant severance
Corporate severance
Product rationalization
Other restructuring activities
Total Restructuring Activities
$
$
2018
3,759
2,041
4,133
1,351
159
11,443
The following table summarizes the line items of the Consolidated Statements of Operations where the
expenses above would have been recorded absent a restructuring program:
(Amounts in thousands)
Cost of goods sold
Selling expenses
General and administrative expenses
Total Restructuring Activities
$
$
2018
7,878
1,620
1,945
11,443
The restructuring costs above may not indicative of expected costs or cost savings in future periods.
As of March 31, 2018, we have $3.4 million and $0.5 million of restructuring liabilities related to the
restructuring activities recorded in Other accrued liabilities and Other liabilities, respectively, in the Consolidated
Balance Sheet.
Federal Income Tax Reform
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act significantly
revises the future ongoing U.S. corporate income tax by, among other things, lowering the U. S. corporate income
tax rate from 35% to 21%, full expensing on qualified property, eliminates the domestic manufacturing deduction
and implements a territorial tax system. The 21% U.S. corporate income tax rate is effective January 1, 2018. Based
on the Company’s fiscal year end of March 31, the U.S. statutory federal rate is 31.5% for the fiscal year ended
March 31, 2018. We currently estimate the provisional future effective tax rate will be in the range of 30% to 32%
which is a decrease of 8% to 10% from our previous historical expectation.
The Company has recognized the provisional tax impacts related to revaluation of deferred tax assets and
liabilities and deemed repatriated earnings and included these amounts in its financial statements for the year ended
March 31, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among
other things, additional analysis, changes in interpretations and assumptions the Company has made, additional
regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The
accounting is expected to be finalized when the fiscal 2018 U.S. corporate income tax return is filed.
The Company recognized an initial provisional amount for revaluing its deferred tax attributes resulting in a
$14.7 million tax benefit for the quarter ended December 31, 2017. On the basis of revised computations during the
fourth quarter, we recognized an additional deferred tax benefit of $1.3 million for the quarter ended March 31,
2018. A total deferred tax benefit of $16.0 million was recorded for the fiscal year ended March 31, 2018.
The Company had an estimated $33.2 million of undistributed earnings on its foreign subsidiaries subject to
the deemed mandatory repatriation. The Company recognized an initial provisional $4.4 million of income tax
expense for the quarter ended December 31, 2017. After the utilization of existing foreign tax credits, the Company
40
Advanced Drainage Systems, Inc.
expected to pay additional U.S. federal taxes of approximately $0.9 million on the deemed mandatory repatriation as
of the quarter ended December 31, 2017. On the basis of revised undistributed earnings computations that were
calculated during the fourth quarter, we recognized an additional measurement-period adjustment of $0.8 million to
income tax expense for the quarter ended March 31, 2018. A total transition tax expense of $5.2 million has been
recorded for the fiscal year ended March 31, 2018. After the utilization of existing foreign tax credits, the Company
expects to pay additional U.S. federal taxes of approximately $1.0 million as of the fiscal year ended March 31,
2018.
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 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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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.
41
Advanced Drainage Systems, Inc.
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 in
2005, Rita in late 2005 and Harvey in 2017), often within a short period of time, even if crude oil and natural gas
prices remain low. Our 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
460 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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 98% of our recycled HDPE resin was internally processed
(enhanced) in fiscal year 2018);
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
42
Advanced Drainage Systems, Inc.
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 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.
Description of our Segments
We operate a geographically diverse business, serving customers in approximately 80 countries. For fiscal
2018, approximately 88% ($1,174.4 million) of net sales were attributable to customers located in the United States
and approximately 12% ($155.9 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 20.
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 2018, 2017, and 2016, we generated net sales attributable to our Domestic segment of
$1,174.4 million, $1,102.2 million, and $1,113.8 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 $17.6 million, $18.7 million and $20.9 million in fiscal years 2018, 2017, and 2016, 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 2018,
2017, and 2016, we generated net sales attributable to our International segment of $155.9 million, $155.1 million,
and $176.9 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 $44.6 million, $42.2 million, and $50.3 million, in fiscal 2018, 2017, and 2016,
respectively.
43
Advanced Drainage Systems, Inc.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA - EBITDA and Adjusted EBITDA, non-GAAP financial measures, have been
presented in this Annual Report on Form 10-K as supplemental measures of financial performance that are not
required by, or presented in accordance with GAAP. We calculate EBITDA as net income before interest, income
taxes and depreciation and amortization. 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.
EBITDA and Adjusted EBITDA are included in this Annual Report on Form 10-K because they are a key
metric used by management and our Board of Directors to assess our financial performance. EBITDA and Adjusted
EBITDA are frequently used by analysts, investors and other interested parties to evaluate companies in our
industry. In addition to covenant compliance and executive performance evaluations, we use EBITDA and 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.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance and should not be
considered as alternatives to net income as measures 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. EBITDA and Adjusted EBITDA contain
certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital
needs and cash costs to replace assets being depreciated and amortized. In evaluating EBITDA and 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. Management compensates for these limitations by relying on our GAAP
results in addition to using EBITDA and adjusted EBITDA supplementally. Our measure of EBITDA and adjusted
EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different
methods of calculation.
For a reconciliation of EBITDA and adjusted EBITDA to net income (loss), the most comparable GAAP
measure, 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.”
44
Advanced Drainage Systems, Inc.
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 by segment
Domestic
International
Total net income
Segment Adjusted EBITDA
Domestic
International
Total Adjusted EBITDA
2018
2017
2016
$ 835,421
339,011
1,174,432
62.8% $ 786,546
315,690
25.5%
88.3% 1,102,236
62.6% $ 812,071
301,725
25.1%
87.7% 1,113,796
62.9%
23.4%
86.3%
118,644
37,278
155,922
10.8%
2.9%
13.7%
$1,330,354 100.0% $1,257,261 100.0% $1,290,678 100.0%
122,384
32,641
155,025
139,731
37,151
176,882
9.7%
2.6%
12.3%
8.9%
2.8%
11.7%
$
$
88.4% $
57,279
7,513
11.6%
64,792 100.0% $
35,118
790
97.8% $
2.2%
35,908 100.0% $
81.4%
24,875
5,692
18.6%
30,567 100.0%
$ 191,629
18,601
86.9%
13.1%
$ 210,230 100.0% $ 193,371 100.0% $ 187,340 100.0%
90.8% $ 162,875
24,465
91.2% $ 175,676
17,695
8.8%
9.2%
Fiscal Year Ended March 31, 2018 Compared with Fiscal Year Ended March 31, 2017
The following table summarizes our operating results as a percentage of net sales that have been derived from
our Consolidated Financial Statements for the fiscal years ended March 31, 2018 and 2017. We believe this
presentation is useful to investors in comparing historical results.
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 and other income, net
Income before income taxes
Income tax expense
Equity in net loss of unconsolidated affiliates
Net income
Less: net income attributable to the non-
controlling interest
Net income attributable to ADS
45
2018
2017
100.0%
77.3
22.7
7.0
7.4
100.0%
76.5
23.5
7.3
8.8
1.1
0.6
6.6
1.1
(0.3)
5.8
0.9
0.1
4.9
0.2
4.7%
0.7
0.7
6.1
1.4
(0.5)
5.2
2.0
0.3
2.9
0.2
2.6%
Advanced Drainage Systems, Inc.
Net sales - Net sales totaled $1,330.4 million in fiscal 2018, increasing $73.1 million or 5.8%, as compared to
$1,257.3 million in fiscal 2017.
Fiscal Year Ended March 31,
2018
2017
$ Variance
% Variance
(in thousands)
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
$
835,421 $
339,011
1,174,432
786,546
315,690
1,102,236
118,644
37,278
155,922
122,384
32,641
155,025
$ 1,330,354 $ 1,257,261
$
$
48,875
23,321
72,196
(3,740)
4,637
897
73,093
6.2%
7.4
6.5%
(3.1)%
14.2
0.6
5.8%
Our Domestic sales increased $72.2 million, or 6.5%, as compared to fiscal 2017. Our domestic pipe sales
increased by $48.9 million, or 6.2%, which was primarily the result of pipe volume increase of $27.0 million and
price increases and changes in product mix of $21.4 million. Allied Product sales increased $23.3 million, or 7.4%.
International sales remained relatively flat with an increase of $0.9 million, or 0.6%, to $155.9 million in
fiscal year 2018, as compared to $155.0 million in the prior year. The increase was primarily attributable to an
increase in Allied Product sales of $4.6 million, or 14.2%. This increase was offset by a decrease in international
pipe sales of $3.7 million.
Cost of goods sold and Gross profit - Cost of goods sold increased $66.4 million, or 6.9%, to $1,027.9 million
during year 2018 as compared to $961.5 million during fiscal 2017.
Gross profit increased $6.7 million, or 2.3%, to $302.5 million from $295.8 million during fiscal 2017. Gross
profit as a percentage of net sales decreased to 22.7% in fiscal 2018 from 23.5% in fiscal 2017.
Gross Profit
Domestic
International
Total gross profit
Fiscal Year Ended March 31,
2018
2017
$ Variance
% Variance
(in thousands)
$ 277,429 $ 267,976
27,834
$ 302,481 $ 295,810
25,052
$
$
9,453
(2,782)
6,671
3.5%
(10.0)
2.3%
Domestic gross profit increased $9.4 million, or 3.5%, to $277.4 million for fiscal 2018 as compared to
$268.0 million during fiscal 2017. The increase was primarily due to the gross profit impact of the net sales increase
discussed above offset by a $13.2 million increase in material costs and a $6.5 million increase in distribution
expenses.
International gross profit decreased $2.8 million, or 10.0%, for fiscal 2018 over fiscal 2017 primarily due to a
$3.6 million increase in labor and overhead costs partially offset by the gross profit impact of the 0.6% increase in
net sales discussed above.
Selling expenses - Selling expenses for fiscal 2018 decreased as a percentage of revenue by 30 basis points over
fiscal 2017. The decrease is primarily due to a benefit in bad debt expense in fiscal 2018 resulting from the
collection of approximately $0.6 million from a Canadian customer that had previously been reserved offset by an
increase of $1.3 million in compensation expense.
General and administrative expenses - General and administrative expenses for fiscal 2018 decreased as a
percentage of revenue by 140 basis points over fiscal 2017. The decrease was primarily due to a decrease in
46
Advanced Drainage Systems, Inc.
professional and legal fees of $13.5 million resulting from decreased restatement costs. The decrease was also due to
a decrease in stock-based compensation expense of $1.3 million. This decrease was partially offset by a legal
settlement of $2.0 million. On April 1, 2017, all stock options were amended and became equity classified. In the
fiscal year ended March 31, 2017, all stock options were liability-classified resulting in adjustments to fair value
each period.
Loss on disposal of assets and costs from exit and disposal activities – In the fiscal year ended March 31, 2018, we
recorded $11.4 million of expense related to restructuring activities, including closing four underutilized
manufacturing facilities. In addition, we recorded a loss on other disposals and partial disposals of property, plant
and equipment of approximately $3.6 million. See “Note 2. Loss on Disposal of Assets and Costs from Exit and
Disposal Activities” for additional discussion.
Intangible amortization - Intangible amortization remained relatively flat as a percentage of revenue in fiscal 2018
compared to fiscal 2017.
Interest expense - Interest expense from our debt and capital lease obligations decreased $2.2 million or 12.6% in
fiscal 2018 as compared to fiscal 2017. Interest expense decreased primarily due to our average overall outstanding
debt decreasing by $25.0 million or 7.1% for fiscal 2018 compared to the average balance outstanding for fiscal
2017.
Derivative gains and other income, net – Derivative gains and other income, net, decreased to gains of $4.0 million
in fiscal 2018 compared to gains of $6.0 million in fiscal 2017. The decrease in gain on derivative contracts is
primarily due to a significant amount of the Company’s propylene swaps maturing in fiscal 2017. The decrease in
gain on derivative contracts was partially offset by changes in foreign currency exchange rates.
Income tax expense – For the fiscal years ended March 31, 2018 and 2017, we had effective tax rates of 14.8% and
38.0%, respectively. The decrease in the effective tax rate was primarily due to impact of the Tax Act and return to
provision adjustments. See “Note 17. Income Taxes” for additional information.
Equity in net loss of unconsolidated affiliates - Equity in net loss of unconsolidated affiliates decreased $3.6 million
over fiscal 2018 to a net loss of $0.7 million for fiscal 2018 compared to a net loss of $4.3 million during fiscal
2017. The net loss decreased primarily as a result of the $1.9 million gain recognized as a result of the contribution
of outstanding receivables we made to the South American Joint Venture. See “Note 10. Investment in
Unconsolidated Affiliates” for additional information. The decrease was also due to the $1.3 million impairment
charge related to our investment in the South American Joint Venture in fiscal 2017, which was partially offset by
the $0.3 million impairment charge related to our investment in the Tigre-ADS USA in fiscal 2018.
