Fiscal Year 2019
Annual Report
ADVANCED DRAINAGE SYSTEMS, INC
ads-pipe.com
Dear Fellow Shareholders,
Driven by excellent cooperation, disciplined planning and execution, we finished fiscal 2019 with strong
financial performance, posting record net sales and Adjusted EBITDA for the year. Our fiscal 2019 revenue
increased 4% to $1.4 billion, and our Adjusted EBITDA increased 10% to $232 million. We were able to
achieve these results by providing best-in-class water management solutions to our customers, executing
our conversion strategies to displace traditional materials and capturing the benefits of our operational and
transportation initiatives.
Revenue growth was driven by favorable pricing and volume growth in our domestic construction markets.
We stayed focused on our key growth initiatives, including executing our market share model, driving
growth in key geographies and selling our complete line of water management solutions. Our domestic
construction market sales outpaced the broad-based growth in our end markets by 400 basis points and we
experienced strong growth in key states, such as Texas, Florida, North Carolina, Georgia and Arizona.
Internationally, we are seeing good growth in our Exports business and Canadian construction market sales.
Mexico had a strong first half of the year, but the transition phase of the new government resulted in lower
infrastructure investment and construction spending toward the end of the year.
From a profitability standpoint, successful execution of our growth strategies and efficiency initiatives as well
as our commitment to continuous improvement resulted in 100 basis points of margin expansion this year.
Our team did a great job managing through an inflationary cost environment this past year, and we are very
pleased with our results.
Our growth and profitability initiatives also led to an improvement in cash flow generation, which we
used to return $75 million to our shareholders through a special dividend. This special dividend payment
demonstrates our commitment to returning capital to shareholders, as well as our confidence in the
strength of our balance sheet. Importantly, we were able to return this cash to our shareholders without
impacting our ability to execute on our organic growth and acquisition priorities.
Our top priorities are investing in organic growth and strategic acquisitions. Our fiscal 2020 capital plans are
focused on investing in growth and capacity to support high growth products in key regions, productivity
and efficiency initiatives, and technological solutions for our support functions. In addition to these priorities,
we have developed a robust acquisition process, widening the aperture of potential deals with more
dedicated resources. We are looking at companies, product lines, and potential relationships based on their
relatedness to our core markets, and the opportunity attractiveness of these targets. We believe this is the
best way to create value for our shareholders.
In addition to the priorities set forth above, over the last year we have taken steps to more effectively engage
with our external communities. We released our first Sustainability Report in April 2019 to educate our
stakeholders on our environmental and community impact. Sustainability is a core component of how we
grow and operate our business as protecting water as a precious natural resource is at the very core of what we
do. By providing innovative products, using industry leading recycling practices and being a good local citizen
in the communities which we operate, we are growing our environmental, operational and social impact.
Finally, we are more actively engaging with the political community as we promote open material
competition in public infrastructure projects. Studies show that open material competition reduces cost,
fosters innovation and improves quality. The current process allows for a single material to be specified for
storm water pipes on construction plans. By shifting this to defined system requirements and requiring
bidding of all technically qualified materials, we can help stretch the value of every dollar spent on our
publicly funded transportation systems.
Inaugural Investor Day and
Three-Year Plan
In November 2018 we held our first Investor Day, presenting our
three-year financial targets for the first time and detailing our plans
to accelerating profitable growth through fiscal 2021. Our fiscal 2019
results and fiscal 2020 targets are in line with the sales growth,
margin expansion and cash flow generation targets we presented.
Key initiatives to our plan are presented on the right.
Looking Forward to Fiscal 2020
As we move forward into the next fiscal year, we are focused on
execution. We are excited about where we are headed and the
opportunities in front of us. We are beginning to get a taste of
early returns from our continuous improvement initiatives in our
supply chain, capital and leadership investments. We are also
working to create a safety culture that changes mindsets, changes
behaviors and encourages our employees to demonstrate safe
habits in everything they do.
I want to take this opportunity to thank two members of our
Board of Directors, Richard Rosenthal and Abigail Wexner, who
have chosen not to stand for re-election as directors at our 2019
Annual Meeting. During Mr. Rosenthal’s tenure as a board member,
he helped guide the company from a small, local start-up to
the industry standard and leader. Ms. Wexner helped guide the
company through our IPO, led our Nominating and Corporate
Governance committee since then and was instrumental in the
process of hiring a new leader after the retirement of our long-time
CEO, Joe Chlapaty. We sincerely thank both Mr. Rosenthal and Ms.
Wexner for all they have done to make Advanced Drainage Systems
a success story. I also want to thank the talented workforce that has
made our Company into what it is today, our Board of Directors and
our shareholders, for your continued support and confidence in our
team.
Sincerely,
Scott Barbour
President and CEO
Sales Growth
+4% to 6% CAGR
• Execute our market share model:
Approval, Acceptance, Coverage,
Win Rate
• Drive growth in key states, such
as Florida, Texas and California,
where there is population growth
and increased spending on
construction projects
• Provide best in class water
management solutions to our
customers
• Further penetrate the large
diameter pipe market through our
HP products
Margin Expansion
18% to 19% Adjusted EBITDA
Margin by Fiscal 2021
• Optimize material blending
to reduce costs and maximize
throughput, as well as increase
consumption of recycled high-
density polyethylene
• Continuous improvement within
our four wall manufacturing
facilities and throughout our
supply chain
• Optimize our network of
manufacturing and distribution
facilities
• Optimize our fleet assets and
national footprint to provide high-
quality, cost-effective and efficient
service to our customers
Free Cash Flow
Generation
>50% of Adjusted EBITDA by Fiscal 2021
• Execute on sales growth and
margin expansion strategies
• Accelerate cash generation
through working capital programs,
including better aligning
receivables and payables and
turning inventory faster
• Effectively use our strong balance
sheet
Company Snapshot
For more than 50 years, Advanced Drainage Systems, Inc. (ADS) has been a leading manufacturer of high
performance thermoplastic corrugated pipe, providing innovative solutions to some of the world’s most challenging
water management problems. Whether at construction sites, on farmland or within businesses, schools and
neighborhoods, our products make a difference in communities around the world. We established our market
leading position through innovative products that displace traditional materials and we have accelerated our
growth by differentiating ourselves as a water management solutions provider. Our comprehensive set of products
help communities efficiently and safely manage storm and waste water from the minute it hits the ground until it is
released back into the ecosystem.
1st
in Corrugated
Plastic Pipe
Ticker:
WMS
Since 2014
350+
Total Number of
Products Offered
$1.4
billion
2019
Revenue
8.5+billion
Feet of ADS pipe in
service around the
world today
50+
Years of
Experience
4,400+
Total Number
of Employees
>> We are constantly focused on
introducing new and innovative ways
to create a safer work environment
for our employees. In fiscal 2019, We
rolled out a program to provide bump
caps to all of our plant employees and
mandated their use on the plant floor
to reduce exposure to lacerations and
abrasions caused by minor bumps to
the head. We also approved over $2
million of safety related investments.
Key Financial Highlights
FY 2019 Revenue
(Figures in millions)
FY 2019 Adjusted EBITDA1*
(Figures in millions)
CAGR: 4.1%
CAGR: 12.7%
$1,180
$1,291
$1,257
$1,330
$1,385
$144
$187
$193
$210
$232
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
1 EBITDA adjustments exclude one-time transaction costs
and certain non-cash items.
FY 2019 Sales by Geography
FY 2019 Sales by Product Category
88%
Domestic
12%
International
72%
Pipe
28%
Allied
FY 2019 Domestic Revenue Growth Vs. End Market
End Market
% of Domestic Sales
Market Performance
ADS Sales
Non-Residential
Construction
Residential
Construction
Infrastructure
Construction
Agriculture
60%
23%
9%
8%
+3%
+1%
+6%
+8%
+11%
(4%)
(22%)
(22%)
Construction market sales outperformed overall end markets by 400 basis points
1 Based on management estimates.
*Non-GAAP. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the accompanying Form 10-K for the
definitions of non-GAAP measures and reconciliation of non-GAAP measures to GAAP measures.
Management of a Precious Resource
Protecting Aquifers in Texas
We are proud to be able to work closely with communities around the world to provide innovative solutions to address
their water management challenges and protect our precious resources. This is a role we take seriously, as we know
with each shipment, we are helping to improve the environments and quality of life for people everywhere.
Central Texas is home to the Edwards Aquifer, an underground layer of sponge-like permeable rock, which also
serves as the main source of drinking water for nearly two million people in the region. As one of our nation’s largest
aquifers, this resource is the primary water supply for agriculture and industry in the region, feeding rivers, lakes
and springs in the area, in addition to sustaining the lives of plants and animals. Protecting the water quality in the
region is of utmost importance because chemicals that enter the water can quickly cause contamination, especially
if pollutants enter the surface area surrounding the aquifer.
4
2
3
1
1
Water is conveyed through N-12 pipe into
the StormTech detention system
2
3
4
Before storage, the water moves through
the Isolator Row to remove coarse
sediments and other contaminants
Water is stored in the StormTech detention
system before being discharged into the
San Gabriel River
Water is treated by our BayFilter Water
Quality Units to filter and remove fine
sediments
A local developer in Georgetown, TX was looking for a way to detain and clean the storm water runoff at a
grocery store development site near the San Gabriel River, which feeds the aquifer. His engineers had considered
constructing a pond or using a sand filtration system with a large detention system underneath but were struggling
with cost and constructability. His ultimate goal was to protect the aquifer as much as possible while also
controlling the storm water runoff. Our engineers were able to work with the developer to provide the solution he
was looking for, including conveyance, detention and water treatment for the system which ultimately discharges
into the San Gabriel River. Ultimately, we were able to build a system that exceeded the strict local guidelines,
which are sensitive to this area. System highlights are above.
Our StormTech® chambers
manage the retention
and detention of over
1.7 billion
gallons of storm water run-off at a given time, protecting
bodies of water, wetlands and shorelines.
Our BarracudaTM water quality units treat
180,000+
gallons of water per minute
during storm events.
Florida Highlights
Since gaining our 100-year design service life approval
in Florida DOT in 2012 (HDPE) and 2014 (HP), Florida
has been a key growth state at ADS. We have been
heavily focused on promoting our N-12, HP and Allied
products in key growth areas, and our efforts are
paying off. Here are a few places benefitting from our
products across the state.
University of Florida baseball fans may be aware that
construction of a new state of the art stadium broke
ground in early 2019. The new stadium will seat 10,000
fans, with athlete amenities, an infield practice facility and
the field sitting on approximately 14 acres of land. Our
N-12 pipe, StormTech retention chambers and Nyloplast
catch basins were specified to provide the storm water
drainage needs underneath the field, around the stadium
and under the parking lot.
Due to the high water table and tight surface area,
contractors in Jacksonville, FL chose ADS products
to service the storm water at an urban-style
apartment complex. Using an innovative design,
contractors actually built a pipe system beneath
a storm water retention area to lower the water
table and reduce the risk of flooding. The project
required a full suite of storm water products, and
ultimately used over 13,000 feet of N-12 and HP
pipe, a StormTech retention system, Nyloplast
catch basins, InsertaTee lateral connections and
geotextiles, all provided by ADS.
Residential: San
Marco Promenade
Apartment
Community
Jacksonville, FL
Gainesville,FL
The Florida Department of Transportation
(FDOT) approved construction on I-95
in Broward County, FL to extend an
existing express lane and convert another
lane, creating two express lanes in each
direction to alleviate congestion and slow
moving traffic. Breaking ground in January
2019, the project required nearly seven
miles of drainage along the side of the
highway, and our HP pipe was chosen
because of its overall cost effectiveness
and ease of installation. Our pipe products
are being chosen for FDOT and local
infrastructure projects across the state –
in Fiscal 2019 we sold nearly 200 miles
of pipe on Florida street and highway
infrastructure projects.
Infrastructure: I-95 Express
Lane Extension
Broward
County, FL
Industry Leading Recycling Solutions
Sustainability 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.