Net income attributable to noncontrolling interest - Income attributable to noncontrolling interest remained
relatively flat as a percentage of revenue in fiscal 2018 compared to fiscal 2017.
47
Advanced Drainage Systems, Inc.
Fiscal Year Ended March 31, 2017 Compared with Fiscal Year Ended March 31, 2016
The following table summarizes our operating results as a percentage of net sales that have been derived from
our Consolidated Financial Statements for the fiscal years ended March 31, 2017 and 2016. We believe this
presentation is useful to investors in comparing historical results.
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 attributable to the non-
controlling interest
Net income attributable to ADS
2017
2016
100.0%
76.5
23.5
7.3
8.8
100.0%
77.9
22.1
6.9
7.2
0.7
0.7
6.1
1.4
(0.5)
5.2
2.0
0.3
2.9
0.2
2.6%
0.1
0.7
7.3
1.4
1.3
4.6
1.8
0.4
2.4
0.4
1.9%
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.
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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.
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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)
6.7
1.9
$
2.9
(0.2)
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.
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, 2018, we had $14.7 million in cash that was held by our foreign subsidiaries. Prior to the
Tax Act, our intent was to indefinitely reinvest our earnings in foreign subsidiaries with the exception of cash
dividends paid by our ADS Mexicana joint venture. As a result of the Tax Act, we continue to evaluate our strategy
with our foreign cash but we still intend to indefinitely reinvest our earnings in foreign subsidiaries.
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
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Advanced Drainage Systems, Inc.
terminated at any time at our discretion. During fiscal 2018, we repurchased 400,000 shares of common stock at a
cost of $7.9 million.
Working Capital and Cash Flows
During fiscal 2018, our net increase in cash amounted to $11.1 million compared to a net decrease of
$0.1 million during fiscal 2017. Our source of funds in fiscal 2018 was primarily driven by an increase in cash
provided by operating activities. Our use of cash in fiscal year 2018 was primarily driven by decreased accounts
payable, accrued expenses, other liabilities, increased receivables and our long-term debt restructuring. 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.
As of March 31, 2018, we had $433.1 million in liquidity, including $17.6 million of cash, $365.5 million in
borrowings available under our Revolving Credit Facility and $50.0 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, 2018, we had consolidated indebtedness (excluding capital lease obligations) of
approximately $300.8 million, down $49.6 million compared to March 31, 2017.
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 by financing activities
2018
2017
2016
$
137,120 $
(30,445)
(94,953)
104,239 $
(61,259)
(42,825)
135,342
(49,018)
(82,964)
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 increased to $237.2 million as of March 31, 2018, from $184.8 million as of March 31, 2017,
primarily due to a decrease in accounts payable of $16.4 million, the reclassification of $11.9 million due to the
modification of the liability-classified stock-based awards, as discussed in “Note 16. Stock-Based Compensation”,
an increase in cash of $11.1 million and a decrease of $10.9 million of the current debt obligations maturities related
to the refinancing of the Secured Bank Loans and Senior Notes Payable, as discussed in “Note 12. Debt.”
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.
Operating Cash Flows - During the fiscal 2018, cash provided by operating activities was $137.1 million as
compared with cash provided by operating activities of $104.2 million for fiscal 2017. Cash flow from operating
activities during fiscal 2018 was primarily impacted by increased income from continuing operations including
decreased restatement related costs.
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Advanced Drainage Systems, Inc.
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.
Investing Cash Flows - During fiscal 2018, cash used for investing activities was $30.4 million, primarily due to
$41.7 million for capital expenditures and additions to capitalized software, and $2.0 million for the acquisition of
Duraslot, Inc. The Company received $13.6 million of proceeds from the sale of corporate-owned life insurance.
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.
Financing Cash Flows - During fiscal 2018, cash used in financing activities was $95.0 million, primarily for net
debt payments of $46.8 million related to the refinancing of the Secured Bank Loans and Senior Notes Payable, as
discussed in “Note 12. Debt,” payments on our capital lease obligations of $24.2 million, dividend payments of
$18.5 million and repurchases of common stock of $7.9 million.
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.
Capital Expenditures
Capital expenditures totaled $41.7 million for fiscal 2018. Our capital expenditures were used primarily to
support facility expansions, equipment replacements, our recycled resin initiatives and technology. For fiscal year
ended March 31, 2018, our most significant capital expenditures were $8.4 million for increased capacity related to
the opening of the manufacturing facility in Harrisonville, MO and $3.7 million related to the implementation of
three software solutions to support sales growth and operating effectiveness initiatives.
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 $60-70 million in fiscal
2019. Such capital expenditures are expected to be financed using funds generated by operations.
Employee Stock Ownership Plan (“ESOP”)
The Company established the Advanced Drainage Systems, Inc. ESOP (the “ESOP” or the “Plan”) effective
April 1, 1993 to enable eligible employees to acquire stock ownership in ADS in the form of redeemable convertible
preferred shares. The Plan was funded by an existing tax-qualified profit-sharing retirement plan, as well as a 30-
year term loan from ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than
March 2023, the shares of redeemable convertible preferred stock owned by the ESOP will be converted into shares
of the Company’s common stock.
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Advanced Drainage Systems, Inc.
The Company is obligated to make contributions to the Plan, which, when aggregated with the Plan’s
dividends, equal the amount necessary to enable the Plan to make its regularly scheduled payments of principal and
interest due on its term loan to ADS. Compensation expense is recognized based upon the average annual fair value
of the shares during the period which ADS receives payments on the term loan, and the number of ESOP shares
allocated to participant accounts.
As disclosed in “Note 15. Employee Benefit Plans”, redeemable convertible preferred stock can convert to
common stock upon retirement, disability, death, or vested terminations over the life of the Plan. As stated above,
within 30 days following the repayment of the ESOP loan, all redeemable convertible preferred stock will be
converted to common stock, which will be no later than March 2023.
The ESOP’s conversion of redeemable convertible preferred stock into common stock will have a meaningful
impact on the Company’s net income, net income per share and common shares outstanding. The outstanding shares
of common stock would be 33% greater after conversion.
Impact on Net Income – Following the repayment of the ESOP loan discussed above, the Company will no
longer be required to apply the two-class method to determine Net income per share. In addition, the Company
would not be required to recognize the fair value of ESOP deferred compensation attributable to the shares of
redeemable convertible preferred shares allocated.
The impact of the ESOP on net income includes the fair value of ESOP deferred compensation attributable to
the shares of redeemable convertible preferred stock allocated to employee ESOP accounts during the applicable
period, which is a non-cash charge to our earnings and not deductible for income tax purposes.
(Amounts in thousands)
Net income attributable to ADS
ESOP deferred stock-based compensation
2018
2017
2016
$
62,007 $
11,724
32,950 $
9,568
25,052
10,250
Impact on Common Stock Outstanding – The repayment of the ESOP loan and related conversion of
redeemable convertible preferred shares will have an impact on the number of common shares outstanding. As
shares are converted, the number of common shares outstanding will increase.
(Shares in millions)
Weighted average common shares outstanding
Conversion of redeemable convertible shares
2018
2017
2016
55.7
18.3
54.9
18.9
54.0
19.4
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 Loans, the Senior Notes and the Company’s capital lease obligations.
Financing Transactions
Secured Bank Loans - On September 24, 2010, we entered into a credit agreement with PNC Bank, National
Association, or PNC, as administrative agent, and lender parties thereto. The credit agreement, as amended and
restated on June 12, 2013 and subsequently further amended, provides for our Bank Term Loans consisting of (i) the
Revolving Credit Facility providing for revolving loans and letters of credit of up to a maximum aggregate principal
amount of $325 million, (ii) the Term Loan Facility providing for the Term Loans in an aggregate original principal
amount of $100 million, and (iii) the ADS Mexicana Revolving Credit Facility, described below, which is more
fully described in our Fiscal 2017 Form 10-K. On June 22, 2017, we entered into a Second Amended and Restated
Credit Agreement with PNC, which amends and restates the agreement dated as of June 12, 2013, to provide us a
$550 million Revolving Credit Facility, which is more fully described in “Note 12. Debt” to the Consolidated
Financial Statements.
As of March 31, 2018, the outstanding principal drawn on the Revolving Credit Facility was $171.5 million, with
$365.5 million available to be drawn on the U.S. facility, net of $13.0 million of outstanding letters of credit.
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Advanced Drainage Systems, Inc.
ADS Mexicana Revolving Credit Facility - On September 24, 2010, ADS Mexicana entered into a credit agreement
with PNC, as administrative agent, and lender parties thereto. The credit agreement, as amended and restated on
June 12, 2013 and subsequently further amended, provides for revolving loans and letters of credit of up to a
maximum aggregate principal amount of $12.0 million. As of March 31, 2018, ADS Mexicana had no outstanding
principal drawn on the Revolving Credit Facility with $12.0 million available to be drawn.
Senior Notes - On December 11, 2009, we entered into a private shelf agreement with Prudential Investment
Management Inc., or Prudential, which agreement, as amended and restated on September 24, 2010 and
subsequently further amended, provides for the issuance by us of senior secured promissory notes to Prudential or its
affiliates from time to time in the aggregate principal amount up to $100 million. On June 22, 2017, we entered into
the Second Amended and Restated Private Shelf Agreement with Prudential, which amends and restates the
agreement dated as of September 24, 2010, to provide for the issuance of secured senior notes to Prudential or its
affiliates from time to time in the aggregate principal amount of up to $175 million, which is more fully described in
“Note 12. Debt” to the Consolidated Financial Statements. We have $50 million available for issuance of senior
notes under the private shelf agreement. At March 31, 2018, the outstanding principal balance on these notes was
$125 million.
Covenant Compliance
Our outstanding debt agreements and instruments contain various restrictive covenants including, but not limited to,
limitations on additional indebtedness and capital distributions, including dividend payments. The two primary debt
covenants of the amended ADS Revolving Credit Facility and Senior Notes include a Leverage Ratio and an Interest
Coverage Ratio maintenance covenant. The Credit Agreement Leverage Ratio generally requires that at the end of
any fiscal quarter, for the four fiscal quarters then ended, we will not permit the ratio of its total consolidated
indebtedness to our Consolidated EBITDA (as defined in the Credit Agreement) to be greater than 4.00 to 1.00 (or
4.25 to 1.00 as of the date of any acquisitions permitted under the Credit Agreement for which the aggregate
consideration is $100.0 million or greater). The Credit Agreement Interest Coverage Ratio generally requires that at
the end of any fiscal quarter, for the four fiscal quarters then ended, we will not permit the ratio of Consolidated
EBITDA to our consolidated interest expense payable during such period to be less than 3.00 to 1.00.
The primary debt covenant of the ADS Mexicana Revolving Credit Facility is a Leverage Ratio maintenance
covenant. For any relevant period of determination, the Leverage Ratio is calculated by dividing Total Consolidated
Indebtedness (funded debt plus guarantees) by Consolidated EBITDA, as defined by the credit facility. The current
upper limit is 4.0 times.
For further information, see “Note 12. Debt” to the Consolidated Financial Statements. We were in compliance with
our debt covenants as of March 31, 2018.
Contractual Obligations as of March 31, 2018
(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
$ 300,776 $ 26,848 $ 26,896 $ 172,032 $ 75,000
3,309
2,648
7,699
—
$ 462,573 $ 79,289 $ 87,318 $ 207,310 $ 88,656
19,023
4,016
37,383
—
13,497
1,695
20,086
—
11,015
3,297
24,809
13,320
46,844
11,656
89,977
13,320
The Secured Bank Loans mature in June 2022.
(1)
(2) Based on applicable rates and pricing margins as of March 31, 2018.
(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, 2018. The maximum borrowing permitted under the South American Joint Venture’s credit facility
is $22 million. As of March 31, 2018, our South American Joint Venture had approximately $14.5 million of
outstanding debt subject to our guarantee, resulting in our guarantee of 50%, or $7.3 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, such as our South American
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.
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 net realizable
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
Net realizable value 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 net realizable
value 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, 2018. 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 2018, 2017 or
2016. Future events and
unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
56
Effect if Actual Results Differ
from Assumptions
We did not record any impairment
charges for intangible assets in fiscal
2018, 2017, or 2016. 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.
57
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 recorded an impairment charge
of $0.3 million in fiscal 2018 on our
Tigre-ADS USA investment, which
was disposed of in April 2018.
If our historical experience differs
from future experience, our
allowance for doubtful accounts
could differ.
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.
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.
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.
58
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, at each
relevant reporting date for
accounting purposes. 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
As the value of the shares increase,
it could result in a significant
increase in ESOP compensation in
the fourth quarter.
All current stock based awards
qualify for equity classification. If the
Company were to offer awards that
require liability classification, there
could be significant fluctuations in
expenses due to stock price
fluctuations.
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.
(cid:129)
(cid:129)
(cid:129)
(cid:129)
59
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 $20.00.
Judgments and Estimates
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.
Deferred tax assets and liabilities 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.
As of March 31, 2018, we had
valuation allowances of less than
$0.1 million and unrecognized tax
benefits of $7.6 million. Although
we believe our estimates are
reasonable, if these judgments are
not accurate then future income tax
expense or benefit could be
different.
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.
60
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 $0.7 million based on our borrowings as of March 31, 2018. Assuming the
Revolving Credit Facility is fully drawn and considering our interest rate swap, each 1.0% increase or decrease in
the applicable interest rate would change our interest expense by approximately $4.5 million, as of March 31, 2018.
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 18% of our Receivables balance as of March 31, 2018.
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 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.
61
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 and collar
structures covering future months demand for diesel fuel and are designed to decrease our exposure to changing fuel
costs. These hedges covered a 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, 2018. 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.
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 effective as of March 31, 2018.
62
Advanced Drainage Systems, Inc.
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, 2018. 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 the Company’s internal control over financial reporting
was effective as of March 31, 2018.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on the
effectiveness of our internal control over financial reporting as of March 31, 2018 and this report is included herein.
Remediation of Previously Identified Material Weakness
As of March 31, 2018, we have completed our actions to remediate the material weaknesses previously identified in
our Fiscal 2017 Form 10-K. These previously identified material weaknesses in internal control over financial
reporting that have been remediated were in the areas of (i) 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.
A summary of remediation actions that have been taken with respect to each of the previously identified material
weaknesses are summarized below:
(cid:129)
Control Environment – We hired qualified individuals to key finance and leadership positions; enhanced
training and development with emphasis on ethics, compliance, anti-corruption and public company
culture; completed an assessment of the finance and senior executive organization; implemented and
enhanced entity level controls and enhanced reporting line procedures. We also took actions to improve the
process and controls to enhance the documentation and basis for account balances, journal entries and
accounting estimates.
(cid:129) Accounting for Leases – We improved the process and controls in the determination of the appropriate
accounting and classification of leases. These actions included the implementation of a new software
solution to improve the process of accounting for leases, improvements to the design of existing controls
and implementation of additional controls.
(cid:129) Accounting for Inventory – We improved the design of existing controls, implemented additional controls
and enhanced the process of accounting for inventory cost, including related to the capitalization of
variances.
(cid:129)
Journal Entry and Account Reconciliation – We implemented an enhanced journal entry and account
reconciliation policy to support account balances, journal entries, accrual calculations and management
estimates. We made improvements to the journal entry process, including assessment of user access and
system approval enhancements for journal entries. In addition, we implemented a new software solution to
improve the process and documentation for account reconciliations.
63
Advanced Drainage Systems, Inc.
(cid:129) ADS Mexicana Control Environment – We established a management oversight committee related to
foreign operations, implemented and enhanced entity level controls, enhanced critical accounting policies
and procedures, and completed enhanced training on ethics, compliance and anti-corruption in our Mexican
operations.
(cid:129) ADS Mexicana Revenue Recognition Cut-Off Process – We established a new policy and enhanced
internal controls related to the ADS Mexicana revenue recognition cut-off process.
As part of our assessment of internal controls over financial reporting, management evaluated all controls to assess
whether they were designed and operating effectively as of March 31, 2018. Based on this assessment, management
concluded that the above noted previously identified material weaknesses were remediated during the quarter ended
March 31, 2018.
Changes in Internal Control over Financial Reporting
Except for the remediation of the previously identified material weaknesses described above, there were no changes
in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
that occurred during the three months ended March 31, 2018 that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
Item 9B.
Other Information
None.
64
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.
65
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.”
66
Advanced Drainage Systems, Inc.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.1A
10.1B
10.1C
10.1D
10.1E
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).
Form of 3.53% Senior Series C Secured Notes due June 28, 2024 (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 June 28, 2017).
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 10.1 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 Second 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 Second 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 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).
67
Advanced Drainage Systems, Inc.
Exhibit
Number
10.1F
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Description
Sixth Amendment to Second Amended and Restated Credit Agreement, dated as of March 15, 2017
(incorporated by reference to Exhibit 10.2F of Form 10-K filed May 10, 2017).
Second Amended and Restated Credit Agreement, dated as of June 22, 2017, 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 of Form 8-K filed
June 28, 2017).
Second Amended and Restated Private Shelf Agreement, dated as of June 22, 2017, by and among
Advanced Drainage Systems, Inc., as seller, the guarantors from time to time party thereto, PGIM, Inc.,
as a purchaser, and the other purchasers from time to time party thereto (incorporated by reference to
Exhibit 10.2 of Form 8-K filed June 28, 2017).
Second Amended and Restated Security Agreement, dated as of June 22, 2017, 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 10.3 of Form 8-K filed June 28, 2017).
Second Amended and Restated Pledge Agreement, dated as of June 22, 2017, 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 10.4 of
Form 8-K filed June 28, 2017).
Second Amended and Restated Intercompany Subordination Agreement, dated as of June 22, 2017, 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 10.5 of Form 8-K filed June 28, 2017).
Amended and Restated Intercompany Subordination Agreement, dated as of June 22, 2017, by and
among Advanced Drainage Systems, Inc., the guarantors from time to time party thereto, and PGIM,
Inc. (incorporated by reference to Exhibit 10.6 of Form 8-K filed June 28, 2017).
Second Amended and Restated Intercreditor and Collateral Agency Agreement, dated as of June 22,
2017, 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 of Form 8-K filed June 28, 2017).
10.9†
10.10†
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).
10.10A† 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).
10.11† 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).
10.11A† First Amendment to the 2008 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to Form
8-K filed February 10, 2017).
68
Advanced Drainage Systems, Inc.
Exhibit
Number
Description
10.12† 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).
10.12A† 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).
10.12B† Form of Amendment to Pre-2017 Stock Option Agreements(incorporated by reference to Exhibit
10.11B of Form 10-K filed May 10, 2017).
10.13†
Executive Employment Agreement, dated as of September 1, 2017, by and between Advanced
Drainage Systems, Inc. and D. Scott Barbour (incorporated by reference to Exhibit 10.3 to Form 8-K
filed August 17, 2017).
10.14† 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).
10.14A† 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).
10.14B† Second Amendment to Amended and Restated Executive Employment Agreement, by and between the
Company and Joseph A. Chlapaty (incorporated by reference to Exhibit 10.2 to Form 8-K filed August
17, 2017).
10.15†
10.15A
10.16†
10.17†
10.18†
10.19†
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).
First Amendment to Amended and Restated Executive Employment Agreement by and between the
Company and Thomas M. Fussner (incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K, File No. 001-36557, filed on March 21, 2018).
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).
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).
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).
69
Advanced Drainage Systems, Inc.
Exhibit
Number
Description
10.19A† 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).
10.20†
10.20A†
10.21†
10.21A†
10.22†
10.23
10.24
10.24A
10.25
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).
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).
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).
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).
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).
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).
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).
70
Advanced Drainage Systems, Inc.
Exhibit
Number
10.25A
10.25B
10.26
10.27†
10.28†
10.29†
10.30
10.31
10.32
10.33
10.34
10.35
10.36
21.1
23.1
24.1
31.1
Description
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).
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).
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).
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).
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).
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).
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).
Advanced Drainage Systems, Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit
10.1 to our Current Report on Form 8-K, File No. 001-36557, filed on September 8, 2017).
Form of Restricted Stock Award Notice and Award Agreement pursuant to 2017 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, File No. 001-
36557, filed on September 8, 2017).
Form of Notice of Grant of Stock Options and Stock Option Award Agreement pursuant to 2017
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K,
File No. 001-36557, filed on September 8, 2017).
Form of Director Restricted Stock Award Notice and Award Agreement pursuant to 2017 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, File
No. 001-36557, filed on November 6, 2017).
Confidentiality Agreement by and between the Company and Joseph A. Chlapaty (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K, File No. 001-36557, filed on August 17,
2017).
Consulting Agreement by and between the Company and Thomas M. Fussner (incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K, File No. 001-36557, filed on March 21,
2018).
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. #
71
Advanced Drainage Systems, Inc.
Exhibit
Number
31.2
32.1
32.2
Description
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.
72
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, 2018
SIGNATURES
/s/ D. Scott Barbour
ADVANCED DRAINAGE SYSTEMS, INC.
By:
Name: D. Scott Barbour
Title:
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, 2018.
Signature
/s/ D. Scott Barbour
D. Scott Barbour
/s/ Scott A. Cottrill
Scott A. Cottrill
/s/ Tim A. Makowski
Tim A. Makowski
/s/ C. Robert Kidder**
C. Robert Kidder
/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/ Richard A. Rosenthal**
Richard A. Rosenthal
/s/ Carl A. Nelson, Jr.**
Carl A. Nelson, Jr.
/s/ Abigail S. Wexner**
Abigail S. Wexner
Title
Director, President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer)
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Chairman of the Board of Directors and 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
73
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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, 2018 and 2017
Consolidated Statements of Operations for the fiscal years ended March 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended March 31, 2018, 2017,
and 2016
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2018, 2017, and 2016
Consolidated Statements of Stockholders’ Equity (Deficit) and Mezzanine Equity for the fiscal years ended
March 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
Schedule II, Consolidated Valuation and Qualifying Accounts for the fiscal years ended March 31, 2018,
2017, and 2016
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-14
F-58
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Advanced Drainage Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advanced Drainage Systems, Inc. and
subsidiaries (the "Company") as of March 31, 2018 and 2017, 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, 2018, and the related notes and the financial statement schedule listed in
the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the three years in the period ended March 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2018, based on 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, 2018, expressed an unqualified opinion
on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/Deloitte & Touche LLP
Columbus, Ohio
May 30, 2018
We have served as the Company’s auditor since 2002.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Advanced Drainage Systems, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Advanced Drainage Systems, Inc. and subsidiaries
(the “Company”) as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of March 31,
2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended March 31, 2018, of the
Company and our report dated May 30, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 the assessed 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect 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 the policies or procedures may
deteriorate.
/s/ Deloitte & Touche LLP
Columbus, Ohio
May 30, 2018
F-3
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 $6,826 and $10,431, respectively)
Inventories
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
Other accrued liabilities
Accrued income taxes
Total current liabilities
$
$
Long-term debt obligation (less unamortized debt issuance costs of $3,028 and $1,723,
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; 23,300 and 24,225 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; 56,889
shares issued; 56,476 and 55,338 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,
2018
2017
17,587 $
171,961
263,792
5,113
458,453
399,381
103,017
44,437
37,954
1,043,242 $
26,848 $
22,007
105,521
60,560
6,307
221,243
270,900
59,963
32,304
25,023
609,433
291,247
(190,168)
8,471
109,550
11,426
364,908
(8,277)
(21,247)
(39,214)
307,596
16,663
324,259
1,043,242 $
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
66,386
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
See accompanying notes to consolidated financial statements.
F-4
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
Less: net income attributable to noncontrolling interest
Net income attributable to ADS
Weighted average common shares outstanding:
Basic
Diluted
Net income per share available to common stockholders:
Basic
Diluted
Cash dividends declared per share
$
Fiscal Year Ended March 31,
2017
1,257,261 $
961,451
295,810
2018
1,330,354 $
1,027,873
302,481
2016
1,290,678
1,005,326
285,352
92,764
98,392
91,475
110,950
15,003
8,068
88,254
15,262
(3,950)
76,942
11,411
739
64,792
2,785
62,007
8,509
8,548
76,328
17,467
(5,970)
64,831
24,615
4,308
35,908
2,958
32,950
55,696
56,334
54,919
55,624
$
$
$
1.00 $
0.99 $
0.28 $
0.51 $
0.50 $
0.24 $
88,478
92,504
812
9,224
94,334
18,460
16,575
59,299
23,498
5,234
30,567
5,515
25,052
53,978
55,176
0.40
0.39
0.20
See accompanying notes to consolidated financial statements.
F-5
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Net income
Other comprehensive income (loss):
Currency translation
Comprehensive income
Less: other comprehensive (gain) loss attributable to
noncontrolling interest, net of tax
Less: net income attributable to noncontrolling interest
Total comprehensive income attributable to ADS
Fiscal Year Ended March 31,
2017
2016
2018
$
64,792 $
35,908 $
30,567
3,886
68,678
(5,037)
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65,575 $
(1,483)
2,958
29,396 $
$
(8,594)
21,973
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5,515
19,312
See accompanying notes to consolidated financial statements.