We are the 6th largest recycling company in North America based on our recycling operations. In Fiscal 2019, we
purchased 250 million pounds of post consumer recycled plastic and 150 million pounds of post industrial plastic
– saving over 230 million gallons of water and preventing over 530 million pounds of CO2 equivalent from being
released into the atmosphere. Our industry-leading resin blending program converts this post consumer and post
industrial recycled materials into pipe products that can support America’s infrastructure and water management
needs.
In fiscal 2019, we consumed
30%
of the recycled pigmented HDPE
bottles in the United States.
The amount of recycled HDPE we consumed through this
general process in fiscal 2019 reduced our CO2 emissions
equivalent by over 530 million pounds, which amounts to
taking over
51,000
cars off the road.
The average
life span of
a consumer
HDPE bottle
is less than 1
year.
<1
year
LIFE SPAN
These bottles
as well as other
plastics and
recyclable
materials are
picked up through
curbside recycling
programs and
taken to recycling
facilities.
At the recycling
facilities,
materials are
sorted and
packed into
bales. The bales
are then taken
to an ADS Green
Line Polymer
facility.
At our facilities
we unpack the
bales and sort the
plastic material.
We then shred the
plastic into flake
and wash it to
produce a clean
flake material.
Flake may be
further pelletized
and is then
used in the
manufacturing
of our HDPE
products.
Our products
are installed
in storm water
systems that
are designed
to last over 100
years.
100+
years
LIFE SPAN
Figures based on “Life Cycle Impacts For Postconsumer Recycled Resins,: PET, HDPE, and PP” report prepared for the Association of Plastics Recyclers by
Franklin Associates, A Division of Eastern Research Group, published in December 2018.
Sustainability By-the-Numbers
6th Largest
Recycling
Company
in North America
400M
pounds
of plastic is kept from landfills
each year because of ADS
–3%
incidents
–3%
rate
OSHA Recordable
Incidents
Total Case Incident Rate
Standardizing
Operating
Procedures
Aluminum trailers continuing
to be incorporated into fleet
to improve fuel efficiency
4%
increase
in payload efficiency in
Fiscal 2019
8%
Of our truck asset mix is
comprised of smaller and
higher fuel economy trucks
>60%
Our MEGA GREEN™ pipe contains
>60% 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
1M+
gallons
reused
rain
water
At two of our Green
Line Polymer
facilities
Annual Ethics &
Anti-Corruption
Training
Global-focused
Code of Business
Conduct
Donated more than
$500,000
to charitable organizations in Fiscal 2019
400+
employees have participated
in leadership training
4
Industry
organization
memberships
Board of Directors
Executive Officers
Scott Barbour
Director, President and
Chief Executive Officer
Scott A. Cottrill
Executive Vice President,
Chief Financial Officer, Secretary
Darin Harvey
Executive Vice President, Supply Chain
Robert M. Klein
Executive Vice President, Sales
Kevin C. Talley
Executive Vice President and
Chief Administrative Officer
Ronald R. Vitarelli
Executive Vice President,
Engineering and Business Development
Ewout Leeuwenburg
Senior Vice President, International
Chairman Emeritus
Joe Chlapaty
Chlapaty Investments LLC
Retired Chairman, President and
Chief Executive Officer
Advanced Drainage Systems
Robert Kidder
Chairman
Scott Barbour
Director, President and
Chief Executive Officer
Michael Coleman
Partner
Ice Miller LLP
Robert M. Eversole
Principal
Stonehenge Partners, Inc.
Alexander R. Fischer
President and Chief Executive Officer
Columbus Partnership
Tanya Fratto
Retired President and Chief Executive Officer
General Electric Superabrasives
M.A. (Mark) Haney
Retired Executive 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 Executive Officer
St. Joseph Bancorp
Abigail S. Wexner
Chairman and Chief Executive Officer
Whitebarn Associates
Of
)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
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
Trading
Symbol(s)
Title of Each Class
Name of Each Exchange On Which Registered
Common Stock, $0.01 par value per share
WMS
Securities registered pursuant to Section 12(g) of the Act: None
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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 ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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)
Large Accelerated Filer ☒
☐
Non-Accelerated Filer
Emerging Growth Company ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Accelerated Filer
Smaller Reporting Company
☐
☐
The aggregate market value of the shares of common stock held by non-affiliates of the registrant (treating all executive officers and directors of
the registrant, for this purpose, as affiliates of the registrant) was $1,175 million as of September 30, 2018, 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, 2018.
As of May 21, 2019, the registrant had 57,521,292 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, 2019, 213,748 shares of unvested restricted common stock were
outstanding and 22,609,679 shares of ESOP preferred stock, convertible into 17,391,365 shares of common stock, were outstanding. As of May
21, 2019, 75,126,405 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 23, 2019.
TABLE OF CONTENTS
Cautionary Statement About Forward-Looking Statements ............................................................................
PART I
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 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..............................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance .............................................................
Item 11. Executive Compensation ...................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ...........................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................
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Item 14. Principal Accountant Fees and Services ..........................................................................................
61
Item 15. Exhibits and Financial Statement Schedules ..................................................................................
62
Item 16. Form 10-K Summary .........................................................................................................................
68
PART IV
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Table of Contents
Advanced Drainage Systems, Inc.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. Some of the forward-looking
statements can be identified by the use of terms such as “believes,” “expects,” “may,” “will,” “should,” “could,”
“seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements
include all matters that are not related to present facts or current conditions or that are not historical facts. They
appear in a number of places throughout this 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
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 any claims, litigation, investigations or proceedings, including those described below under
“Item 3. Legal Proceedings” of this Annual Report;
the effect of weather or seasonality;
the loss of any of our significant customers;
the risks of doing business internationally;
our ability to remediate the material weakness in our internal control over financial reporting, including
remediation of the control environment for our joint venture affiliate ADS Mexicana, S.A. de C.V. as
described in “Item 9A. Controls and Procedures” of this Annual Report;
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;
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Advanced Drainage Systems, Inc.
•
•
•
•
•
•
•
•
•
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•
•
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the risk associated with manufacturing processes;
our ability to manage our assets;
the risks associated with our product warranties;
our ability to manage our supply purchasing and customer credit policies;
the risks associated with our self-insured programs;
our ability to control labor costs and to attract, train and retain highly qualified employees and key
personnel;
our ability to protect our intellectual property rights;
changes in laws and regulations, including environmental laws and regulations;
our ability to project product mix;
the risks associated with our current levels of indebtedness;
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.
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Table of Contents
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. 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 9
HDPE pipe manufacturing plants in the U.S. and Canada and, according to the December 24, 2018 ranking by Plastics
News of Pipe, Profile & Tubing Extruders, recently had estimated sales of $140 million, or approximately ten times
less than our net sales in fiscal 2019.
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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 2019 Revenue
SEGMENT INFORMATION
For a discussion of segment and geographic information, see “Note 21. Business Segment Information” to our
audited consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this
Form 10-K.
OUR MANUFACTURING AND DISTRIBUTION PLATFORM
We have a leading domestic and international manufacturing and distribution infrastructure, serving customers
in all 50 U.S. states as well as approximately 80 other countries through 56 manufacturing plants and 32 distribution
centers, including 8 manufacturing plants and 5 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 three 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.
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In addition to the extrusion of pipe, and blow molding and injection molding of fittings, we also use a variety of
other processes in our manufacturing facilities. These processes include thermoforming, compression molding, and
custom plastic welding and fabrication. The wide variety of production processes and expertise allow us to provide
cost-effective finished goods at competitive prices delivered in a timely fashion to our customers.
Our manufacturing plants have no process-related by-products released into the atmosphere, waterways, or
solid waste discharge. During pipe production start-ups and size changeovers, non-compliant scrap and any
damaged finished goods pipe are recycled through a grinder for internal re-use.
International Presence – We own manufacturing facilities in Canada to produce our products for sale in the
Canadian markets. 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 online 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 to 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 1,250 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.
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OUR PRODUCTS
We design, manufacture and market a complete line of high performance thermoplastic corrugated pipe and
related water management products for use in a wide range of end markets. Our product line includes: single, double
and triple wall corrugated polypropylene and polyethylene pipe (or “Pipe”) and a variety of additional water
management products (“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, drainage grates and other products (or “Other Resale”). The table below
summarizes the percentage of Net Sales for Pipe and Allied Products.
Pipe
Allied Products
Pipe
2019
2018
2017
72 %
28 %
72 %
28 %
72 %
28 %
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
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smooth black inner wall. This combination of the three wall design adds strength and stiffness, while reducing
weight as compared to PVC 2729. Triple Wall is produced in two sizes, 3” and 4”, and sold through our distribution
network. We also manufacture smoothwall HDPE pipe in 3”, 4”, and 6” diameters that are sold into the residential
drainage and on-site septic systems markets.
Allied Products
We produce a range of 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 HDPE and PP 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 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 HDPE, 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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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. Our Barracuda
separator removes sediment and other debris from storm water run-off, further protecting water resources. The
Barracuda separator is designed to be used in a single manhole configuration and offers multiple pipe
configurations.
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 PP, 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
825 million pounds of virgin and recycled resin annually from over 425 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 most 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 primarily as a result of the new supplies of natural gas liquids being produced through sustained oil and
gas exploration and production.
We leverage our raw material blending and processing technologies to produce an HDPE pipe that
incorporates recycled resin. These products, which meet an ASTM International standard and an American
Association of State Highway and Transportation Officials standard, replaces a majority of the virgin resin that is
used 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 U.S. In fiscal 2019, 91% of our non-virgin HDPE raw
material needs were internally processed (enhanced) through our GLP operations.
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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 Performance Materials NA,
Inc. (formerly 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 HDPE and PP, respectively.
CUSTOMERS
We have a large, active customer base of approximately 20,000 customers, with two customers representing
10% or more of fiscal 2019 net sales. Ferguson Enterprises (“Ferguson”) accounted for 13.8% and Core and Main
accounted for 11.6% of fiscal 2019 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 and
Core and Main 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 three regional
customer service call centers. 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 forces in the industry, with more than
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.
Our sales and engineering objective is to influence, track and quote all selling opportunities as early in the
project life cycle as possible. We strive to be meaningfully involved in all phases of the project cycle, including
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design, bidding, award and installation. 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.
The inclusion of our products in bid documents improves the probability of completing the sale. On-demand
installation support allows us to maintain customer relationships and ensure positive installation experience. 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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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, 2019, in our domestic and international operations the Company and its consolidated
subsidiaries had approximately 4,400 employees, consisting of approximately 3,000 hourly personnel and
approximately 1,400 salaried employees. As of March 31, 2019, approximately 250 hourly personnel in our
Mexican joint venture 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 60 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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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 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 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. 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
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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.
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:
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•
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•
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.
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.
The homebuilding industry underwent a significant decline after its peak in 2005. While new housing
starts demonstrated a compounded annual growth rate of 6.2% from 2013 to 2018, 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.
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
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business is particularly impacted by changes in the economies of the United States, Canada and Mexico, which
represented 88.4%, 6.8% and 3.5%, respectively, of our net sales for fiscal 2019 and collectively represented 98.7%
of our net sales for fiscal 2019.
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,
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.
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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.
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 2019. 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.
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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
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.
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, 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
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
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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.
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
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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 judgment. Management estimates warranty reserves based in part upon historical warranty costs.
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, 2019 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
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
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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.
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 first three fiscal quarters in
fiscal 2015 (the “Prior Restatement”). In addition, as described in our Annual Report on Form 10-K/A for the fiscal
year ended March 31, 2016 (the “Fiscal 2016 Form 10-K”), we restated our previously issued consolidated financial
statements for the fiscal years ended March 31, 2016 and 2015 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 continue to 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 and 2017
as a result of the Prior Restatements were approximately $4 million and $24 million, respectively. In fiscal 2019, we
recorded a $1.9 million benefit as a result of insurance proceeds received. Furthermore, we have also incurred
significant expenses in connection with the remediation of the weaknesses in our internal control over financial
reporting as part of the Prior Restatements as well as incurring significant expenses in connection with hiring
additional personnel in order to increase the finance department. Any future restatement of our financial statements
would adversely affect our financial position, results of operations and cash flows.