F-6
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Fiscal Year Ended March 31,
2017
2016
2018
$
64,792 $
35,908 $
30,567
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:
Receivables
Inventories
Prepaid expenses and other current assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Capital expenditures
Cash paid for acquisitions, net of cash acquired
Purchase of property, plant and equipment through financing
Proceeds from note receivable to related party
Issuance of note receivable to related party
Proceeds from sale of corporate-owned life insurance
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
Proceeds from Senior Notes
Payments on Senior Notes
Proceeds from notes, mortgages, and other debt
Payments of notes, mortgages, and other debt
Payments on loans against corporate-owned life insurance
Equipment financing loans
Debt issuance costs
Payments on capital lease obligations
Cash dividends paid
Proceeds from option exercises
Repurchase of common stock
Other financing activities
Net cash used in financing activities
Effect of exchange rate changes on cash
Net change in cash
Cash at beginning of year
Cash at end of year
$
75,003
(11,239)
72,355
(8,971)
71,009
10,686
12,655
18,845
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—
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1,648
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137,120
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(24,214)
(18,478)
9,087
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7,316
17,875
1,408
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(5,871)
15,055
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(2,548)
6,851
104,239
(46,676)
(8,573)
(4,620)
—
—
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(61,259)
412,400
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(10,000)
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1,000
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(6,823)
4,620
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(16,820)
4,011
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6,450 $
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4,382
1,412
2,163
490
5,234
—
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(37,788)
28,330
646
10,156
135,342
(44,942)
(3,188)
—
3,854
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409,100
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(8,750)
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(7,208)
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(19,780)
(16,240)
1,765
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(82,964)
(428)
2,932
3,623
6,555
See accompanying notes to consolidated financial statements.
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F-13
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, 2018 refers to fiscal 2018, which is the period from April 1,
2017 to March 31, 2018.
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.
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 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, net of an
allowance for doubtful accounts, and other miscellaneous receivables. Receivables at March 31, 2018 and
2017 are as follows:
(Amounts in thousands)
Trade receivables
Other miscellaneous receivables
Receivables
2018
2017
$ 159,291 $ 160,655
8,288
$ 171,961 $ 168,943
12,670
As of March 31, 2018 and 2017, Other miscellaneous receivables includes an insurance recoverable of
approximately $3.4 million and $2.4 million, respectively, which has a corresponding liability recorded in
Other accrued liabilities.
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.
F-14
Advanced Drainage Systems, Inc.
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 net realizable 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. Net realizable value of inventory is established
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.
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 and leasehold improvement
Machinery and equipment
Years
20 — 45 or the lease term if shorter
3 — 18
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, $0.6 million, and $0.4 million during the fiscal years ended March 31, 2018, 2017, and 2016,
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
F-15
Advanced Drainage Systems, Inc.
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 2018, 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
fiscal 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, 2018 and 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 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, 2018, 2017, and 2016.
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, 2018 and 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, 2018, 2017, and 2016.
F-16
Advanced Drainage Systems, Inc.
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. In the year ended March
31, 2018, the Company discontinued offering the cash surrender value of officer life insurance, and collected
proceeds of $13.6 million from the sale of the officer life insurance. 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 5 to 10 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
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, the Company recorded an
impairment charge of $1.3 million 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
2018
2017
$
$
12,343 $
—
10,195
2,776
2,089
10,551
37,954 $
8,986
12,028
7,980
1,289
1,856
14,398
46,537
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
$
2018
2017
2016
2,156 $
47
1,688
3,372 $
54
1,689
3,872
362
1,898
F-17
Advanced Drainage Systems, Inc.
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 useful life 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, 2018, 2017, and 2016, the Company’s
Accumulated other comprehensive loss (“AOCL”) consisted 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 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 - The Company incurs shipping costs to deliver products to customers using an in-house fleet
or common carrier. Typically shipping costs are prepaid and included in the product price; however, in some
instances, the Company bills shipping costs to customers. Shipping costs are also incurred to physically move
raw materials, tooling and products between manufacturing and distribution facilities. Shipping costs for the
fiscal years ended March 31, 2018, 2017, and 2016 were $133.8 million, $120.4 million, and $120.5 million,
respectively, and are included in Cost of goods sold. Shipping costs billed to customers were $6.3 million,
$5.5 million, and $7.0 million during 2018, 2017 and 2016, respectively, and are included in Net sales.
Stock-Based Compensation - See “Note 16. 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 $4.1 million, $3.1
million, and $3.2 million for the fiscal years ended March 31, 2018, 2017, and 2016, 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 $41.3 million, $39.5 million, and $37.5 million
for the fiscal years ended March 31, 2018, 2017, and 2016, respectively, of which employees contributed $5.9
million, $5.1 million, and $4.5 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 a deductible of $0.3 million per occurrence or claim
F-18
Advanced Drainage Systems, Inc.
incurred. Amounts expensed during the period, including an estimate for claims incurred but not reported at
year end, were $2.2 million, $1.8 million, and $2.1 million, for the years ended March 31, 2018, 2017, and
2016, respectively.
ADS is also self-insured for workers’ compensation insurance with stop-loss coverage for claims that exceed
$0.5 million per incident up to the respective state statutory limits. Amounts expensed, including an estimate
for claims incurred but not reported, were $1.3 million, $2.1 million, and $3.9 million for the fiscal years
ended March 31, 2018, 2017, and 2016, 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.
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 Core and Main, each representing more than 10% of
annual net sales. Such customers accounted for 25.4%, 23.5%, and 21.1% of fiscal year 2018, 2017 and 2016
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.
F-19
Advanced Drainage Systems, Inc.
One customer, Ferguson Enterprises, accounted for approximately 17.6% and 15.7% of Receivables at
March 31, 2018 and 2017, 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. For the interest
rate swap executed on June 28, 2017, gains and losses resulting from the difference between the spot rate and
applicable base rate is recorded in Interest expense. For commodity options in the form of collars and swaps,
and foreign currency forward contracts, 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, qualify as normal purchase contracts. 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
Measurement of Inventory — In July 2015, the Financial Accounting Standards Board (“FASB”) issued an
accounting standards update (“ASU”) 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. The Company adopted this standard effective
April 1, 2017. The new standard did not have a material impact on the Consolidated Financial Statements.
Stock-Based Compensation — In March 2016, the FASB issued an ASU which is intended to simplify certain
aspects of the accounting for stock-based compensation. The Company adopted the standard on April 1, 2017.
The adoption of the ASU did not have a material impact on the historical Consolidated Financial Statements.
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 update
is expected to result in increased volatility to 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. In addition, excess tax benefits will now be classified as operating cash flows rather than
financing cash flows in the Consolidated Statements of Cash Flows.
The amendment also contained potential changes to the accounting for forfeitures, whereby entities could elect
to either continue to apply the previous 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 update also modified 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 “Note 16. Stock-Based Compensation” for further
information on the modification.
F-20
Advanced Drainage Systems, Inc.
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
permits the use of either the retrospective or cumulative effect transition method. The Company will adopt this
standard effective April 1, 2018 using the modified retrospective method. The adoption of this standard will
result in the Company recording a contract asset for estimated inventory returns. At March 31, 2018, the
estimated inventory returns would have resulted in a $0.6 million decrease in Receivables, net and a $0.6
million increase in Other current assets on the Company’s Consolidated Balance Sheets. The adoption of this
standard will not cause a material shift in the amount or timing of revenue recognition.
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 implemented a new software solution to improve the process of accounting for
leases under the current and new standard.
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 adoption of this standard will not have a
material impact on the consolidated financial statements.
F-21
Advanced Drainage Systems, Inc.
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 adoption of this standard will not have a material impact 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
The Company recorded loss on disposal of assets and costs from exit and disposal activities of $15.0 million,
$8.5 million and $0.8 million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively.
In fiscal 2018, the Company initiated restructuring activities (the “2018 Restructuring Plan”), including
closing four underutilized manufacturing facilities, reducing headcount, optimizing product offerings and
eliminating nonessential costs, designed to improve the Company’s cost structure. As additional restructuring
opportunities may be identified, the Company does not have an estimated completion date or expected total
cost estimate for the 2018 Restructuring Plan. In fiscal year ended March 31, 2017, 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. The
following table summarizes the activity included in Loss on disposal of assets and costs from exit and
disposal activities recorded during the fiscal years ended March 31, 2018, 2017 and 2016:
(Amounts in thousands)
Accelerated depreciation
Plant severance
Corporate severance
Product rationalization
Other restructuring activities
Total 2018 Restructuring Plan activities
Loss on other disposals and partial disposals of property,
plant and equipment
Total loss on disposal of assets and costs from exit
and disposal activities
2018
2017
2016
$
$
3,759 $
2,041
4,133
1,351
159
11,443 $
— $
—
—
—
— $
3,560
8,509
$
15,003 $
8,509 $
—
—
—
—
—
812
812
Approximately $11.0 million and $0.4 million of the Total 2018 Restructuring Plan activities related to the
Domestic and International reporting segment, respectively.
F-22
Advanced Drainage Systems, Inc.
A reconciliation of the beginning and ending amounts of restructuring liability related to the 2018
Restructuring Plan for the year ended March 31, 2018 is as follows:
(Amounts in thousands)
Balance at beginning of year
Expenses
Non-cash expenses
Payments
Balance at end of year
$
$
2018
—
11,443
(4,882)
(2,660)
3,901
As of March 31, 2018, we have $0.5 million of long-term severance liability related to the restructuring
activities recorded in Other liabilities in the Consolidated Balance Sheet.
Periodically, the Company will dispose of equipment, including equipment accounted for as capital leases.
The net loss on the disposition of the equipment was $3.6 million, $8.5 million, and $0.8 million during fiscal
2018, 2017 and 2016, respectively.
3.
ACQUISITIONS
Fiscal 2018 Acquisition of DURASLOT, Inc.
On August 1, 2017, ADS acquired DURASLOT, Inc., a manufacturer of linear surface drains, for $2.3
million. The acquisition included approximately $2.1 million of tax-deductible goodwill.
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.
F-23
Advanced Drainage Systems, Inc.
(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, 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
F-24
Advanced Drainage Systems, Inc.
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
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
1,294,277
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, additional interest expense, net of related
income taxes and amounts related to the noncontrolling interest, of less than $0.1 million and the impact of
our prior equity method accounting of $0.1 million, net of related income taxes, for the year ended March 31,
2016.
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
2018
200,459 $
780,210
6,607
987,276
(587,895)
399,381 $
2017
189,163
771,878
14,022
975,063
(568,205)
406,858
$
$
F-25
Advanced Drainage Systems, Inc.
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)(1)
2018
2017
2016
$
63,044 $
58,692 $
55,650
(1) Depreciation expense does not include accelerated depreciation expense from the 2018 Restructuring
plan. See “Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities” for
additional discussion.
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 as of the fiscal years ended March 31 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
$
2018
6,124 $
208,475
214,599
(110,346)
2017
6,044
199,813
205,857
(108,144)
$
104,253 $
97,713
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
2018
2017
2016
$
4,086 $
18,511
3,864 $
17,415
3,367
15,782
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, 2018:
(Amounts in thousands)
2019
2020
2021
2022
2023
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
$
$
$
$
24,809
20,660
16,723
12,887
7,199
7,699
89,977
8,007
81,970
22,007
59,963
81,970
F-26
Advanced Drainage Systems, Inc.
(a)
Excludes contingent rentals which may be paid. Contingent rentals amounted to $0.6 million, $0.6 million and
$0.1 million for the years ended March 31, 2018, 2017 and 2016, 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.
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, 2018, are
summarized below (amounts in thousands):
Future operating lease payments
$ 3,297 $ 2,371 $ 1,645 $ 1,033 $
2019
2020
2021
2022
2023
Thereafter
2,648
662 $
Total rent expense was $6.6 million, $6.6 million, and $6.3 million in the fiscal years ended March 31, 2018,
2017, and 2016, 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
2018
54,909 $
208,883
263,792 $
2017
52,746
205,684
258,430
$
$
The Company had no work-in-process inventories as of March 31, 2018 and 2017.
During fiscal years ended March 31, 2018 and 2017, the Company incurred production-related general and
administrative costs included in the cost of finished goods inventory of $27.0 million and $21.2 million,
respectively, of which $6.5 million and $6.3 million remained in inventory at March 31, 2018 and 2017,
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, 2016
Currency translation
Balance at March 31, 2017
Acquisition
Currency translation
Balance at March 31, 2018
Domestic International
$
Total
90,002 $
—
90,002 $
2,103
—
92,105 $
(319)
10,883 $ 100,885
(319)
10,564 $ 100,566
2,103
348
10,912 $ 103,017
—
348
$
$
F-27
Advanced Drainage Systems, Inc.
Intangible Assets - Intangible assets as of March 31, 2018 and 2017 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
2018
Accumulated
Amortization
Net
Intangible
Gross
Intangible
2017
Accumulated
Amortization
Net
Intangible
$ 27,580 $ (17,405) $ 10,175 $ 27,580 $ (14,888) $ 12,692
(26,768) 13,999
31,035
2,744
(4,768)
7,512
(20,567) 10,468 40,767
7,512
2,556
(4,956)
607
15,969
82,703
40
1,242
(567)
(6,678)
9,291 15,741
(50,173) 32,530 92,842
(1,102)
140
(5,465) 10,276
(52,991) 39,851
11,907
— 11,907
— 11,907 11,907
$ 94,610 $ (50,173) $ 44,437 $104,749 $ (52,991) $ 51,758
The gross intangible asset value of customer relationships and non-compete and other contractual agreements
decreased due to intangible assets fully amortized in fiscal 2017. Trademarks and tradenames increased as a
result of the Duraslot acquisition.
The following table presents the weighted average amortization period for definite-lived intangible assets at
March 31, 2018:
Developed technology
Customer relationships
Patents
Non-compete and other contractual agreements
Trademarks and tradenames
Weighted
Average
Amortization
Period
(in years)
11.0
8.6
8.2
5.2
13.4
The following table presents the future intangible asset amortization expense based on existing intangible
assets at March 31, 2018:
(Amounts in thousands)
Amortization expense
2019
7,702 $
$
2020
6,017 $
Fiscal Year
2021
5,876 $
2022
4,159 $
8.
FAIR VALUE MEASUREMENT
2023
2,520 $
Thereafter
Total
6,256 $ 32,530
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.
F-28
Advanced Drainage Systems, Inc.
Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future
cash flows based on internal and external inputs.
Recurring Fair Value Measurements
The assets, liabilities and mezzanine equity carried at fair value as of the fiscal years ended March 31 were as
follows:
Total
Level 1
Level 2
Level 3
March 31, 2018
— $
—
— $
—
$
—
596 $
2,801
3,397 $
116
$
—
—
—
—
—
578
$
694 $
— $
116 $
578
March 31, 2017
Total
Level 1
Level 2
Level 3
(Amounts in thousands)
Assets:
Derivative assets — diesel fuel contracts
Interest rate swaps
$
Total assets at fair value on a recurring basis $
596 $
2,801
3,397 $
Liabilities:
Derivative liability - diesel fuel contracts
Contingent consideration for acquisitions
Total liabilities at fair value on a recurring
basis
$
116 $
578
(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
— $
— $
— $
—
179 $
179 $
—
—
142 $
—
—
1,348
$
1,490 $
— $
142 $
1,348
Quantitative Information about Level 3 Fair Value Measurements
(Amounts in thousands)
Liabilities & Mezzanine Equity
Contingent consideration for
acquisitions
Fair Value
at 3/31/18
$
578
Valuation
Technique(s)
Discounted
cash flow
Unobservable Input
Weighted Average Cost of Capital
(“WACC”)(a)
Liabilities & Mezzanine Equity
Contingent consideration for
acquisitions
Fair Value
at 3/31/17
$
1,348
Valuation
Technique(s)
Discounted
cash flow
Unobservable Input
Weighted Average Cost of Capital
(“WACC”)(a)
Quantifiable
Input
9.50%
Quantifiable
Input
9.50%
(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-29
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, 2018 and 2017 were as follows:
Balance at March 31, 2016
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2017
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2018
Contingent
consideration
2,858
(266)
(1,244)
1,348
39
(809)
578
$
$
$
There were no transfers in or out of Levels 1, 2 and 3 for the fiscal years ended March 31, 2018 and 2017.
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 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 $125.0 million and $122.3 million, respectively, as of March 31, 2018 and $75.0
million and $75.9 million, respectively, at March 31, 2017. 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 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.
Non-recurring Fair Value Measurements
Valuation of Investment in the South American Joint Venture - During the fourth quarter of each 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. The equity owned by the Company’s joint venture partner is
shown as either Noncontrolling interest in subsidiaries (ADS Mexicana) or Redeemable noncontrolling
interest in subsidiaries (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.
F-30
Advanced Drainage Systems, Inc.
ADS Mexicana - ADS participates in joint ventures for the purpose of expanding upon the growth of
manufacturing and selling HDPE corrugated pipe and PVC conduit 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,
2018 and 2017. 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
2018
2017
$
$
$
$
24,616 $
18,855
1,314
44,785 $
8,979 $
1,343
10,322 $
24,952
19,262
2,269
46,483
11,042
2,961
14,003
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 acquisition of an additional interest in BaySaver
is disclosed in “Note 3. Acquisitions”.
The table below includes the assets and liabilities of BaySaver that are consolidated as of March 31, 2018 and
2017. 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
2018
2017
$
$
$
$
3,761 $
216
10,470
14,447 $
820 $
820 $
2,572
111
11,568
14,251
1,344
1,344
F-31
Advanced Drainage Systems, Inc.
Redeemable Noncontrolling Interest in Subsidiaries - 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 noncontrolling interest in subsidiaries balance
was accreted to the redemption value using the effective interest method until April 1, 2017.
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. 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 significant variable interests 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
$
2018
2017
12,343 $
817
6,559
3,639
In order to improve the South American Joint Venture’s working capital position and allow it to reallocate
capital resources to business growth, the Company and the joint venture partner each contributed equal
amounts of outstanding receivables owed to them from the South American Joint Venture in exchange for
incremental ownership interest in the South American Joint Venture in December 2017. The Company and the
joint venture partner continue to maintain a 50% ownership interest in the South American Joint Venture
following the contribution. As a result of the transaction the Company contributed receivables of
approximately $5.8 million net of a $3.0 million allowance for doubtful accounts and recorded an additional
investment in the South American Joint Venture at the fair value of $4.7 million and a $1.9 million gain on the
book value of the receivables. The investment is recorded within Other assets on the Company’s Consolidated
Balance Sheets and the gain is recorded within Equity in net (income) loss of unconsolidated affiliates on the
Company’s Consolidated Statements of Operations.
During the fourth quarter of each 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 impairment charges of $1.3 million and $4.0 million, respectively,
reducing the carrying value of the investment to its fair value. The past impairment charges 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 $4.4 million and $4.9 million as of March 31, 2018 and 2017 respectively. The
basis difference will be amortized over the estimated remaining useful life of the underlying property, plant
and equipment, 8 years. The Company recognized $0.5 million, $0.4 million and $0.1 million of amortization
of the basis difference in fiscal 2018, 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 - 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 joint venture
represents a continuation of the existing activities of Tigre-ADS USA through its Janesville, Wisconsin
F-32
Advanced Drainage Systems, Inc.
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.
In April 2018, the Company and the joint venture partner agreed to exchange the Company’s shares of Tigre-
ADS USA for a release from the existing debt guarantees. Following the exchange, the Company no longer
has an interest in Tigre-ADS USA. As a result of the agreement, the Company determined there was an other-
than-temporary decline in the fair value of its investment in Tigre-ADS USA. Accordingly, the Company
recorded an impairment charge of $0.3 million, reducing the carrying value of the investment to its fair value.
The impairment charge is included in Equity in net loss of unconsolidated affiliates in the Consolidated
Statements of Operations.
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
$
2018
2017
— $
10
2,427
9
11. RELATED PARTY TRANSACTIONS
ADS Mexicana - ADS conducts business in Mexico and Central America through its joint venture ADS
Mexicana. 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 Scotia Bank revolving credit facility
matured on December 11, 2017.
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.”
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, 2018. 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, 2018 and 2017, the outstanding principal balance of the credit facility including
letters of credit was $14.5 million and $16.0 million, respectively. As of March 31, 2018, there were no U.S.
dollar denominated loans. The weighted average interest rate as of March 31, 2018 was 5.82% 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 $2.1 million and $1.3 million in the fiscal years
ended March 31, 2018 and 2017, respectively. ADS pipe sales to the South American Joint Venture were $0.4
million and $0.9 million in the fiscal years ended March 31, 2018 and 2017, respectively.
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Advanced Drainage Systems, Inc.
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 $2.0 million, $1.6 million and $0.7 million of Tigre-ADS USA manufactured products for use
in the production of ADS products during fiscal years 2018, 2017 and 2016, respectively.
12. DEBT
Long-term debt as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Secured Bank 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
2018
2017
$
$
171,500 $
—
—
125,000
940
3,336
—
300,776
(3,028)
(26,848)
270,900 $
194,300
1,500
72,500
75,000
1,845
4,216
1,000
350,361
(1,723)
(37,789)
310,849
Long-term Debt Modification
Secured Bank Loans - On June 22, 2017, the Company and certain of its subsidiaries, as guarantors
(collectively, the “Guarantors”), entered into a Second Amended and Restated Credit Agreement (the “Credit
Agreement”) with PNC Bank, National Association (“PNC”), as administrative agent (in such capacity, the
“Agent”), and various financial institutions party thereto (together with PNC, collectively, the “Lenders”),
pursuant to which the Lenders have committed to provide the Company a $550.0 million revolving credit
facility (with an option to increase such revolving credit facility or incur new term loans in an agreement
amount of up to $150.0 million) subject to the terms and conditions in the Credit Agreement. The Credit
Agreement amends and restates the Amended and Restated Credit Agreement dated as of June 12, 2013, as
amended, among the Company and certain of its subsidiaries, as guarantors, various financial institutions
party thereto, and the Agent. The Secured Bank Loans are secured by a lien on a significant majority of the
Company’s assets. Letters of credit outstanding at March 31, 2018 amounted to $13.0 million and reduce the
availability of the Revolving Credit Facilities. The amount available for borrowing for ADS, Inc. and ADS
Mexicana was $365.5 million and $12.0 million, respectively at March 31, 2018.
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Advanced Drainage Systems, Inc.
Borrowings under the credit facility will be used for general corporate purposes, including repurchases of
stock, repayments of existing indebtedness, repayments of short-term borrowings, working capital
requirements, capital expenditures and acquisitions. The interest rates under the Credit Agreement are
determined by certain base rates or LIBOR rates, plus an applicable margin based on the Leverage Ratio then
in effect. The average interest rate was 3.39% as of March 31, 2018. The Credit Agreement has an expiration
date of June 22, 2022.
The Credit Agreement sets forth certain customary business and financial covenants to which the Company
and Guarantors are subject when any amounts under the Credit Agreement are outstanding, including
covenants that limit or restrict the ability of the Company and the Guarantors to incur indebtedness, to make
capital distributions, and to incur certain liens and encumbrances on any of its respective property. The two
primary financial covenants of the Credit Agreement require the Company to maintain a certain Leverage
Ratio and an Interest Coverage Ratio.
The Credit Agreement Leverage Ratio generally requires that at the end of any fiscal quarter, for the four
fiscal quarters then ended, the Company will not permit the ratio of its total consolidated indebtedness to the
Company’s Consolidated EBITDA (as defined in the Credit Agreement) to be greater than 4.00 to 1.00 (or
4.25 to 1.00 as of the date of any acquisitions permitted under the Credit Agreement for which the aggregate
consideration is $100.0 million or greater). The Credit Agreement Interest Coverage Ratio generally requires
that at the end of any fiscal quarter, for the four fiscal quarters then ended, the Company will not permit the
ratio of Consolidated EBITDA to the Company’s consolidated interest expense payable during such period to
be less than 3.00 to 1.00.
The Credit Agreement provides for customary events of default, including, among other things, in the event of
nonpayment of principal, interest, or other amounts, a representation or warranty proving to have been
incorrect in any material respect when made, failure to perform or observe certain covenants within a specified
period of time, a cross-default to other Company indebtedness of a specified amount, the bankruptcy or
insolvency of the Company or a Guarantor, monetary judgment defaults of a specified amount, a change of
control of the Company, and ERISA defaults resulting in liability under certain circumstances. In the event of
a default by the Company, the Agent or the requisite number of Lenders may declare all amounts owed under
the Credit Agreement and outstanding letters of credit immediately due and payable and terminate the
Lenders’ commitments to make loans under the Credit Agreement. For defaults related to bankruptcy,
insolvency or reorganization proceedings, the commitments of the Lenders will be automatically terminated
and all outstanding loans and other amounts will become immediately due and payable.
On June 28, 2017, ADS executed a Forward Interest Rate Swap on the 30-Day LIBOR interest rate to mitigate
the impact of interest rate volatility. The swap has a notional value of $100.0 million and a fixed rate of
1.8195% for a five year period.