Our failure to maintain effective disclosure controls and internal control over financial reporting could adversely
affect our business, financial position and results of operations.
We are required to evaluate the effectiveness of our disclosure controls on a periodic basis and publicly
disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002. As of March 31, 2019, we have identified a material weakness in internal control
over financial reporting. The material weakness in our internal control over financial reporting as of March 31, 2019
was a result of a material weakness in the control environment of our consolidated joint venture affiliate, ADS
Mexicana. See Item 9A. “Controls and Procedures” for further description.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
consolidated financial statements will not be prevented or detected on a timely basis. We are actively engaged in
remediation activities designed to address the material weakness, but our remediation efforts are not complete and
are ongoing. Although we are working to remedy the ineffectiveness of the Company’s internal control over
financial reporting, there can be no assurance as to when the remediation plan will be fully implemented or the
aggregate cost of implementation. Until our remediation plan is fully implemented, our management will continue to
devote significant time and attention to these efforts. If we do not complete our remediation in a timely fashion, or at
all, or if our remediation plan is inadequate, there will continue to be an increased risk that we will be unable to
timely file future periodic reports with the SEC and that our future consolidated financial statements could contain
errors that will be undetected. If we are unable to report our results in a timely and accurate manner, we may not be
able to comply with the applicable covenants in our financing arrangements, and may be required to seek additional
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amendments or waivers under these financing arrangements, which could adversely impact our liquidity and
financial condition. Further and continued determinations that there is a material weakness in the effectiveness of the
Company’s internal control over financial reporting could reduce our ability to obtain financing or could increase
the cost of any financing we obtain and require additional expenditures of both money and our management’s time
to comply with applicable requirements.
Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in
their implementation, could result in additional material weaknesses or material misstatement in our consolidated
financial statements. Any new misstatement could result in a further restatement of our consolidated financial
statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause
investors to lose confidence in our reported financial information, leading to a decline in our stock price. We cannot
assure you that we will not discover additional weaknesses in our internal control over financial reporting.
As a result of the material weakness, our management concluded that we did not maintain effective internal
control over financial reporting as of March 31, 2019. This could cause investors to lose confidence in the reliability
of our financial statements and could result in a decrease in the value of our common stock. Failure to comply with
the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, NYSE, or
other regulatory authorities.
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 resulted in an 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 were 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, on
November 27, 2018, the plaintiff filed a motion for relief from final judgment and for leave to file an amended
complaint with the district court, on which the district court has not yet ruled. We were also subject of a formal
investigation by the SEC’s Division of Enforcement (the “Enforcement Division”), resulting in a $1.0 million fine as
part of the settlement of that investigation. We could become subject to additional litigation or government
investigations and enforcement actions arising out of the Prior Restatement, the Stock-Based Compensation
Restatement, as well as any delinquent Exchange Act filings.
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Our management 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. Any
insurance that we maintain may not be adequate for such matters in the future and there is risk that our insurers
could rescind or otherwise not renew the policies, that some or all of any future 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 15. Commitments and Contingencies — Litigation” to our audited consolidated financial
statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
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 changed 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.
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
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,
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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.
The occurrence of such interruptions could have a material adverse effect on our business financial condition and
results of operations.
Cybersecurity attacks may threaten our confidential information, disrupt operations and result in harm to our
reputation and adversely impact our business and financial performance.
Cybersecurity attacks across industries, including ours, are increasing in sophistication and frequency and may
range from uncoordinated individual attempts to measures targeted specifically at us. These attacks include but are
not limited to, malicious software or viruses, attempts to gain unauthorized access to, or otherwise disrupt, our
information systems, attempts to gain unauthorized access to business, proprietary or other confidential information,
and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of
confidential or otherwise protected information and corruption of data. Cybersecurity failures may be caused by
employee error, malfeasance, other corporate or governmental actors, system errors or vulnerabilities, including
vulnerabilities of our vendors, suppliers, and their products. While we have been subject to cybersecurity attacks in
the past, that (based on information known to date) did not have a material impact on our financial condition or
results of operations, we may experience such attacks in the future, potentially with more frequency or
sophistication which may have a material impact on our financial condition or results of operations.
Failures of our IT systems as a result of cybersecurity attacks or other disruptions could result in a breach of
critical operational or financial controls and lead to a disruption of our operations, commercial activities or financial
processes. Cybersecurity attacks or other disruptions impacting significant customers and/or suppliers could also
lead to a disruption of our operations or commercial activities. Despite our attempts to safeguard our systems and
mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyberattacks or security
breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise
protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events
could have a material adverse effect on our business financial condition and results of operations.
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 legislation.
We provide workers’ compensation, automobile and product/general liability coverage through a high
deductible insurance program. In addition, we provide medical coverage to some of our employees through a self-
insured preferred provider organization. Possible changes to health care legislation could have possible adverse
effects including increased costs, exposure to expanded liability and requirements for us to revise ways in which we
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provide healthcare and other benefits to our employees. Our business, financial condition, results of operations and
cash flows may be adversely affected if the cost, number and severity of insurance claims increases.
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
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
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enter into confidentiality agreements. We cannot assure that these agreements will provide meaningful protection for
our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the
proprietary nature of our technologies, we could be materially adversely affected.
We rely on our trademarks, trade names and brand names to distinguish our products from the products of our
competitors and have registered or applied to register many of these trademarks. We cannot assure that our
trademark applications will be approved. Third parties may also oppose our trademark applications or otherwise
challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be
forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote
resources to advertising and marketing new brands. Further, we cannot assure that competitors will not infringe our
trademarks or that we will have adequate resources to enforce our trademarks. We also license third parties to use
certain of our trademarks. In an effort to preserve our trademark rights, we enter into license agreements with these
third parties which govern the use of our trademarks and which require our licensees to abide by quality control
standards with respect to the goods and services that they provide under our trademarks. Although we make efforts
to police the use of our trademarks by our licensees, we cannot assure that these efforts will be sufficient to ensure
that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark
rights could be diluted.
Although we rely on copyright laws to protect the works of authorship (including software) created by us, we
generally do not register the copyrights in any of our copyrightable works. Copyrights of United States origin must
be registered before the copyright owner may bring an infringement suit in the United States. Furthermore, if a
copyright of United States origin is not registered within three months of publication of the underlying work, the
copyright owner is precluded from seeking statutory damages or attorneys’ fees in any United States enforcement
action and is limited to seeking actual damages and lost profits. Accordingly, if one of our unregistered copyrights
of United States origin is infringed by a third party, we will need to register the copyright before we can file an
infringement suit in the United States, and our remedies in any such infringement suit may be limited.
The misuse of our intellectual property rights by others could adversely impact our ability to compete, cause
our net sales to decrease or otherwise harm our business. If it became necessary for us to resort to litigation to
protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail.
Also, we cannot be certain that the products that we sell do not and will not infringe issued patents or other
intellectual property rights of others. Further, we are subject to legal proceedings and claims in the ordinary course
of our business, including claims of alleged infringement of the patents, trademarks and other intellectual property
rights of third parties by us or our customers, whom we generally indemnify in connection with their use of the
products that we manufacture. These claims could divert management’s attention and resources and may require us
to initiate or defend protracted and costly litigation on behalf of ourselves or our customers, regardless of the merits
of the claims. Should we be found liable for infringement, we may be required to enter into licensing agreements (if
available on acceptable terms or at all) or pay damages and cease making or selling certain products. Moreover, we
may need to redesign or sell different products to avoid future infringement liability. Any of the foregoing could
cause us to incur significant costs, prevent us from selling our products or negatively impact our ability to compete.
We could incur significant costs in complying with environmental, health and safety laws or permits or as a
result of satisfying any liability or obligation imposed under such laws or permits.
Our operations are subject to various federal, state, local and foreign environmental, health and safety laws
and regulations. Among other things, these laws regulate the emission or discharge of materials into the
environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes,
protect the health and safety of our employees and the end users of our products, regulate the materials used in and
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
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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.
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, 2019, we had an aggregate principal amount of $236.8 million of outstanding debt. In fiscal
2019, we incurred $10.8 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
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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 Loan and our Senior Notes, which we have defined in
“Note 13. 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 Secured Bank Loan provides an aggregate commitment of up to $550.0 million. As of
March 31, 2019, we had an additional $407.1 million of availability under the Secured Bank Loan. If new debt is
added to our current debt levels, the related risks that we now face could intensify. See “Note 13. Debt” to our
consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”
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 Loan 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.
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If we are unable to repay indebtedness, secured parties having secured obligations, such as the lenders or noteholders,
as the case may be, 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 Loan, 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
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.
In addition, we recently declared a special dividend. The fact that we declared a special dividend does not
suggest and stockholders should not expect that our Board of Directors will declare a regular or special cash
dividend in the future. Any future dividends will depend on a variety of factors, including our liquidity and
balance sheet position, solvency, strength of operations, product successes, research and development needs and
other factors.
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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, 2019, we have 57.8 million outstanding shares of common stock, including 0.3 million outstanding shares
of our restricted stock, a significant portion of which are freely tradeable without restriction under the Securities Act
of 1933, as amended, (“Securities Act”) unless held by “affiliates,” as that term is defined in Rule 144 under the
Securities Act. The remaining shares of common stock outstanding are restricted securities within the meaning of
Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if their offer and sale
is registered under the Securities Act or if the offer and sale of those securities qualify for an exemption from
registration, including exemptions provided by Rules 144 and 701 under the Securities Act. 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, 2019, there were stock options outstanding to purchase a total of approximately
1.7 million shares of our common stock. In addition, approximately 2.7 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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Advanced Drainage Systems, Inc.
All of the shares of our convertible preferred stock held by our Employee Stock Ownership Plan (“ESOP”)
may be converted into our common stock at any time by action of the ESOP trustee, and will be automatically
converted into our common stock upon distributions of such shares allocated to the ESOP accounts of ESOP
participants upon a distribution event such as retirement or other termination of employment. Such distributed
common stock will not be subject to any lock-up agreement and will be eligible for future sale, subject to the
applicable volume, manner of sale, holding period and other limitations of Rule 144. As of March 31, 2019, there
were approximately 22.6 million shares of convertible preferred stock held by our ESOP, which in aggregate could
be converted into approximately 17.4 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, 2019, our directors, officers and principal stockholders and their affiliates collectively own
approximately 49.0% of our outstanding shares of common stock. Additionally, our ESOP holds convertible
preferred stock that converts into a substantial number of shares of our common stock and, prior to conversion, is
entitled to vote on a one-for-one basis on any matter requiring the vote or consent of our stockholders, voting
together with our common stock as a single class unless otherwise required by law. Thus, the collective voting
power of our directors, officers and principal stockholders and their affiliates as of May 21, 2019 is approximately
60.8%, inclusive of the outstanding shares of convertible preferred stock held by the ESOP. As a result, these
stockholders, if they act together, may be able to control our management and affairs and most matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a change of control and might adversely
affect the market price of our common stock. This concentration of ownership may not be in the best interests of our
other stockholders.
The trustee of our ESOP has certain limited powers to vote a large block of shares on matters presented to
stockholders for approval.