Senior Notes - On June 22, 2017, the Company and the Guarantors entered into the Second Amended and
Restated Private Shelf Agreement (the “Private Shelf Agreement”) with PGIM, Inc. (“Prudential”) and certain
other parties thereto. The Private Shelf Agreement amends and restates the Amended and Restated Private
Shelf Agreement dated as of September 24, 2010, as amended, pursuant to which the Company has previously
issued and sold secured senior notes of the Company. Under the terms of the Private Shelf Agreement, the
Company may request that Prudential purchase, over the next three years, secured senior notes of the
Company so long as the aggregate principal amount of notes outstanding at any time does not exceed $175.0
million (the “Shelf Notes”). The Shelf Notes shall bear interest at a fixed interest rate and have a maturity date
not to exceed ten years from the date of issuance. Prudential and its affiliates are under no obligation to
purchase any of the Shelf Notes. The interest rate and terms of payment of any series of Shelf Notes will be
determined at the time of purchase. The proceeds of any series of Shelf Notes will be used as specified in the
request for purchase with respect to such series, subject to compliance with the requirements in the Private
Shelf Agreement, but are anticipated to be used for general corporate purposes, including refinancing of short-
term borrowings and/or repayment of outstanding indebtedness under the Credit Agreement, which is
described above, as well as financing of capital expenditures and acquisitions.
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Advanced Drainage Systems, Inc.
Obligations under the Private Shelf Agreement are secured by capital stock of certain direct and indirect
subsidiaries of the Company and the Guarantors and substantially all other tangible and intangible personal
property owned by the Company and the Guarantors. Obligations under the Private Shelf Agreement are
secured by the collateral on a pari passu basis with obligations under the Credit Agreement.
The Private Shelf Agreement sets forth certain customary business and financial covenants to which the
Company and Guarantors are subject when any Shelf Note is outstanding, including covenants that limit or
restrict the ability of the Company and the Guarantors to incur indebtedness, to make capital distributions, and
to incur certain liens and encumbrances on any of its respective property. The two primary financial covenants
of the Private Shelf Agreement require the Company to maintain a certain Leverage Ratio and an Interest
Coverage Ratio.
The Private Self Agreement Leverage Ratio generally requires that at the end of any fiscal quarter, for the four
fiscal quarters then ended, the Company will not permit the ratio of its total consolidated indebtedness to the
Company’s Consolidated EBITDA (as defined in the Private Shelf Agreement) to be greater than 4.00 to 1.00
(or 4.25 to 1.00 as of the date of any acquisitions permitted under the Private Self Agreement for which the
aggregate consideration is $100.0 million or greater). The Private Self Agreement Interest Coverage Ratio
generally requires that at the end of any fiscal quarter, for the four fiscal quarters then ended, the Company
will not permit the ratio of Consolidated EBITDA to the Company’s consolidated interest expense payable
during such period to be less than 3.00 to 1.00.
The Private Shelf Agreement provides for customary events of default, including, among other things, in the
event of nonpayment of principal, interest, or other amounts, a representation or warranty proving to have
been incorrect in any material respect when made, failure to perform or observe certain covenants within a
specified period of time, a cross-default to other Company indebtedness of a specified amount, the bankruptcy
or insolvency of the Company or a Guarantor, monetary judgment defaults of a specified amount, a change of
control of the Company, and ERISA defaults resulting in liability under certain circumstances. In the event of
a default by the Company, any or all holders of Shelf Notes may declare amounts owed under the Private
Shelf Agreement immediately due and payable. For defaults related to bankruptcy, insolvency or
reorganization proceedings, all amounts owed under the Agreement will become immediately due and
payable, and Prudential may at its option terminate the Private Shelf Note Facility.
On June 28, 2017, the Company issued and sold Shelf Notes in the aggregate principal amount of $75.0
million pursuant to the Private Shelf Agreement. The $75.0 million of Shelf Notes bears interest at a fixed
interest rate of 3.53% per annum and have a maturity date of seven years from the date of issuance. The rate is
subject to an additional 100 basis point excess leverage fee if the calculated leverage ratio exceeds 3 to 1 at the
end of a fiscal quarter.
Master Loan and Security Agreement – In June 2016, ADS signed a Master Loan and Security Agreement
for Equipment Financing in the U.S. and Canada for an aggregate amount of up to $4.5 million. During fiscal
2017, the Company issued $4.6 million of Equipment Notes with a weighted average fixed interest rate at
2.72%, with the aggregate loan amount during fiscal 2017 reaching a total of $4.2 million, net of principal
payments. Each Equipment Note amortizes the principal over five years and is payable monthly.
Secured Bank Loans – Prior to the long-term debt modification in June 2017, the Company had 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 and a $100.0 million term note. The Company did not
modify ADS Mexicana’s borrowing capacity. The ADSM Mexicana revolving credit facility expires in June
2018. The revolving credit facilities and the term note had a variable interest rate that depended upon the
Company’s “pricing ratio” as defined in the agreements for the revolving credit facilities. The interest rate was
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% and 2.70%, at March 31, 2017 and 2016, respectively.
Senior Notes Payable – Prior to the long-term debt modification in June 2017, the Company had 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 was subject to an additional
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Advanced Drainage Systems, Inc.
200 basis point excess leverage fee if the calculated leverage ratio exceeds 3 to 1 at the end of a fiscal quarter.
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%. A principal payment of $25.0 million was made in fiscal 2017 and
fiscal 2018. Principal payments of $25.0 million will be made in fiscal 2019 and 2020.
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, 2018, was 3.42%, including a letter of credit fee of 1.75%. Land and buildings with a net book
value of approximately $9.1 million at March 31, 2018, 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. 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. The Scotia Bank revolving
credit facility matured on December 11, 2017. The obligations under the revolving credit facility were not
guaranteed by ADS. As of the maturity date, there was no outstanding principal drawn on the Scotia Bank
revolving credit facility, which bore interest at the LIBOR, plus 1.60%.
Principal Maturities - Maturities of long-term debt (excluding interest and deferred financing costs) as of
March 31, 2018 are summarized below:
(Amounts in thousands)
Principal maturities
Fiscal Years Ending March 31,
2021 2022
2020
2019
2023
Thereafter Total
$26,848 $25,936 $ 960 $ 532 $171,500 $ 75,000 $300,776
Fiscal Year 2017 Amendments and Consents Related to the Secured Bank Loans and Senior Notes - In July
2016, the Company obtained consents from the lenders of the previous Secured Bank 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 that was paid on shares of preferred stock in March 2017.
In October 2016, the Company obtained additional consents from the lenders of the previous Secured Bank
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 that was paid on shares of preferred
stock in March 2017.
In December 2016, the Company obtained additional consents from lenders of the previous Secured Bank
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.
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Advanced Drainage Systems, Inc.
13. DERIVATIVE TRANSACTIONS
The Company uses interest rate swaps and commodity options in the form of collars and swaps to manage its
various exposures to interest rate and commodity price fluctuations. For the interest rate swap executed on
June 28, 2017, gains and losses resulting from the difference between the spot rate and applicable base rate is
recorded in Interest Expense. For collars and commodity swaps, contract settlement gains and losses are
recorded in the Consolidated Statements of Operations in Derivative gains and other income, net. Gains and
losses related to mark-to-market adjustments for changes in fair value of the derivative contracts are also
recorded in the Consolidated Statements of Operations in Derivative gains and other income, net.
A summary of the fair values for the various derivatives at March 31, 2018 and 2017 is presented below:
2018
Assets
Liabilities
(Amounts in thousands)
Diesel fuel option collars and swaps
Interest rate swaps
(Amounts in thousands)
Diesel fuel option collars and swaps
Receivables Other assets
$
573 $
311
23 $
2,490
Other accrued
liabilities
Other
liabilities
(78) $
—
(38)
—
2017
Assets
Liabilities
Receivables Other assets
$
149 $
30 $
Other accrued
liabilities
Other
liabilities
(122) $
(20)
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)
2017
2016
2018
$
(2,801) $
—
(443)
—
(3,244) $
(252) $
—
(2,642)
(8,027)
(10,921) $
(513)
28
(237)
2,885
2,163
(Amounts in thousands)
Foreign exchange forward contracts
Diesel fuel option collars
Propylene swaps
Total net realized losses (gains)
14. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
Net Realized Losses (Gains)
2017
2016
2018
$
$
— $
(476)
—
(476) $
— $
1,893
6,671
8,564 $
(150)
3,142
11,742
14,734
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, 2018, the Company has agreed to
purchase resin over the period April 2018 through December 2018 at a committed purchase cost of $13.3
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
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Advanced Drainage Systems, Inc.
the Company, along with Joseph A. Chlapaty, the Company’s former Chief Executive Officer, and Mark B.
Sturgeon, the Company’s former Chief Financial Officer, as defendants and alleging violations of the federal
securities laws. An amended complaint was filed on April 28, 2016. The amended complaint alleged that the
Company made material misrepresentations and/or omissions of material fact in its public disclosures during
the period from July 25, 2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On March 10, 2017,
the District Court dismissed Plaintiff’s claims against all defendants in their entirety and with prejudice.
Plaintiff appealed to the United States Court of Appeals for the Second Circuit, and on October 13, 2017 the
District Court’s judgment was affirmed by the Second Circuit. On October 27, 2017, Plaintiff filed a petition
for rehearing with the Second Circuit. The Second Circuit denied the petition for rehearing on November 28,
2017. The plaintiff did not seek Supreme Court review and therefore the matter is closed.
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
continued to cooperate with the Enforcement Division’s investigation and recently has engaged in discussions
with the staff of the Enforcement Division about a potential resolution. As part of settlement discussions the
Company has submitted a formal offer of settlement to the Enforcement Division for consideration by the
Commission. The terms of the settlement offer remain subject to approval by the Commission. Accordingly,
there can be no assurance that the Company’s efforts to resolve the investigation will be successful or that the
settlement amount will be as anticipated, and the Company cannot predict the ultimate timing or outcome of
the Commission’s consideration.
In May 2017, a former employee filed a class action complaint against the Company in Superior Court for the
State of California, County of Kern (the “Hayes matter”), alleging that the Company violated certain
California wage and hour laws for missed meal and rest periods and other wage and hour claims. In June
2017, the Company removed the case to the United States District Court for the Eastern District of California.
The plaintiffs were seeking to recover, on their own behalf and on behalf of a putative class of all non-exempt
ADS employees in the State of California from December 16, 2012 through present, damages resulting from
missed rest breaks, missed meal periods, unpaid minimum wage, straight-time and overtime pay, improper
wage statements, non-payment of wages at termination, and attorneys’ fees and costs. On January 24, 2018,
the parties attended mediation and entered into a settlement agreement to resolve the class action for $1.8
million. As part of the parties’ agreement, ADS consented to have the case remanded back to Kern County
Superior Court for approval of the class settlement.
Thereafter, during the fourth quarter of fiscal 2018, the parties agreed to amend their existing Hayes
settlement agreement (i) to expand the settlement class to include temporary employees assigned to work at
ADS locations in California and (ii) to increase the settlement amount from $1.8 million to $2.0 million. The
parties stipulated to the filing of an Amended Complaint to add a California Private Attorneys General Act
(“PAGA”) claim, as well as a joint employer claim on behalf of temporary employees assigned to work at
ADS locations in California. Pursuant to the settlement, the Company would pay approximately $2.0 million,
which includes payments to class members in resolution of all claims, attorneys’ fees, and settlement fund
claims administration fees. The settlement is subject to court approval and approval by the California Labor
and Workforce Development Agency; these approvals are pending.
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
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Advanced Drainage Systems, Inc.
transfer of assets from our tax-qualified profit-sharing retirement plan, as well as a 30-year term loan from
ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than March 2023
the shares of redeemable convertible preferred stock owned by the ESOP will be converted into shares of the
Company’s common stock. 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 on the Plan’s unallocated shares of redeemable convertible preferred stock, 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 for services rendered throughout the
period are recognized based upon the annual fair value of the shares allocated. Deferred compensation —
unearned ESOP shares is relieved at fair value, with any difference between the annual 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 $20.00, $16.80, and $16.35 per share of redeemable convertible preferred stock at March 31,
2018, 2017, and 2016, respectively, resulting in an average annual fair value per share of $18.40, $16.58, and
$19.20 per share for the fiscal years ended March 31, 2018, 2017, and 2016, respectively. During the fiscal
years ended March 31, 2018, 2017, and 2016, the Company recognized compensation expense of $11.7
million, $9.6 million, and $10.3 million, respectively, related to allocation of ESOP shares to participants.
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.
The ESOP committee directed the Plan trustee to retain dividends on unallocated ADS shares rather than to
service the Plan’s debt. In the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized
compensation expense and the trustee retained $3.2 million, $2.9 million and $2.5 million, respectively, for
dividends on unallocated ADS shares. These dividends were allocated to participants based on the total shares
in their account in relation to total shares allocated at March 31, 2018 and 2017.
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 absent a market for the Company’s common
stock, and as a result the redeemable convertible preferred stock is classified as Mezzanine equity in the
Company’s Consolidated Balance Sheets. 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, 2018, the applicable redemption value was $0.781 per share as there were no unpaid cumulative
dividends.
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Advanced Drainage Systems, Inc.
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, 2018, 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 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 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, 2018, 2017 and 2016. The annual dividend was
paid in cash and stock on the allocated shares. During the first quarter of 2018, the Board of Directors
approved the 2.5% annual dividend to be paid on March 31, 2018 to stockholders of record as of March 1,
2018.
Cash and stock dividends on allocated Redeemable convertible preferred stock for the fiscal years ended
March 31, 2018 and 2017, respectively, are summarized in the following table.
(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
2018
2017
$
$
$
$
1,713 $
11
1,724 $
134
11
145 $
7,437
0.0195
145 $
1,494
18
1,512
134
18
152
7,779
0.0195
152
In the fiscal years ended March 31, 2018 and 2017, 0.6 million and 0.6 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.
Executive Retirement Expense - 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, 2018, 2017, and 2016 was $1.5 million, $1.1 million and $(0.3) million, respectively,
F-41
Advanced Drainage Systems, Inc.
and is included in General and administrative expenses in the Consolidated Statements of Operations. As of
March 31, 2018 and 2017, the executive termination payment obligation was $6.1 million and $5.1 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, 2018, 2017, and 2016. The Company has a defined contribution
postretirement benefit plan covering Canadian employees. The Company recognized costs of $0.7 million,
$0.8 million and $0.6 million in the fiscal years ended March 31, 2018, 2017 and 2016.
16.
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, 2018, 2017, and 2016:
(Amounts in thousands)
Component of income before income taxes:
Cost of goods sold
Selling expenses
General and administrative expenses
2018
2017
2016
$
179 $
105
6,837
177 $
177
7,953
(300)
(500)
(5,068)
Total stock-based compensation expense
(benefit)
$
7,121 $
8,307 $
(5,868)
The following table summarizes stock-based compensation expense (benefit) by award type for the fiscal
years ended March 31, 2018, 2017, and 2016:
(Amounts in thousands)
Stock-based compensation expense (benefit):
2018
2017
2016
Liability-classified stock options
Equity-classified stock options
Restricted stock
Non-employee director
Total stock-based compensation expense
(benefit)
$
— $
4,148
1,741
1,232
4,936 $
108
1,945
1,318
(6,784)
—
916
—
$
7,121 $
8,307 $
(5,868)
F-42
Advanced Drainage Systems, Inc.
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 ASU in Note 1, employees can now withhold shares with a fair value up to
the maximum statutory rate. Accordingly, the Company modified the awards previously accounted for as
liability-classified to equity-classified and reclassified the carrying amount of the awards of $13.7 million to
Paid-in capital in the Consolidated Balance Sheet. All stock options have been accounted for as equity-
classified awards for the periods subsequent to the modification. Prior to the modification, liability-classified
awards were reclassified to additional paid in capital at fair value when stock options were exercised.
The following table summarizes the assumptions used in estimating the fair value of stock options:
Common stock price
Expected stock price volatility
Risk-free interest rate
Weighted-average expected
option life (years)
Dividend yield
2010 and 2013 Stock Options Plans
2018
$19.35 - $22.95
32.1% - 35.6%
1.9% - 2.2%
2017
2016
$18.70 - $28.17
29.6% - 33.0%
0.9% - 1.9%
$18.34 - $33.03
31.1% - 39.3%
0.5% - 1.5%
5.6 – 6.0
1.1% - 1.5%
0.5 – 5.1
0.9%
0.5 – 6.2
0.9%
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 estimates the fair value of
stock options using a Black-Scholes option-pricing model.
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 no shares available for grant under the 2000 Plan as of March 31, 2018.
The stock option activity for the fiscal year ended March 31, 2018 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)
195 $
—
(55)
(5)
135
81
54
$
13.31
—
11.73
15.74
13.85
12.61
15.74
—
5.4
—
—
—
4.8
4.1
6.0
F-43
Advanced Drainage Systems, Inc.
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2018:
(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
59 $
—
—
(5)
54 $
As of March 31, 2018, there was a total of $0.2 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 3.3 years.
No options vested during the fiscal years ended March 31, 2018, 2017 and 2016. No options were granted
during the fiscal years ended March 31, 2018, 2017 and 2016. The aggregate intrinsic value for options
outstanding and currently exercisable as of March 31, 2018 was $1.6 million and $1.1 million, respectively.
The total intrinsic value of options exercised during the fiscal years ended March 31, 2018, 2017, and 2016
were $0.5 million, $3.7 million and $3.7 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 three to five
equal annual amounts beginning in year one and expire after approximately 10 years from issuance. Options
issued to the former Chief Executive Officer vested equally over four years and expire after approximately 10
years from issuance.
The Company had no shares available for grant under the 2013 Plan as of March 31, 2018.
The stock option activity for the fiscal year ended March 31, 2018 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)
2,260 $
3
(618)
(143)
1,502
1,063
439
$
16.04
22.95
13.65
24.20
16.27
15.10
19.09
7.53
6.7
—
—
—
5.9
5.4
6.5
F-44
Advanced Drainage Systems, Inc.
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2018:
(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
8.51
7.53
8.76
7.99
8.42
1,120 $
3
(541)
(143)
439 $
As of March 31, 2018, there was a total of $2.4 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 1.5 years.
The aggregate intrinsic value for options outstanding and currently exercisable as of March 31, 2018 was
$14.5 million and $11.4 million, respectively. The total fair value of options that vested during the fiscal years
ended March 31, 2018, 2017, and 2016 were $4.7 million, $3.4 million, and $3.6 million, respectively. The
total intrinsic value of options exercised during the fiscal year ended March 31, 2018 was $4.4 million.
2008 Restricted Stock Plan
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 former Chief
Executive Officer, which do not have a substantial risk of forfeiture as a result of different vesting provisions.
Under the restricted stock plan, vested shares are considered issued and outstanding. Employees with
restricted stock have the right to dividends on the shares awarded (vested and unvested) in addition to voting
rights on non-forfeited shares.
The restricted stock is accounted for as equity-classified awards. 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 no shares available for grant under this plan as of March 31, 2018.
The information about the unvested restricted stock grants as of March 31, 2018 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
254 $
1
(151)
(3)
101 $
21.92
22.15
21.25
22.49
22.95
The Company expects all restricted stock grants to vest.
At March 31, 2018, there was approximately $1.9 million of unrecognized compensation expense related to
the restricted stock that will be recognized over the weighted average remaining service period of 1.7 years.
During the fiscal year ended March 31, 2018 and 2017, the weighted average grant date fair value of restricted
stock granted was $22.15 and $24.20, respectively. No restricted stock was granted during the fiscal year
F-45
Advanced Drainage Systems, Inc.
ended March 31, 2016. During the fiscal years ended March 31, 2018, 2017, and 2016, the total fair value of
restricted stock that vested was $2.9 million, $1.2 million and $1.1 million, respectively.
2017 Omnibus Plan
On May 24, 2017, the Board of Directors approved the 2017 Omnibus Incentive Plan (the “2017 Incentive
Plan”) which was approved by the Company’s stockholders on July 17, 2017. The 2017 Incentive Plan
provides for the issuance of a maximum of 3.5 million shares of the Company’s common stock for awards
made thereunder, which awards may consist of stock options, restricted stock, restricted stock units, stock
appreciation rights, phantom stock, cash-based awards, performance awards (which may take the form of
performance cash, performance units or performance shares) or other stock-based awards. The Company had
approximately 3.3 million shares available for awards as of March 31, 2018. The 2017 Incentive Plan replaces
the 2000 Incentive Stock Option Plan, 2008 Restricted Stock Plan, 2013 Stock Option Plan, and 2014 Non-
Employee Director Compensation Plan (the “Prior Plans”) and no further grants will be made under the prior
plans.
The stock option activity for the fiscal year ended March 31, 2018 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.
Number
of Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in
years)
—
198 $
—
—
198
—
198
—
19.75
—
—
19.75
—
19.75
5.94
—
—
—
—
9.4
—
9.4
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2018:
(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
—
5.94
—
—
5.94
—
198 $
—
—
198 $
As of March 31, 2018, there was a total of $0.9 million of unrecognized compensation expense related to
unvested stock option awards under the 2017 Incentive Plan that will be recognized as an expense as the
awards vest over the remaining weighted average service period of 2.4 years.
F-46
Advanced Drainage Systems, Inc.
The aggregate intrinsic value for options outstanding as of March 31, 2018 was $1.2 million. There were no
options that vested or were exercised during the fiscal year ended March 31, 2018.
The information about the unvested restricted stock grants as of March 31, 2018 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
— $
108
—
—
108 $
—
19.91
—
—
19.91
At March 31, 2018, there was approximately $1.2 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, 2018, the weighted average grant date fair value of restricted stock
granted was $19.91. During the fiscal year ended March 31, 2018, no restricted stock vested.
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
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 no shares available for grant under this plan as of March 31, 2018.
The following table summarizes information about the unvested Non-Employee Director Compensation stock
grants as of March 31, 2018 :
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Unvested at end of year
2018
Weighted
Average
Grant
Date Fair
Value
Number
of Shares
40 $
—
(40)
— $
24.20
—
—
—
As of March 31, 2018, there was no unrecognized compensation expense.
17. 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
2018
72,109 $
4,833
76,942 $
2017
59,543 $
5,288
64,831 $
2016
45,159
14,140
59,299
$
$
F-47
Advanced Drainage Systems, Inc.
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
Total deferred tax expense (benefit)
Total Income tax expense
2018
2017
2016
$
17,107 $
3,541
2,242
22,890
24,318 $
4,652
3,040
32,010
6,889
2,126
3,791
12,806
(11,236)
(55)
(188)
(11,479)
11,411 $
(5,887)
(1,297)
(211)
(7,395)
24,615 $
10,019
1,431
(758)
10,692
23,498
$
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
ESOP stock appreciation
Effect of tax rate of foreign subsidiaries
State and local taxes—net of federal income
tax benefit
Stock-based compensation
Uncertain tax position change
Impact of tax reform
Return to provision - federal and state
Qualified production activity deduction
Closure of Puerto Rico
Other
Effective rate
2018
2017
2016
31.5%
5.4
0.7
3.6
0.5
0.3
(19.4)
(5.0)
(2.5)
—
(0.3)
14.8%
35.0%
4.1
1.3
4.1
0.3
(1.1)
—
1.1
(3.3)
(4.2)
0.7
38.0%
35.0%
5.0
0.8
4.3
(1.8)
(3.6)
—
—
(0.9)
—
0.8
39.6%
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act significantly
revises the future ongoing U.S. corporate income tax by, among other things, lowering the U. S. corporate
income tax rate from 35% to 21%, full expensing on qualified property, eliminates the domestic
manufacturing deduction and implements a territorial tax system. The 21% U.S. corporate income tax rate is
effective January 1, 2018. Based on the Company’s fiscal year end of March 31, the U.S. statutory federal
rate is 31.5% for the fiscal year ended March 31, 2018.
The Company has recognized the provisional tax impacts related to revaluation of deferred tax assets and
liabilities and deemed repatriated earnings and included these amounts in its financial statements for the year
ended March 31, 2018. The ultimate impact may differ from these provisional amounts, possibly materially,
due to, among other things, additional analysis, changes in interpretations and assumptions the Company has
made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the
Tax Act. The accounting is expected to be finalized when the fiscal 2018 U.S. corporate income tax return is
filed.
The Company recognized an initial provisional amount for revaluing its deferred tax attributes resulting in a
$14.7 million tax benefit for the quarter ended December 31, 2017. On the basis of revised computations
during the fourth quarter, we recognized an additional deferred tax benefit of $1.3 million for the quarter
ended March 31, 2018. A total deferred tax benefit of $16.0 million was recorded for the fiscal year ended
March 31, 2018.
F-48
Advanced Drainage Systems, Inc.
The Company had an estimated $33.2 million of undistributed earnings on its foreign subsidiaries subject to
the deemed mandatory repatriation. The Company recognized an initial provisional $4.4 million of income
tax expense for the quarter ended December 31, 2017. After the utilization of existing foreign tax credits, the
Company expected to pay additional U.S. federal taxes of approximately $0.9 million on the deemed
mandatory repatriation as of the quarter ended December 31, 2017. On the basis of revised undistributed
earnings computations that were calculated during the fourth quarter, we recognized an additional
measurement-period adjustment of $0.8 million to income tax expense for the quarter ended March 31, 2018.