In general, the ESOP trustee votes the shares of convertible preferred stock held by the ESOP as directed by
the ESOP’s participants. Consequently, the ESOP trustee has the ability to vote a significant block of shares on
certain matters presented to stockholders for approval. Each participant in the ESOP may direct the ESOP trustee on
how to vote the shares of convertible preferred stock allocated to the participant’s ESOP accounts; and the ESOP
trustee must vote any unallocated stock and allocated stock for which no participant instructions were received in the
same proportion as the allocated stock for which participants’ voting instructions have been received is voted.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a
change in control of us and may affect the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws include a number of
provisions that may discourage, delay or prevent a change in our management or control over us that stockholders
may consider favorable. For example, our amended and restated certificate of incorporation and amended and
restated bylaws: authorize the issuance of “blank check” preferred stock that could be issued by our board of
directors to thwart a takeover attempt; maintain a classified board of directors, as a result of which our board will
continue to be divided into three classes, with each class serving for staggered three-year terms, which prevents
stockholders from electing an entirely new board of directors at an annual meeting; limit the ability of stockholders
to remove directors; provide that vacancies on our board of directors, including newly-created directorships, may be
filled only by a majority vote of directors then in office; prohibit stockholders from calling special meetings of
stockholders; prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of
the stockholders; do not give the holders of our common stock cumulative voting rights with respect to the election
of directors, which means that the holders of a majority of our outstanding shares of common stock can elect all
directors standing for election; establish advance notice requirements for nominations for election to our board of
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Advanced Drainage Systems, Inc.
directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; require a super-
majority stockholders vote of 75% to approve any reorganization, recapitalization, share exchange, share
reclassification, consolidation, merger, conversion or sale of all or substantially all assets to which we are a party
that is not approved by the affirmative vote of at least 75% of the members of our board of directors; and require the
approval of holders of at least 75% of the outstanding shares of our voting common stock to amend the bylaws and
certain provisions of the certificate of incorporation.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or
Delaware General Corporation Law that has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect
the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws may also make it
difficult for stockholders to replace or remove our management. These provisions may facilitate management
entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in
the best interests of our stockholders.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit
our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers,
employees or agents.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting
a claim of breach of a fiduciary duty owed to us or our stockholders by our directors, officers, employees or agents;
any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and
restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us
that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest
in shares of our common stock shall be deemed to have notice of and to have consented to the provisions of our
amended and restated certificate of incorporation described above. The choice of forum provision may limit a
stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers, employees or agents, which may discourage such lawsuits against us or our directors, officers, employees
or agents. If a court were to find the choice of forum provision contained in our amended and restated certificate of
incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Item 1B.
Unresolved Staff Comments
None.
Item 2. Properties
Property
We have a network of 56 manufacturing plant locations and 32 distribution centers, summarized in the
following table:
United States
Canada
Mexico (1)
South America (1)(2)
Other (3)
Total
Manufacturing
Plants
44
4
4
4
—
56
Distribution
Centers
21
5
—
5
1
32
Total
65
9
4
9
1
88
(1) Manufacturing plants and distribution centers in Mexico and South America are owned or leased by our
joint ventures.
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Advanced Drainage Systems, Inc.
(2) Manufacturing plants and distribution centers owned or leased by our South America joint venture are not
consolidated.
(3) The other facility is located in the Netherlands.
We currently own approximately 36,000 square feet and lease approximately 16,000 square feet of office
space in Hilliard, Ohio for our corporate headquarters.
Our network of 56 manufacturing plants consist of 44 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 2 owned and 30 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.
In-House Fleet
As of March 31, 2019, our in-house fleet consist of approximately 700 tractors and approximately 1,250
trailers that are specially designed to haul our lightweight pipe and fittings products.
Item 3.
Legal Proceedings
As previously disclosed in the Company’s fiscal 2018 Form 10-K, the Company’s historical accounting
practices were the subject of an investigation by SEC’s Division of Enforcement (the “Enforcement Division”),
which began in August 2015. That matter was resolved on July 10, 2018 via a settlement between the Company and
the SEC. Pursuant to the settlement, the Company consented to the entry of an administrative order without
admitting or denying the findings therein. The order required the Company to cease and desist from committing or
causing any violations and any future violations of certain provisions of the federal securities laws and the rules
promulgated thereunder and to pay a civil monetary penalty of $1.0 million, which payment has been made. The
Company previously accrued an expense for the penalty amount during fiscal 2018.
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.
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 the
plaintiff’s claims against all defendants in their entirety and with prejudice. The 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, the plaintiff filed a petition for rehearing with the Second Circuit. The
Second Circuit denied the petition for rehearing on November 28, 2017. On November 27, 2018, the plaintiff filed a
motion for relief from final judgment and for leave to file an amended complaint with the District Court. The
defendants have opposed the plaintiff’s motion and are awaiting a decision by the District Court. While it is
reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is
currently unable to estimate the range of the possible losses, but it could be material.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of
our business, including but not limited to commercial disputes, environmental matters, employee related claims,
intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures.
The Company does not believe that such litigation, claims, and administrative proceedings will have a material
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Advanced Drainage Systems, Inc.
adverse impact on our financial position or our results of operations. The Company records a liability when a loss is
considered probable, and the amount can be reasonably estimated.
Item 4.
Mine Safety Disclosures
Not applicable.
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Advanced Drainage Systems, Inc.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information for Common Stock
Our common stock is listed and traded on the NYSE under the symbol “WMS”.
During each quarter of fiscal 2018 and fiscal 2017, the Board of Directors approved a quarterly cash dividend
of $0.07 per share and $0.06 per share, respectively, to all common stockholders. In addition, during each quarter of
fiscal 2019, the Board of Directors approved a quarterly cash dividend of $0.08 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 2020, the Company declared a quarterly cash dividend of $0.09 per share of
common stock. The dividend is payable on June 14, 2019 to stockholders of record at the close of business on June
3, 2019. During the first quarter of fiscal 2020, the Board of Directors approved a special dividend of $1.00 per
share payable on June 14, 2019 to stockholder of record at the close of business on June 3, 2019.
Holders of Record
As of May 21, 2019, we had 344 holders of record of our common stock. The number of holders of record is
based upon the actual number of holders registered as of such date and does not include holders of shares in “street
name” or persons, partnerships, associates, corporations or other entities in security position listings maintained by
depositories.
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Advanced Drainage Systems, Inc.
Stock Performance Graph
The following graph presents a comparison from July 25, 2014 (the date our common stock commenced
trading on the NYSE) through March 31, 2019 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.
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Advanced Drainage Systems, Inc.
Item 6. Selected Financial and Operating Data
The following tables set forth selected historical consolidated financial data, for the periods and as of the dates
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 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
2019
2018
2017
2016
2015
$ 1,384,733 $ 1,330,354 $ 1,257,261 $ 1,290,678 $ 1,180,073
1,057,766 1,027,873 961,451 1,005,326 974,960
326,967 302,481 295,810 285,352 205,113
80,481
75,855
92,764
91,475
98,392 110,950
96,335
89,692
88,478
92,504
3,647
7,880
129,413
18,618
15,003
8,068
88,254
15,262
8,509
8,548
76,328
17,467
812
9,224
94,334
18,460
362
9,754
38,661
19,368
(815 )
111,610
30,049
(3,950 )
76,942
11,411
(5,970 )
64,831
24,615
16,575
59,299
23,498
14,370
4,923
6,284
95
81,466
739
64,792
4,308
35,908
5,234
30,567
2,335
(3,696 )
3,694
77,772
2,785
62,007
2,958
32,950
5,515
25,052
4,131
(7,827 )
57,025
57,611
55,696
56,334
54,919
55,624
53,978
55,176
51,344
51,344
$
1.23 $
1.22
0.32
1.00 $
0.99
0.28
0.51 $
0.50
0.24
0.40 $
0.39
0.20
(0.38 )
(0.38 )
0.08
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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
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)
2019
2018
2017
2016
2015
6,555 $
8,891 $
6,450 $
17,587 $
$
3,623
260,228 237,210 184,812 187,378 228,947
1,042,159 1,043,242 1,046,285 1,037,316 1,033,581
208,602 270,900 310,849 312,214 385,772
45,503
541,524 609,433 695,850 723,080 748,435
102,322 109,550 112,825 111,747 108,021
398,313 324,259 237,610 202,489 177,125
58,710
59,963
56,809
61,555
$ 151,678 $ 137,120 $ 104,239 $ 135,342 $
(49,018 )
(30,445 )
(61,259 )
(42,544 )
74,379
(76,093 )
(117,655 )
(94,953 )
(42,825 )
(82,964 )
1,791
$ 231,960 $ 210,230 $ 193,371 $ 187,340 $ 143,877
32,080
42,299
43,412
108,266
41,709
95,411
46,676
57,563
44,942
90,400
(1) Working capital is equal to current assets less current liabilities. Working capital is an indication of liquidity
and potential need for short-term funding.
(2) Our mezzanine equity consists of the redeemable convertible preferred stock held by our ESOP as well, prior
to the acquisition of the noncontrolling interest in third quarter of fiscal 2019, the Redeemable noncontrolling
interest in subsidiaries related to the noncontrolling interest in the BaySaver joint venture. See “Note 4.
Acquisitions” and “Note 10. 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 16. Employee Benefit plans” 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 key
metrics 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
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Advanced Drainage Systems, Inc.
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)
Contingent consideration remeasurement
Stock-based compensation expense
(benefit) (d)
ESOP deferred stock-based
compensation (e)
Executive retirement expense (benefit)(f)
Expense related to executive stock
repurchase agreements(g)
Loss related to BaySaver step acquisition
Inventory step up related to PTI acquisition
Bargain purchase gain on PTI acquisition
Restatement-related costs (h)
Legal Settlement (i)
Impairment of investment in unconsolidated
affiliate (j)
Strategic growth and operational improvement
initiatives (k)
Transaction costs (l)
Adjusted EBITDA
2018
2017
2016
2019
2015
$ 81,466 $ 64,792 $ 35,908 $ 30,567 $
(3,696 )
71,900 75,003 72,355 71,009 65,472
18,618 15,262 17,467 18,460 19,368
30,049 11,411 24,615 23,498
6,284
202,033 166,468 150,345 143,534 87,428
7,746
5,404
(443 ) (10,921 )
(1,629 )
2,163
697
634
314
(1,748 )
3,647 15,003
8,509
812
362
1,463
(6 )
2,692
39
2,751
(265 )
3,215
371
3,585
174
6,532
7,121
8,307
(5,868 ) 24,247
15,296 11,724
1,473
(178 )
9,568 10,250 12,144
328
1,092
(294 )
—
—
—
—
(1,924 )
—
—
—
—
—
—
—
490
—
—
525
—
(609 )
4,227 24,026 27,970
—
2,000
—
1,011
—
—
—
—
—
—
312
1,300
4,000
—
3,450
699
—
1,448
$ 231,960 $ 210,230 $ 193,371 $ 187,340 $ 143,877
—
1,362
—
372
—
—
(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.
(c) Represents our proportional share of interest, income taxes, depreciation and amortization related to our South
American joint venture, which is 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
Tigre-ADS USA joint venture prior to its disposal in April 2018 and 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. 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.
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Advanced Drainage Systems, Inc.
(d) Represents the non-cash stock-based compensation cost related to our stock options and restricted stock
awards.
(e) 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.
(f) Represents the non-cash compensation expense recorded related to future payments to certain executives upon
retirement or other qualified termination events.
(g) 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.
(h) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with the restatement of our prior period financial statements. The benefit recognized in fiscal 2019 is the result
of insurance proceeds received in fiscal 2019. Fiscal 2019 and 2018 expenses relate to the ongoing SEC
Enforcement Division’s investigation and related shareholder litigation.
(i) Represents settlement agreement to resolve the Hayes matter.
(j) Represents an other-than-temporary impairment of our investments in the former Tigre-ADS USA joint
venture and the South American Joint Venture.
(k) Represents professional fees incurred in connection with our strategic growth and operational improvement
initiatives, which include various market feasibility assessments and acquisition strategies, along with our
operational improvement initiatives, which include evaluation of our manufacturing network and
improvement initiatives.
(l) 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 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
2019
2018
2017
$ 151,678 $ 137,120 $ 104,239 $ 135,342 $ 74,379
(43,412 ) (41,709 ) (46,676 ) (44,942 ) (32,080 )
$ 108,266 $ 95,411 $ 57,563 $ 90,400 $ 42,299
2015
2016
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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, 2019 refers to fiscal 2019, which is the period from April 1, 2018 to March 31,
2019.
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 former 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.
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
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Advanced Drainage Systems, Inc.
table summarizes the restructuring activity included in Loss on disposal of assets and costs from exit and disposal
activities recorded during the fiscal years ended March 31, 2019 and 2018:
(Amounts in thousands)
Accelerated depreciation
Plant severance
Corporate severance
Product rationalization
Other restructuring activities
Total Restructuring Activities
2019
2018
430 $
131
306
283
475
1,625 $
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
$
$
2019
2018
1,229 $
—
396
1,625 $
7,878
1,620
1,945
11,443
The restructuring costs above may not be indicative of expected costs or cost savings in future periods.