A total transition tax expense of $5.2 million has been recorded for the fiscal year ended March 31, 2018.
After the utilization of existing foreign tax credits, the Company expects to pay additional U.S. federal cash
taxes of approximately $1.0 million as of the fiscal year ended March 31, 2018.
These undistributed 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, in addition
to the repatriation amount, that might be payable on the eventual remittance of such earnings.
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
Inventory
Non-qualified stock options
Executive termination payments (Note 15)
Worker’s compensation
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
Goodwill
Other
Total deferred tax liabilities
Net deferred tax liability
2018
2017
$
$
1,126 $
891
1,696
3,558
3,596
1,299
732
445
2,441
15,784
(26)
15,758
4,254
38,181
3,698
1,814
47,947
32,189 $
1,474
1,363
2,660
5,820
6,052
2,044
1,323
2,223
3,359
26,318
(2,223)
24,095
9,728
52,322
3,886
1,464
67,400
43,305
Net deferred tax assets and liabilities are included in Other assets and Deferred tax liabilities, respectively, on
the Consolidated Balance Sheets. The related balances at March 31 were as follows:
(Amounts in thousands)
Net non-current deferred tax assets
Net non-current deferred tax liabilities
2018
2017
$
115 $
32,304
702
44,007
F-49
Advanced Drainage Systems, Inc.
Accounting for Uncertain Tax Positions
As of March 31, 2018, the Company had unrecognized tax benefit of $7.6 million, which if resolved
favorably, would reduce income tax expense by $7.6 million. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits for the years ended March 31, 2018, 2017, and 2016 is as follows:
(Amounts in thousands)
Balance at beginning of year
Tax positions taken in current year
Decreases in tax positions for prior years
Increases in tax positions for prior years
Lapse of statute of limitations
Foreign translation adjustment
Balance at end of year
2018
2017
2016
$
$
6,196 $
81
—
5,108
(3,940)
148
7,593 $
7,998 $
—
(1,786)
80
(96)
—
6,196 $
10,452
917
(599)
358
(3,130)
—
7,998
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 $2.1 million and $1.8
million at March 31, 2018 and 2017, 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, 2015 through March 31, 2018. 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, 2018. The foreign
income tax returns are open to audit under the statute of limitations for the years ended March 31, 2014
through March 31, 2018.
18. NET INCOME PER SHARE AND STOCKHOLDERS’ EQUITY
Basic net income per share is calculated by dividing the Net income 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 per share is computed by dividing the Net income 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 per share. The two-class method is an earnings allocation formula that treats
participating securities as having rights to earnings that would otherwise have been available to common
stockholders.
The dilutive effect of stock options and unvested restricted stock is based on the more dilutive of the treasury
stock method or the diluted two-class method. In computing diluted net income per share, income available to
common 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. 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, 2018, 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-50
Advanced Drainage Systems, Inc.
The following table presents information necessary to calculate net income per share for the fiscal years ended
March 31, 2018, 2017, and 2016, 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 PER SHARE — BASIC:
Net income attributable to ADS
Adjustment for:
Accretion of redeemable noncontrolling interest
in subsidiaries
Dividends paid to redeemable convertible
preferred stockholders
Dividends paid to unvested restricted
stockholders
Net income available to common stockholders
and participating securities
Undistributed income allocated to participating
securities
Net income available to common
stockholders — Basic
Weighted average number of common shares
outstanding — Basic
Net income per common share —
Basic
NET INCOME PER SHARE —
DILUTED:
Net income 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 per common share —
Diluted
Potentially dilutive securities excluded as anti-
dilutive
2018
2017
2016
$
62,007 $
32,950 $
25,052
—
(1,560)
(932)
(1,858)
(1,646)
(1,425)
(49)
(73)
(24)
60,100
29,671
22,671
(4,514)
(1,700)
(1,270)
55,586
27,971
21,401
55,696
54,919
53,978
$
1.00 $
0.51 $
0.40
55,586
27,971
21,401
55,696
638
54,919
705
53,978
1,198
56,334
55,624
55,176
$
0.99 $
0.50 $
0.39
6,167
6,228
6,383
Stockholders’ Equity – During the fiscal year ended March 31, 2018, the Company repurchased 0.4 million
shares of common stock at a cost of $7.9 million. The repurchases were made under the Board of Directors’
authorization in February 2017 to repurchase up to $50 million of ADS common stock in accordance with
applicable securities laws. As of March 31, 2018, approximately $42.1 million of common stock may be
repurchased under the authorization. The repurchase program does not obligate the Company to acquire any
particular amount of common stock, and may be suspended or terminated at any time at the Company’s
discretion.
Treasury Stock Retirement – On November 1, 2017, the Board of Directors resolved to retire 97.7 million
shares of Treasury Stock. The retirement of the Treasury Stock resulted in a reclassification of Treasury stock
to Paid-In-Capital and did not have an impact on Total Stockholders’ Equity.
F-51
Advanced Drainage Systems, Inc.
19. OTHER ACCRUED LIABILITIES
Other accrued liabilities as of fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Accrued compensation and benefits(1)
Accrued rebate liability(2)
Self-insurance accruals
Current portion of liability-classified stock-based awards
Other
Total accrued liabilities
2018
2017
$
$
17,980 $
12,938
12,439
—
17,203
60,560 $
17,066
8,480
8,559
11,926
20,355
66,386
(1) Accrued compensation and benefits is primarily comprised of accrued payroll, bonuses and commissions.
(2) Accrued rebate liability represents the Company’s estimated rebates to be paid to customers.
20. 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
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, subsidiaries that
distribute to Europe and the Middle East, exports and through the Company’s joint-ventures with local
partners in Mexico and South America. The Company’s 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.
F-52
Advanced Drainage Systems, Inc.
The following table sets forth reportable segment information with respect to the amount of Net sales
contributed by each class of similar products in each of the fiscal years ended March 31:
(Amounts in thousands)
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
2018
2017
2016
$ 835,421 $ 786,546 $ 812,071
301,725
1,174,432 1,102,236 1,113,796
315,690
339,011
118,644
37,278
155,922
139,731
37,151
176,882
$1,330,354 $1,257,261 $1,290,678
122,384
32,641
155,025
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
2018
2017
2016
$ 191,629 $ 175,676 $ 162,875
24,465
$ 210,230 $ 193,371 $ 187,340
18,601
17,695
$
$
$
$
$
$
$
$
$
$
14,929 $
333
15,262 $
17,049 $
418
17,467 $
17,908
552
18,460
9,199 $
2,212
11,411 $
21,786 $
2,829
24,615 $
20,465
3,033
23,498
66,978 $
8,025
75,003 $
63,747 $
8,608
72,355 $
62,625
8,384
71,009
(2,427) $
1,688
(739) $
(505) $
(3,803)
(4,308) $
181
(5,415)
(5,234)
39,562 $
2,147
41,709 $
39,642 $
7,034
46,676 $
37,242
7,700
44,942
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
F-53
Advanced Drainage Systems, Inc.
The following sets forth certain additional financial information attributable to the reportable segments as of
March 31:
(Amounts in thousands)
Investments in unconsolidated affiliates
Domestic
International
Total
Total identifiable assets
Domestic
International
Eliminations
Total
Reconciliation of Segment Adjusted EBITDA to Net income
2018
2017
$
$
— $
12,343
12,343 $
2,427
6,559
8,986
$
904,718 $
142,822
(4,298)
917,006
134,987
(5,708)
$ 1,043,242 $ 1,046,285
(Amounts in thousands)
Net income (loss)
Depreciation and amortization
Interest expense
Income tax expense
Derivative fair value adjustments
Foreign currency transaction (gains) losses
Loss (gain) on disposal of assets and costs
from exit and
disposal activities
Unconsolidated affiliates interest, taxes,
depreciation and amortization (a)
Contingent consideration remeasurement
Stock-based compensation expense (benefit)
ESOP deferred stock-based compensation
Executive retirement expense (benefit)
Loss related to BaySaver step acquisition
Inventory step up related to PTI acquisition
Bargain purchase gain on PTI acquisition
Restatement-related costs (b)
Legal settlement(c)
Impairment on investment in unconsolidated
affiliate(d)
Transaction costs (e)
Segment Adjusted EBITDA (f)
2018
2016
2017
Domestic International Domestic International Domestic International
5,692
$ 57,279 $
8,384
66,978
552
14,929
3,033
9,199
24
(443)
697
—
7,513 $ 35,118 $
8,025 63,747
333 17,049
2,212 21,786
— (10,921)
—
790 $ 24,875 $
8,608 62,625
418 17,908
2,829 20,465
2,139
—
—
(1,629)
(1,748)
14,248
1,181
39
7,121
11,724
1,473
—
—
—
4,227
2,000
312
1,362
$191,629 $
755
4,793
3,716
892
(80)
1,088
1,511
(265)
—
8,307
—
9,568
—
1,092
—
—
—
525
—
—
(609)
— 24,026
—
—
1,052
1,663
371
—
—
(5,868)
— 10,250
(294)
—
490
—
—
—
—
—
— 27,970
—
—
2,163
—
—
—
—
—
—
—
—
—
—
—
—
372
18,601 $175,676 $
1,300
—
—
—
17,695 $162,875 $
4,000
—
24,465
F-54
Advanced Drainage Systems, Inc.
(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
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 settlement agreement to resolve the Hayes matter, as further discussed in “Note 14. Commitments
and Contingencies” to the Consolidated Financial Statements.
(c)
(d) Represents an other-than-temporary impairment of our investments in Tigre-ADS USA and the South
(e)
(f)
American Joint Venture.
Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with the debt refinancing and asset acquisitions and dispositions.
A portion of the reduction in International Adjusted EBITDA from fiscal 2016 to fiscal 2017 is related to
transfer pricing. The reduction is fully offset by an increase in Domestic Adjusted EBITDA.
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
2018
2017
2016
$1,313,917 $1,243,074 $1,274,700
15,978
$1,330,354 $1,257,261 $1,290,678
14,187
16,437
2018
2017
$
$
401,470 $
12,343
413,813 $
411,752
6,559
418,311
(a)
For segment reporting purposes, long-lived assets include Investments in unconsolidated affiliates, Central
parts and Property, plant and equipment.
21.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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:
2018
2016
2017
Interest
Income taxes
$
17,890 $
24,510
17,273 $
13,525
18,352
32,175
F-55
Advanced Drainage Systems, Inc.
(Amounts in thousands)
Supplemental disclosures of noncash investing
and financing activities:
Redeemable convertible preferred stock dividend
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
Contribution of net accounts receivable to
the South American Joint Venture
Payable recorded for business acquisition
2018
2017
2016
$
134 $
134 $
132
1,258
—
11,566
2,549
—
7,425
1,165
150
10,250
26,571
26,276
34,207
636
390
134
—
4,147
3,702
2,785
300
—
950
—
—
22. 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, 2018 and 2017. 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 2018
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,
2018
250,114 $
48,115
(4,856)
(5,703)
December
31, 2017
September
30, 2017
320,832 $
77,826
33,215
32,105
401,049 $
89,801
17,959
17,863
June 30,
2017
358,359
86,739
18,474
17,742
$
$
(0.11) $
(0.11) $
0.52 $
0.51 $
0.29 $
0.29 $
0.29
0.28
Fiscal Year 2017
For the Three Months Ended
$
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
(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.
F-56
Advanced Drainage Systems, Inc.
23.
SUBSEQUENT EVENTS
Dividends on Common Stock - During the first quarter of fiscal 2019, the Company declared a quarterly cash
dividend of $0.08 per share of common stock. The dividend is payable on June 15, 2018 to stockholders of
record at the close of business on June 5, 2018.
* * * * * *
F-57
Advanced Drainage Systems, Inc.
SCHEDULE II
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Valuation and Qualifying Accounts for the Fiscal Years Ended March 31, 2018,
Allowance for Doubtful Accounts:
2017 and 2016 (in thousands):
Year ended March 31,
2018
2017
2016
Balance at
beginning
of period
$ 10,431 $
7,956
5,423
Charged to
costs and
expenses
Charged to
other
accounts (1)
Deductions
(2)
Balance at
end of
period
503 $
2,940
3,542
(391) $
(13)
(81)
(3,717) $
(452)
(928)
6,826
10,431
7,956
(1) Amounts represent the impact of foreign currency translation.
(2) Amounts includes the release of a $3.0 million allowance related to the South American Joint Venture capital
contribution. See “Note 10. Investment in Unconsolidated Affiliates” for additional information.
F-58
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About Advanced Drainage
Systems, Inc.
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. For more information, please visit ads-pipe.com.
1111 Advanced Drainage System, Inc.
4640 Trueman Blvd.
Hilliard, OH 43026
www.ads-pipe.com