Strategic Growth and Operational Improvement Initiatives
In fiscal 2019, we began incurring professional fees in connection with strategic growth and operational
improvement initiatives. These initiatives include market feasibility assessments, acquisition strategies, operational
improvement initiatives, which include evaluation of our manufacturing network and improvement initiatives
associated with various operational support functions.
Federal Income Tax Reform
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 was effective January 1, 2018.
The Company previously 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. During the fiscal year ended March 31, 2019, the Company finalized the accounting for the
Tax Act. During the fiscal year ended March 31, 2019, the Company did not make any material adjustments to its
provisional amounts included in its consolidated financial statements for the year ended March 31, 2018.
The Company recognized a provisional amount for revaluing its deferred tax attributes resulting in a $16.0
million tax benefit that was recorded for the fiscal year ended March 31, 2018. On the basis of revised computations
in filing the U.S. federal tax return during the third quarter, the Company recognized an additional measurement-
period adjustment of $0.4 million to deferred tax expense for the fiscal year ended March 31, 2019. A total deferred
tax benefit of $15.6 million was recorded. The Company’s accounting for its deferred tax attributes is now complete.
The Company had $26.5 million of undistributed earnings on its foreign subsidiaries subject to the deemed
mandatory repatriation. The Company recognized a provisional amount of $5.2 million of income tax expense that
was recorded for the fiscal year ended March 31, 2018. After the utilization of existing foreign tax credits, the
Company expected to pay additional U.S. federal taxes of approximately $1.0 million as of the fiscal year ended
March 31, 2018. On the basis of revised computations in filing the U.S. federal tax return during the third quarter,
the Company recognized an additional measurement-period adjustment of $0.6 million to income tax benefit for the
fiscal year ended March 31, 2019. A total transition tax expense of $4.6 million was recorded. After the utilization
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of existing foreign tax credits, the Company paid additional U.S. federal taxes of $0.7 million. The Company’s
accounting for the deemed mandatory repatriation tax is now complete.
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:
•
•
•
•
•
•
•
•
•
•
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, logistics or other
overhead costs and resulting changes in the selling prices may also impact changes in period-to-period comparisons
of net sales.
Material Conversion - Our HDPE and PP pipe and related water management product lines compete with other
manufacturers of corrugated polyethylene pipe as well as manufacturers of alternative products made with
traditional materials, such as concrete, steel and PVC. Our net sales are driven by market trends, including the
continued increase in adoption of thermoplastic corrugated pipe products as a replacement for traditional materials.
Thermoplastic corrugated pipe is generally lighter, more durable, more cost effective and easier to install than
comparable products made from traditional materials. We believe customers will continue to acknowledge the
superior attributes and compelling value proposition of our thermoplastic products and expanded regulatory
approvals allow for their use in new markets and geographies. In addition, we believe that PP pipe products will also
help accelerate conversion given the additional applications for which our PP pipe products can be used.
We believe the adoption of HDPE and PP pipe outside of the United States is still in its early stages and
represents a significant opportunity for us to continue to increase the conversion to our products from traditional
products in these markets, including Canada, Mexico and South America where we operate.
Growth in Allied Products - Our Allied Products include storm and septic chambers, PVC drainage structures,
fittings, stormwater filters and water separators. These products complement our pipe product lines and allow us to
offer a comprehensive water management solution to our customers and drive organic growth. Our leading market
position in pipe products allows us to cross-sell Allied Products effectively. Our comprehensive offering of Allied
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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, 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 825 million pounds of virgin and recycled resin annually from over
425 suppliers in North America. As a high-volume buyer of resin, we are able to achieve economies of scale to
negotiate favorable terms and pricing. Our purchasing strategies differ based on the material (virgin resin versus
recycled material) ordered for delivery to our production locations. The price movements of the different materials
also vary, resulting in the need to use a number of strategies to reduce volatility.
In order to reduce the volatility of raw material costs in the future, our raw material strategies for managing
our costs include the following:
•
•
•
•
increasing the use of less price-volatile recycled HDPE resin in our pipe products in place of virgin resin
while meeting or exceeding industry standards;
internally processing an increasing percentage of our recycled HDPE resin in order to closely monitor
quality and minimize costs (approximately 91% of our recycled HDPE resin was internally processed
(enhanced) in fiscal 2019);
managing a resin price risk program that entails both physical fixed price and volume contracts along
with financial hedges. For our PP virgin resin price exposure, we have the ability to utilize financial
hedges of propylene as a proxy for PP; and
maintaining supply agreements with our major resin suppliers that provide multi-year terms and
volumes that are in excess of our projected consumption.
We also consume a large amount of energy and other petroleum products in our operations, including the
electricity we use in our manufacturing process as well as the diesel fuel consumed in delivering a significant
volume of products to our customers through our in-house fleet. As a result, our operating profit also depends upon
our ability to manage the cost of the energy and fuel we require, as well as our ability to pass through increased
prices or surcharges to our customers.
Seasonality - Our operating results are impacted by seasonality. Historically, sales of our products have been higher
in the first and second quarters of each fiscal year due to favorable weather and longer daylight conditions
accelerating construction project activity during these periods while fourth quarter results are impacted by the timing
of spring in the northern United States and Canada. Seasonal variations in operating results may also be significantly
impacted by inclement weather conditions, such as cold or wet weather, which can delay projects, resulting in
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Advanced Drainage Systems, Inc.
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 and Colombian peso. In fiscal 2019,
we converted the functional currency of joint venture facilities using the Argentine peso to the Chilean 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
2019, approximately 88%, or $1,224.1 million, of net sales were attributable to customers located in the
United States and approximately 12%, or $160.6 million, of net sales were attributable to customers outside of the
United States.
Our operations are organized into two reportable segments based on the markets we serve: Domestic and
International. We generate a greater proportion of our net sales and gross profit in our Domestic segment, which
consists of all regions of the United States. We expect the percentage of total net sales and gross profit derived from
our International segment to continue to increase in future periods as we continue to expand globally. See “Note 21.
Business Segment Information,” to our audited consolidated financial statements included in “Item 8. Financial
Statements and Supplementary Data” of this Form 10-K.
Domestic - Our operating results have been, and will continue to be, impacted by macroeconomic trends in the
United States. For fiscal 2019, 2018, and 2017, we generated net sales attributable to our Domestic segment of
$1,224.1 million, $1,174.4 million, and $1,102.2 million, respectively. Unconsolidated sales for our domestic
unconsolidated joint venture, Tigre-ADS USA, prior to the Company’s divestiture in April 2018 were $17.6 million
and $18.7 million in fiscal 2018, and 2017, 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 2019,
2018, and 2017, we generated net sales attributable to our International segment of $160.6 million, $155.9 million,
and $155.1 million, respectively. Our investment in the South American Joint Venture is accounted for under the
equity method and is not consolidated for financial reporting purposes. The unconsolidated sales of the South
American Joint Venture were $47.6 million, $44.6 million, and $42.2 million, in fiscal 2019, 2018, and 2017,
respectively.
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.
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Advanced Drainage Systems, Inc.
EBITDA and Adjusted EBITDA are included in this Annual Report on Form 10-K because they are key
metrics 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.”
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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
2019
2018
2017
$ 868,805 62.7 % $ 844,875 63.5 % $ 794,807 63.2 %
355,326 25.7 % 329,557 24.8 % 307,429 24.5 %
1,224,131 88.4 % 1,174,432 88.3 % 1,102,236 87.7 %
37,766 2.7 %
122,836 8.9 % 119,207 9.0 % 122,724 9.8 %
32,301 2.6 %
160,602 11.6 % 155,922 11.7 % 155,025 12.3 %
$ 1,384,733 100.0 % $ 1,330,354 100.0 % $ 1,257,261 100.0 %
36,715 2.8 %
$
$
70,296 86.3 % $
11,170 13.7 %
81,466 100.0 % $
57,279 88.4 % $
7,513 11.6 %
64,792 100.0 % $
35,118 97.8 %
790 2.2 %
35,908 100.0 %
$ 209,234 90.2 % $ 191,629 91.2 % $ 175,676 90.8 %
17,695 9.2 %
$ 231,960 100.0 % $ 210,230 100.0 % $ 193,371 100.0 %
18,601 8.8 %
22,726 9.8 %
Fiscal Year Ended March 31, 2019 Compared with Fiscal Year Ended March 31, 2018
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, 2019 and 2018. 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
2019
2018
100.0 %
76.4
23.6
7.0
6.5
0.3
0.6
9.3
1.3
(0.1 )
8.1
2.2
0.0
5.9
0.3
5.6 %
100.0 %
77.3
22.7
7.0
7.4
1.1
0.6
6.6
1.1
(0.3 )
5.8
0.9
0.1
4.9
0.2
4.7 %
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Advanced Drainage Systems, Inc.
Net sales - Net sales totaled $1,384.7 million in fiscal 2019, increasing $54.4 million or 4.1%, as compared to
$1,330.4 million in fiscal 2018.
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
Fiscal Year Ended March 31,
2019
2018
$ Variance
(in thousands)
%
Variance
$ 868,805 $ 844,875
355,326 329,557
1,224,131 1,174,432
$ 23,930
25,769
49,699
37,766
122,836 119,207
36,715
160,602 155,922
$ 1,384,733 $ 1,330,354
3,629
1,051
4,680
$ 54,379
2.8 %
7.8
4.2 %
3.0 %
2.9
3.0
4.1 %
Our Domestic sales increased $49.7 million, or 4.2%, as compared to fiscal 2018. Our domestic pipe sales
increased by $23.9 million, or 2.8%, which was primarily the result of price increases and changes in product mix of
$49.3 million partially offset by a pipe volume decrease of $15.9 million. Allied Product sales increased $25.8
million, or 7.8%.
International sales increased $4.7 million, or 3.0%, to $160.6 million in fiscal 2019, as compared to $155.9
million in the prior year. Our international pipe sales increased by $3.6 million, or 3.0%, which was primarily
attributable to price increases and changes in product mix. International Allied Product sales increased $1.0 million,
or 2.9%.
Cost of goods sold and Gross profit - Cost of goods sold increased $29.9 million, or 2.9%, to $1,057.8 million
during year 2019 as compared to $1,027.9 million during fiscal 2018.
Gross profit increased $24.5 million, or 8.1%, to $327.0 million from $302.5 million during fiscal 2018. Gross
profit as a percentage of net sales increased to 23.6% in fiscal 2019 from 22.7% in fiscal 2018.
Gross Profit
Domestic
International
Total gross profit
Fiscal Year Ended March
31,
2019
2018
$ Variance % Variance
(in thousands)
$ 295,735 $ 277,429
25,052
$ 326,967 $ 302,481
31,232
$ 18,306
6,180
$ 24,486
6.6 %
24.7
8.1 %
Domestic gross profit increased $18.3 million, or 6.6%, to $295.7 million for fiscal 2019 as compared to
$277.4 million during fiscal 2018. The increase was primarily due to the gross profit impact of the net sales increase
discussed above. The increased sales were offset by an increase in material and transportation costs of $14.4 million
and increased labor and overhead of $9.1 million.
International gross profit increased $6.2 million, or 24.7%, for fiscal 2019 over fiscal 2018 primarily due to
decreased labor and overhead and the gross profit impact of the net sales increase discussed above. These increases
were offset by an increase in material and transportation costs.
Selling expenses - Selling expenses for fiscal 2019 as a percentage of net sales were consistent with fiscal 2018.
General and administrative expenses - General and administrative expenses for fiscal 2019 decreased as a
percentage of net sales by 90 basis points over fiscal 2018. The decrease was primarily due to a decrease in
professional and legal fees of $10.7 million resulting from decreased restatement costs and a legal settlement of $2.0
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Advanced Drainage Systems, Inc.
million in fiscal 2018. The decrease was offset by an increase in salaries and benefits of $4.4 million due to
increased headcount to support growth.
Loss on disposal of assets and costs from exit and disposal activities – In the fiscal year ended March 31, 2019, we
recorded $1.6 million of expense related to restructuring activities, including closing one underutilized
manufacturing facility. In addition, we recorded a loss on other disposals and partial disposals of property, plant and
equipment of approximately $2.0 million. 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 net sales in fiscal 2019
compared to fiscal 2018.
Interest expense - Interest expense from our debt and capital lease obligations increased $3.4 million or 22.0% in
fiscal 2019 as compared to fiscal 2018. Interest expense increased primarily due to a $4.5 million change in mark to
market losses related to our interest rate swaps. This increase was offset by a decrease in our average overall
outstanding debt of $49.6 million, or 23.9%, for fiscal 2019 compared to the average balance for fiscal 2018.
Derivative gains and other income, net – Derivative gains and other income, net, decreased to gains of $0.8 million
in fiscal 2019 compared to gains of $4.0 million in fiscal 2018. The decrease in derivative gains and other income,
net is primarily due to other non-operating income of $3.0 million for fiscal 2018.
Income tax expense – For the fiscal years ended March 31, 2019 and 2018, we had effective tax rates of 26.9% and
14.8%, respectively. The increase in the effective tax rate was primarily due to the impact of Tax Act items not
affecting the current year and certain other discrete items. See “Note 18. Income Taxes” for additional information.
Equity in net loss of unconsolidated affiliates - Equity in net loss of unconsolidated affiliates decreased $0.6 million
to a net loss of $0.1 million for fiscal 2019 compared to a net loss of $0.7 million during fiscal 2018. We are no
longer invested in Tigre-ADS USA and therefore no longer recognizing a proportionate share of Tigre-ADS USA
net losses. In addition, net income in the South American Joint Venture decreased to a net loss.
Net income attributable to noncontrolling interest - Income attributable to noncontrolling interest remained
relatively flat as a percentage of net sales in fiscal 2019 compared to fiscal 2019.
The discussion of our results of operations for the fiscal year ended March 31, 2018 compared with the fiscal year
ended March 31, 2017 can be found in our fiscal 2018 Form 10-K. See Item 7. Management’s Discussion and
Analysis of Financial Discussion and Results of Operations in our fiscal 2018 Form 10-K for further information on
our prior period results of operations.
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, 2019, we had $6.1 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
regard to foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested.
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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. There were no repurchases of common stock during fiscal 2019.
Working Capital and Cash Flows
During fiscal 2019, our net decrease in cash amounted to $8.7 million compared to a net increase of
$11.1 million during fiscal 2018. Our source of funds in fiscal 2019 was primarily driven by an increase in cash
provided by operating activities due to decreased accounts payable, accrued expenses, other liabilities, increased
receivables. Also payments of long-term debt and revolving credit facility, cash dividend payments and payments of
capital lease obligations impacted our cash position. 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 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.
As of March 31, 2019, we had $491.0 million in liquidity, including $8.9 million of cash, $407.1 million in
borrowings available under our Secured Bank Loan and $75.0 million under the senior notes, described below. We
believe that our cash on hand, together with the availability of borrowings under our Secured Bank Loan 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, 2019, we had consolidated indebtedness (excluding capital lease obligations) of
approximately $236.8 million, a decrease of $63.9 million compared to March 31, 2018.
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 $260.2 million as of March 31, 2019, from $237.2 million as of March 31, 2018,
primarily due to an increase in receivables of $15.0 million and a decrease in accounts payable of $11.9 million.
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 17. 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 13. Debt.”
Operating Cash Flows - During fiscal 2019, cash provided by operating activities was $151.7 million as compared
with cash provided by operating activities of $137.1 million for fiscal 2018. Cash flow from operating activities
during fiscal 2019 was primarily impacted by increased income from continuing operations including decreased
restructuring costs.
During 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.
Investing Cash Flows - During fiscal 2019, cash used for investing activities was $42.5 million, primarily due to
$43.4 million for capital expenditures and additions to capitalized software.
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.
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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.
Financing Cash Flows - During fiscal 2019, cash used in financing activities was $117.7 million, primarily for net
debt payments of $62.1 million related to the repayments of the Secured Bank Loans and Senior Notes Payable,
payments on our capital lease obligations of $24.3 million, dividend payments of $26.1 million and the acquisition
of noncontrolling interest in BaySaver of $8.8 million.
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
13. 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.
Capital Expenditures
Capital expenditures totaled $43.4 million for fiscal 2019. Our capital expenditures were used primarily to
support facility expansions, equipment replacements, our recycled resin initiatives and technology. For fiscal year
ended March 31, 2019, our most significant capital expenditures were $10.8 million for increased capacity related to
manufacturing facility expansion and additional production lines, as well as $4.8 million for additional processing
and utilization of recycled resin.
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.
We currently anticipate that we will make capital expenditures of approximately $55 to 65 million in fiscal
2020. Such capital expenditures are expected to be financed using funds generated by operations.
Special Dividend
During the first quarter of fiscal 2020, the Board of Directors approved a special dividend of $1.00 per share
payable on June 14, 2019 to stockholder of record at the close of business on June 3, 2019. The total special
dividend payment is expected to be approximately $75 million. The dividend will be used to pay back a portion of
the ESOP loan resulting in approximately 12 million shares of redeemable convertible preferred stock being
allocated to ESOP participants.
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 ESOP committee can direct the shares of redeemable convertible preferred stock owned by the
ESOP to be converted into shares of the Company’s common stock.
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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 16. 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.
Following the repayment of the ESOP loan discussed above, the ESOP’s conversion of redeemable
convertible preferred stock into common stock will impact on the Company’s net income, net income per share and
common shares outstanding as follows (with the outstanding shares of common stock being approximately 31%
greater after conversion):
Impact on Net Income – Absent any other participating securities, the Company will no longer be required to
apply the two-class method to determine Net income per share once all of the redeemable convertible preferred
stock is converted into common stock. After the preferred shares are fully allocated upon the repayment of the ESOP
loan and all of the redeemable convertible preferred stock is converted into common stock, the Company will no
longer incur the fair value of ESOP deferred compensation attributable to the shares of redeemable convertible
preferred shares.
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
2019
2018
2017
$
77,772 $
15,296
62,007 $
11,724
32,950
9,568
Impact on Common Stock Outstanding – The impact on the number of common shares outstanding will be 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
2019
2018
2017
57.0
17.6
55.7
18.3
54.9
18.9
A repayment of a significant portion of the ESOP loan would also have an impact on the Company’s net
income per share and common shares outstanding similar to the impact described above but calculated on the basis
of such partial ESOP loan repayment.
Debt and Capitalized Lease Obligations
See “Note 6. Leases” and “Note 13. 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
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$550 million Revolving Credit Facility, which is more fully described in “Note 13. Debt” to the Consolidated
Financial Statements.
As of March 31, 2019, the outstanding principal drawn on the Revolving Credit Facility was $134.4 million,
with $407.1 million available to be drawn on the U.S. facility, net of $8.5 million of outstanding letters of credit.
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. On June 22, 2018, the Company’s $12.0 million Revolving
Credit Facility – ADS Mexicana matured. At June 22, 2018, there were no borrowings under the Revolving Credit
Facility – ADS Mexicana.
ADS Mexicana’s Revolving Credit Facility was replaced by an Intercompany Revolving Credit Promissory
Note (the “Intercompany Note”) with a capacity of $12.0 million. The Intercompany Note matures on June 22, 2022.
The other joint venture partner indemnifies us for 49% of any unpaid borrowing. The interest rates under the
Intercompany Note are determined by certain base rates or LIBOR rates plus an applicable margin based on the
Leverage Ratio. As of March 31, 2019, there were no borrowings under the Intercompany Note.
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 13. Debt” to the Consolidated Financial Statements. We have $75 million available for issuance of senior
notes under the private shelf agreement. At March 31, 2019, the outstanding principal balance on these notes was
$100 million.
Covenant Compliance
Our outstanding debt agreements and instruments contain various restrictive covenants including, but not
limited to, limitations on additional indebtedness and capital distributions, including dividend payments. The two
primary debt covenants 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 13. Debt” to the Consolidated Financial Statements. We were in
compliance with our debt covenants as of March 31, 2019.
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Contractual Obligations as of March 31, 2019
(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
9,851 18,578
4,738
4,159
$ 236,827 $ 25,932 $ 1,495 $ 134,400 $ 75,000
662
6,948
36,039
2,236
12,148
1,015
8,198
94,237 26,604 40,571 18,864
17,640 17,640
—
—
$ 396,891 $ 84,186 $ 65,382 $ 161,227 $ 86,096
—
(1) The Secured Bank Loans mature in June 2022.
(2) Based on applicable rates and pricing margins as of March 31, 2019.
(3) Purchase obligations include commitments with vendors to purchase raw material.
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 12. 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, 2019. The maximum borrowing permitted under the South American Joint Venture’s credit facility
is $22 million. As of March 31, 2019, our South American Joint Venture had approximately $12.3 million of
outstanding debt subject to our guarantee, resulting in our guarantee of 50%, or $6.2 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
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Accounting Policies” to our consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data” included in this Form 10-K.
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Policy
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. The fair value of
goodwill is determined by
considering both the income and
market approach.
Judgments and Estimates
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
We performed our annual
impairment test for goodwill as of
March 31, 2019. 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 2019, 2018, or 2017. Future
events and unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
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Effect if Actual Results Differ
from Assumptions
We did not record any impairment
charges for definite-lived intangible
assets in fiscal 2019, 2018, or
2017. Future events and
unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
We performed our annual
impairment test for indefinite-lived
intangible assets as of March 31,
2019. We determined for our
indefinite-lived intangible assets
that it was not more likely than not
that the fair value of the asset was
less than its carrying value. We
determined the fair value of the
asset exceeded the carrying value.
Accordingly, we did not incur any
impairment charges for indefinite-
lived intangible assets in fiscal
2019, 2018 or 2017. Future events
and unanticipated changes to
assumptions could require a
provision for impairment in a future
period.
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Advanced Drainage Systems, Inc.
Policy
Judgments and Estimates
Determining the fair value of the
definite-lived and indefinite-lived
intangible 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.
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Policy
Revenue Recognition- We generate
revenue by selling pipe and related
water management products
primarily to distributors, retailers,
buying groups and co-operative
buying groups. Products are
shipped predominately by our
internal fleet, and we do not
provide any additional revenue
generating services after product
delivery. Payment terms and
conditions vary by contract.
Revenue is recognized at the point
in-time obligations under the terms
of a contract with a customer are
satisfied, which generally occurs
upon the transfer of control of the
promised goods. In substantially all
of our contracts with customers,
control is transferred to the
customer upon delivery. We
recognize revenue in an amount
that reflects the consideration we
expect to be entitled to in exchange
for those goods or services.
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.
Judgments and Estimates
We estimate and allocate variable
consideration based on numerous
factors, including the customer
agreements and past transaction
history.
Effect if Actual Results Differ
from Assumptions
If our historical experience differs
from future experience, our
estimates of variable consideration
could differ.
Shares of convertible preferred
stock are valued based on an annual
valuation for the ESOP by an
independent third-party appraisal
firm as required by the Plan.
As the value of the shares increase,
it could result in a significant
increase in compensation expense.
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Effect if Actual Results Differ
from Assumptions
All current stock-based awards
qualify for equity classification.
Changes in the assumptions utilized
to determine the fair value could
cause fluctuations in the stock-based
compensation expense for future
grants.
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Advanced Drainage Systems, Inc.
Policy
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
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 the following:
•
•
•
•
Volatility.
Expected term.
Risk-free interest rate.
Dividend yield.
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 and the Term Note, 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. A 1.0% increase in
interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately
$0.3 million based on our borrowings as of March 31, 2019. 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, 2019.
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
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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 19% of our Receivables balance as of March 31, 2019.
Raw Material and Commodity Price Risk
Our primary raw materials used in the production of our products are HDPE and PP 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.
Inflation Risk
Our cost of goods sold is subject to inflationary pressures and price fluctuations of the raw materials we use,
primarily HDPE and PP 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, which primarily 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-57 of this Annual Report on
Form 10-K and are incorporated herein by reference.
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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, 2019. 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 not effective as of March 31, 2019
because of the material weakness in our internal control over financial reporting, as further described below.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting as of March 31, 2019. 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 did not maintain effective internal
control over financial reporting as of March 31, 2019, due to the fact that we had a material weakness in our internal
control over financial reporting in the control environment of our consolidated joint venture affiliate, ADS
Mexicana. This material weakness was a result of the Company’s findings to date as part of an internal
investigation, under the guidelines of the Company’s Code of Business Conduct and Ethics, into ADS Mexicana’s
senior management’s ethical and business conduct, which included consideration of compliance of certain products
with Mexican laws and regulations. The material weakness in the control environment of ADS Mexicana impacts
the overall effectiveness of our internal controls over financial reporting.
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, 2019 and this report is included herein.
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Advanced Drainage Systems, Inc.
Remediation Process
We have commenced a process to remediate the underlying cause of the material weakness described above
and enhance our internal controls over financial reporting at ADS Mexicana. The remediation actions we anticipate
taking include the following:
• The Company will take disciplinary actions relating to ADS Mexicana senior management where
appropriate.
• Evaluate the experience and training of ADS Mexicana personnel and hire qualified employees or
consultants as necessary
• Provide supplemental training on the Company’s Code of Business Conduct and Ethics to ADS Mexicana
personnel;
•
•
Implement additional oversight controls related to ADS Mexicana’s activities, including reports to the
Ethics Hotline
Implement additional controls relating to ADS Mexicana segregation of duties and information technology
access
The material weaknesses did not result in a material misstatement in the financial statements included in our
Annual Report on Form 10-K for the year ended March 31, 2019 or previously issued financial statements.
We believe the foregoing efforts will effectively remediate the material weakness described above. As we continue
to evaluate and work to improve our internal control over financial reporting, we may take additional measures to
address this control deficiency or modify the remediation plan described above. We cannot assure you, however,
when we will remediate such weakness, nor can we be certain of whether additional actions will be required. See
above under Item 1A, “Risk Factors — Our failure to maintain effective disclosure controls and internal control over
financial reporting could adversely affect our business, financial position and results of operations.”
Changes in Internal Control over Financial Reporting
Other than the identification of a material weakness in the control environment of ADS Mexicana as 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, 2019 that has materially affected,
or is reasonably likely to materially affect, internal control over financial reporting.
Item 9B.
Other Information
None.
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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.
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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.”
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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
10.2
10.2A
10.3
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 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).
First Amendment to Second Amended and Restated Credit Agreement, dated as of July 9, 2018
(incorporated by reference to Exhibit 10.1 to Form 10-Q filed November 8, 2018).
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).
Amendment No. 1 to Second Amended and Restated Private Shelf Agreement, dated as of July 9, 2018
(incorporated by reference to Exhibit 10.2 to Form 10-Q filed November 8, 2018).
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).
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.4
10.5
10.6
10.7
10.8†
10.9†
10.9A†
10.10†
Description
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).
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).
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).
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).
10.10A†
First Amendment to the 2008 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to Form
8-K filed February 10, 2017).
10.11†
Advanced Drainage Systems, Inc. 2013 Stock Option Plan (incorporated by reference to Exhibit 10.11
to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980)
filed with the Securities and Exchange Commission on June 20, 2014).
10.11A†
First Amendment to 2013 Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange
Commission on August 15, 2014).
10.11B†
Form of Amendment to Pre-2017 Stock Option Agreements(incorporated by reference to Exhibit
10.11B of Form 10-K filed May 10, 2017).
10.11C†
Form of Amendment to Pre-2017 Stock Option Agreements(incorporated by reference to Exhibit
10.11B of Form 10-K filed May 10, 2017).
10.12†
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).
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.13†
10.13A†
10.13B†
10.14†
10.14A
10.15†
10.16†
10.17†
10.18†
Description
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).
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).
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).
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).
10.18A†
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).
10.19†
10.19A†
10.20†
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).
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.20A†
10.21†
10.22
10.23
10.23A
10.24
Description
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).
10.24A
Amendment No. 1 to BaySaver Technologies, LLC Limited Liability Company Agreement dated as of
July 17, 2015 by and among ADS Ventures, Inc., BaySaver Technologies, Inc. and Mid-Atlantic Storm
Water Research Center, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K filed July 20,
2015).
10.24B
Sale and Assignment of Ownership Interest dated as of July 17, 2015 by and among ADS Ventures,
Inc., BaySaver Technologies, Inc. and Mid-Atlantic Storm Water Research Center, Inc. (incorporated
by reference to Exhibit 10.1 to Form 8-K filed July 20, 2015).
10.25†
Executive Employment Agreement dated November 9, 2015, by and between the Company and
Scott A. Cottrill (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 9, 2015).
10.26†
10.27†
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).
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
Description
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).
Form of Performance Unit Award Agreement pursuant to 2017 Omnibus Incentive Plan (incorporated
by reference to Exhibit 10.1 of Form 8-K, filed on May 30, 2018).
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).
10.36†
Executive Employment Agreement, dated as of November 10, 2016, by and between Advanced
Drainage Systems, Inc. and Kevin C. Talley.#
21.1
List of Subsidiaries. #
23.1
Consent of Deloitte & Touche LLP. #
24.1
Power of Attorney. #
31.1
31.2
32.1
32.2
Certification of President and Chief Executive Officer of Advanced Drainage Systems, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. #
Certification of Executive Vice President and Chief Financial Officer of Advanced Drainage Systems,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #
Certification of Principal Executive Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #
Certification of Principal Financial Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #
101.INS
XBRL Instance Document. #
101.SCH
XBRL Taxonomy Extension Schema. #
101.CAL
XBRL Taxonomy Extension Calculation Linkbase. #
101.DEF
XBRL Taxonomy Extension Definition Linkbase. #
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Advanced Drainage Systems, Inc.
Exhibit
Number
Description
101.LAB
XBRL Taxonomy Extension Label Linkbase. #
101.PRE
XBRL Taxonomy Extension Presentation Linkbase. #
† Management contract or compensatory plan.
#
Filed herewith.
Item 16.
Form 10-K Summary
None.
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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, 2019
SIGNATURES
ADVANCED DRAINAGE SYSTEMS, INC.
By:
Name:
Title:
/s/ D. Scott Barbour
D. Scott Barbour
President and Chief Executive Officer
(Principal Executive Officer)
By:
Name:
Title:
/s/ Scott A. Cottrill
Scott A. Cottrill
Chief Financial Officer (Principal
Financial Officer)
By:
Name:
Title:
/s/ Tim A. Makowski
Tim A. Makowski
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, 2019.
Signature
/s/ D. Scott Barbour
D. Scott Barbour
Title
Director, President and Chief Executive Officer
(Principal Executive Officer)
/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/ Michael B. Coleman **
Michael B. Coleman
/s/ Alexander R. Fischer**
Alexander R. Fischer
/s/ Tanya Fratto**
Tanya Fratto
/s/ M.A. (Mark) Haney**
M.A. (Mark) Haney
/s/ Ross M. Jones**
Ross M. Jones
/s/ Carl A. Nelson, Jr.**
Carl A. Nelson, Jr.
/s/ Richard A. Rosenthal**
Richard A. Rosenthal
/s/ Abigail S. Wexner**
Abigail S. Wexner
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
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
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Advanced Drainage Systems, Inc.
TABLE OF CONTENTS
Page
Audited Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm ............................................................................... F-1
Consolidated Balance Sheets as of March 31, 2019 and 2018 ............................................................................. F-4
Consolidated Statements of Operations for the fiscal years ended March 31, 2019, 2018 and 2017 ................... F-5
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended March 31, 2019, 2018,
and 2017 .......................................................................................................................................................... F-6
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2019, 2018, and 2017 ................. F-7
Consolidated Statements of Stockholders’ Equity (Deficit) and Mezzanine Equity for the fiscal years ended
March 31, 2019, 2018, and 2017 ..................................................................................................................... F-8
Notes to Consolidated Financial Statements ........................................................................................................ F-14
Schedule II, Consolidated Valuation and Qualifying Accounts for the fiscal years ended March 31, 2019,
2018, and 2017................................................................................................................................................. F-57
F-1
Table of Contents
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, 2019 and 2018 , 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, 2019, 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, 2019 and 2018, and the
results of its operations and its cash flows for each of the three years in the period ended March 31, 2019, 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, 2019, 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, 2019, expressed an adverse opinion on
the Company's internal control over financial reporting because of a material weakness.
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, 2019
We have served as the Company's auditor since 2002.
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the 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, 2019, 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,
because of the effect of the material weakness identified below on the achievement of the objectives of the control
criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2019,
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, 2019, of the
Company and our report dated May 30, 2019, 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.
F-2
Table of Contents
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following material weakness has been identified
and included in management's assessment: a material weakness in the internal control over financial reporting in the
control environment of the Company’s consolidated joint venture affiliate, ADS Mexicana. This material weakness
was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated
financial statements and financial statement schedule as of and for the year ended March 31, 2019, of the Company,
and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Columbus, Ohio
May 30, 2019
F-3
Table of Contents
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 $7,653 and $6,826, 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 $2,293 and $3,028,
respectively)
Long-term capital lease obligations
Deferred tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies (see Note 15)
Mezzanine equity:
Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized;
44,170 shares issued; 22,611 and 23,300 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; 57,964 and 56,889
shares issued, respectively; 57,490 and 56,476 shares outstanding, respectively
Paid-in capital
Common stock in treasury, at cost
Accumulated other comprehensive loss
Retained earnings (deficit)
Total ADS stockholders’ equity
Noncontrolling interest in subsidiaries
Total stockholders’ equity
Total liabilities, mezzanine equity and stockholders’ equity
$
As of March 31,
2019
2018
8,891 $
186,991
264,540
6,091
466,513
398,891
102,638
37,177
36,940
1,042,159 $
25,932 $
23,117
93,577
61,901
1,758
206,285
208,602
61,555
45,963
19,119
541,524
282,638
(180,316 )
—
102,322
11,436
391,039
(9,863 )
(25,867 )
17,582
384,327
13,986
398,313
1,042,159 $
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
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
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 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 noncontrolling interest
Net income attributable to ADS
Weighted average common shares outstanding:
Basic
Diluted
Net income per share available to common stockholders:
2019
Fiscal Year Ended March 31,
2018
$ 1,384,733 $ 1,330,354 $ 1,257,261
961,451
295,810
1,057,766
326,967
1,027,873
302,481
2017
96,335
89,692
92,764
98,392
91,475
110,950
3,647
7,880
129,413
18,618
(815 )
111,610
30,049
95
81,466
3,694
77,772
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
57,025
57,611
55,696
56,334
54,919
55,624
Basic
Diluted
$
$
1.23 $
1.22 $
1.00 $
0.99 $
0.51
0.50
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
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,
2018
2017
2019
$
81,466 $
64,792 $
35,908
(5,749 )
75,717
3,886
68,678
(1,129 )
3,694
73,152 $
318
2,785
65,575 $
$
(5,037 )
30,871
(1,483 )
2,958
29,396
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
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,
2018
2019
2017
$
81,466 $
64,792
35,908
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
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 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
Acquisition of noncontrolling interest in BaySaver
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
$
71,900
12,813
75,003
(11,239 )
3,647
21,828
735
2,346
95
—
(5,219 )
(17,953 )
(2,034 )
(1,004 )
(16,942 )
151,678
(43,412 )
—
—
—
868
(42,544 )
405,700
(442,800 )
—
—
(25,000 )
—
(940 )
—
(909 )
—
(24,284 )
(8,821 )
(26,148 )
5,908
—
(361 )
(117,655 )
(175 )
(8,696 )
17,587
8,891 $
12,655
18,845
934
(3,244 )
739
—
1,010
(4,327 )
(4,841 )
1,648
(14,855 )
137,120
(41,709 )
(1,990 )
—
13,644
(390 )
(30,445 )
487,850
(512,150 )
(72,500 )
75,000
(25,000 )
—
(1,905 )
—
—
(2,268 )
(24,214 )
—
(18,478 )
9,087
(7,947 )
(2,428 )
(94,953 )
(585 )
11,137
6,450
17,587
72,355
(8,971 )
7,316
17,875
1,408
(10,921 )
4,308
(609 )
(5,871 )
15,055
(27,917 )
(2,548 )
6,851
104,239
(46,676 )
(8,573 )
(4,620 )
—
(1,390 )
(61,259 )
412,400
(382,600 )
(10,000 )
—
(25,000 )
1,000
(870 )
(6,823 )
4,620
—
(21,760 )
—
(16,820 )
4,011
—
(983 )
(42,825 )
(260 )
(105 )
6,555
6,450
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2016
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($0.24 per share)
Dividend paid to noncontrolling interestholder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Equity classified stock-based compensation
expense before related tax effects
Tax benefit resulting from exercise of
certain stock-based compensation awards
Reclassification of liability-classified awards
ESOP distributions in common stock
Accretion of redeemable noncontrolling interest
Balance March 31, 2017
Common Stock
Paid-In
Amount Capital
Shares
Common Stock
in Treasury
Accumulated
Other
Comprehensive Retained
Shares
Amount
Income
(Deficit)
Total ADS
Stockholders’
Equity
Non-
controlling
Interest in
Subsidiaries
Total
Stockholders’
Equity
153,560 $ 12,393 $ 739,097 99,123 $ (440,995 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(21,261 ) $ (101,778 ) $
32,950
—
(1,512 )
(13,204 )
—
—
(3,554 )
—
—
—
187,456 $
32,950
(3,554 )
(1,512 )
(13,204 )
—
15,033 $
2,236
(1,483 )
—
—
(879 )
202,489
35,186
(5,037 )
(1,512 )
(13,204 )
(879 )
—
—
—
—
—
—
—
—
2,254
—
6,571
2,926
—
—
(358 )
(86 )
—
—
1,595
383
—
—
—
—
—
(134 )
—
—
2,254
(134 )
8,166
3,309
—
—
—
—
2,254
(134 )
8,166
3,309
—
—
139
—
—
—
—
139
—
139
—
—
—
—
—
—
2,033
—
153,560 $ 12,393 $ 755,787 98,222 $ (436,984 ) $
439
220
5,393
(1,252 )
—
—
(457 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(24,815 ) $ (83,678 ) $
439
220
7,426
(1,252 )
222,703 $
—
—
—
—
14,907 $
439
220
7,426
(1,252 )
237,610
See accompanying notes to consolidated financial statements.
F-8
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2016
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($0.24 per share)
Dividend paid to noncontrolling interestholder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Equity classified stock-based compensation
expense before related tax effects
Tax benefit resulting from exercise of
certain stock-based compensation awards
Reclassification of liability-classified awards
ESOP distributions in common stock
Accretion of redeemable noncontrolling interest
Balance March 31, 2017
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
Redeemable
Non-
Controlling
Interest in
Subsidiaries
Amount
Total
Mezzanine
Equity
24,819 $
—
—
—
—
—
310,240
—
—
—
—
—
16,448 $
—
—
—
—
—
(205,664 ) $
—
—
—
—
—
7,171 $
722
—
—
—
(1,226 )
—
—
—
—
—
—
—
—
—
—
(585 )
—
—
—
—
7,314
134
—
—
—
—
—
—
—
—
—
—
(594 )
—
24,225 $
—
—
(7,426 )
—
302,814
—
—
—
—
15,863 $
—
—
—
—
(198,216 ) $
—
—
—
1,560
8,227 $
111,747
722
—
—
—
(1,226 )
7,314
134
—
—
—
—
—
(7,426 )
1,560
112,825
See accompanying notes to consolidated financial statements.
F-9
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2017
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($0.28 per share)
Dividend paid to noncontrolling interestholder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Equity classified stock-based compensation
expense before related tax effects
Reclassification of liability-classified awards
ESOP distributions in common stock
Retirement of common stock held in treasury
Common stock repurchases
Accretion of redeemable noncontrolling interest
Balance March 31, 2018
Common Stock
in Treasury
Accumulated
Other
Comprehensive Retained
Income
(Deficit)
Total ADS
Stockholders’
Equity
Non-
controlling
Interest in
Subsidiaries
Total
Stockholders’
Equity
Common Stock
Paid-In
Amount Capital
Shares
Amount
Shares
153,560 $ 12,393 $ 755,787 98,222 $ (436,984 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(24,815 ) $ (83,678 ) $
— 62,007
—
3,568
—
(1,724 )
— (15,685 )
—
—
222,703 $
62,007
3,568
(1,724 )
(15,685 )
—
14,907 $
1,928
318
—
—
(490 )
237,610
63,935
3,886
(1,724 )
(15,685 )
(490 )
—
—
666
90
—
—
7
1
3,809
—
9,161
2,664
—
—
2
(72 )
—
—
(81 )
153
—
—
—
—
—
(134 )
—
—
3,809
(134 )
9,087
2,818
—
—
—
—
3,809
(134 )
9,087
2,818
—
—
318
(97,745 )
—
—
—
—
2
—
—
(394 )
4,148
13,714
9,811
—
—
1,753
(977 ) (433,852 ) (97,745 ) 434,829
(7,947 )
—
(8,277 ) $
400
—
413 $
—
—
—
(334 )
56,889 $ 11,426 $ 364,908
—
—
—
—
—
—
—
—
—
—
—
—
(21,247 ) $ (39,214 ) $
4,148
13,714
11,566
—
(7,947 )
(334 )
307,596 $
—
—
—
—
—
—
16,663 $
4,148
13,714
11,566
—
(7,947 )
(334 )
324,259
See accompanying notes to consolidated financial statements.
F-10
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2017
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($0.28 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
ESOP distributions in common stock
Accretion of redeemable noncontrolling interest
Balance March 31, 2018
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
Redeemable
Non-
Controlling
Interest in
Subsidiaries
Amount
Total
Mezzanine
Equity
24,225 $
—
—
—
—
—
—
—
—
—
(925 )
—
23,300 $
302,814
—
—
—
—
—
—
—
—
—
(11,567 )
—
291,247
15,863 $
—
—
—
—
—
(644 )
—
—
—
—
—
15,219 $
(198,216 ) $
—
—
—
—
—
8,048
—
—
—
—
—
(190,168 ) $
8,227 $
857
—
—
—
(613 )
—
—
—
—
—
—
8,471 $
112,825
857
—
—
—
(613 )
8,048
—
—
—
(11,567 )
—
109,550
See accompanying notes to consolidated financial statements.
F-11
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2018
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($0.32 per share)
Dividend paid to noncontrolling interestholder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Equity classified stock-based compensation
expense before related tax effects
ESOP distributions in common stock
Acquisition of noncontrolling interest in BaySaver
Balance March 31, 2019
Common Stock
Shares
Amount
Paid-In
Capital
56,889 $ 11,426 $ 364,908
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Common Stock
in Treasury
Shares
Amount
Accumulated
Other
Comprehensive
Income
Retained
(Deficit)
Earnings
Total ADS
Stockholders’
Equity
Non-
controlling
Interest in
Subsidiaries
Total
Stockholders’
Equity
413 $
—
—
—
—
—
(8,277 ) $
—
—
—
—
—
(21,247 ) $ (39,214 ) $
— 77,772
—
(4,620 )
—
(1,913 )
— (18,336 )
—
—
307,596 $
77,772
(4,620 )
(1,913 )
(18,336 )
—
16,663 $
2,862
(1,129 )
—
—
(4,410 )
324,259
80,634
(5,749 )
(1,913 )
(18,336 )
(4,410 )
—
—
420
127
—
—
4
1
5,712
—
5,908
3,982
—
—
52
9
—
—
(1,372 )
(214 )
—
—
—
—
—
(134 )
—
—
5,712
(134 )
4,540
3,769
—
—
—
—
5,712
(134 )
4,540
3,769
—
528
—
2,550
8,604
(625 )
57,964 $ 11,436 $ 391,039
—
5
—
—
—
—
474 $
—
—
—
(9,863 ) $
—
—
—
—
—
(593 )
(25,867 ) $ 17,582 $
2,550
8,609
(1,218 )
384,327 $
—
—
—
13,986 $
2,550
8,609
(1,218 )
398,313
See accompanying notes to consolidated financial statements.
F-12
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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2018
Net income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($0.32 per share)
Dividend paid to noncontrolling interestholder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
ESOP distributions in common stock
Acquisition of noncontrolling interest in BaySaver
Balance March 31, 2019
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
Redeemable
Non-
Controlling
Interest in
Subsidiaries
Amount
Total
Mezzanine
Equity
23,300 $
—
—
—
—
—
—
—
—
—
(689 )
—
22,611 $
291,247
—
—
—
—
—
—
—
—
—
(8,609 )
—
282,638
15,219 $
—
—
—
—
—
(767 )
—
—
—
—
—
14,452 $
(190,168 ) $
—
—
—
—
—
9,584
268
—
—
—
—
(180,316 ) $
8,471 $
832
—
—
—
(1,075 )
—
—
—
—
—
(8,228 )
— $
109,550
832
—
—
—
(1,075 )
9,584
268
—
—
(8,609 )
(8,228 )
102,322
See accompanying notes to consolidated financial statements.
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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, 2019 refers to fiscal 2019, which is the period from April 1,
2018 to March 31, 2019.
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, 2019 and
2018 are as follows:
(Amounts in thousands)
Trade receivables
Other miscellaneous receivables
Receivables, net
2019
170,887 $
16,104
186,991 $
2018
159,291
12,670
171,961
$
$
As of March 31, 2019 and 2018, Other miscellaneous receivables includes insurance recoverables of
approximately $3.9 million and $3.4 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.
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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 situation
in which doubt the customer does not have the ability or intention to pay its financial obligations (e.g.
bankruptcy filing).
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 production equipment
Transportation equipment
Years
20 to 45 or the lease term if shorter
3 to 18
3 to 12
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. There was no interest
capitalized during the fiscal year ended March 31, 2019. Interest capitalized was $0.6 million, and $0.6
million during the fiscal years ended March 31, 2018 and 2017, 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. 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 a reporting unit’s goodwill
exceeds its 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. The fair value of goodwill is determined by considering
both the income and market approach. Determining the fair value of a reporting unit is judgmental in nature
and involves the use of significant estimates and assumptions. These estimates and assumptions include
revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted
discount rates, future economic and market conditions, and determination of appropriate market comparables.
The fair value estimates are based on assumptions management believes to be reasonable but are inherently
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Advanced Drainage Systems, Inc.
uncertain. For all fiscal years presented, 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 tests performed as of March 31, 2019, 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, 2019, 2018, and 2017.
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 tests performed as of
March 31, 2019 and 2018. 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, 2019, 2018, and 2017.
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Advanced Drainage Systems, Inc.
Other Assets - Other assets include investments in unconsolidated affiliates accounted for under the equity
method, capitalized software development costs, including cloud computing costs, deposits, central parts, and
other miscellaneous assets. In the fiscal 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 year 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 11. 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
Capitalized software development costs, net
Deposits
Central parts
Other
Total other assets
2019
2018
$
$
10,467 $
13,069
2,985
2,385
8,034
36,940 $
12,343
10,195
2,776
2,089
10,551
37,954
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
$
2019
2018
2017
2,659 $
73
1,419
2,156 $
47
1,688
3,372
54
1,689
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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. The South American Joint Venture operates within Argentina, which on July
1, 2018, was identified for high inflationary accounting. The Company has determined the effect of a change
in the exchange rate under high inflationary accounting is not expected to have a material effect on the
Company’s results in any annual period. For the fiscal years ended March 31, 2019 and 2018, the Company’s
Accumulated other comprehensive loss (“AOCL”) consisted of foreign currency translation gains and losses.
Net Sales - The Company generates revenue by selling pipe and related water management products primarily
to distributors, retailers, buying groups and co-operative buying groups. Products are shipped predominately
by the Company’s internal fleet, and the Company does not provide any additional revenue generating
services after product delivery. Payment terms and conditions vary by contract.
Revenue is recognized at the point in-time obligations under the terms of a contract with a customer are
satisfied, which generally occurs upon the transfer of control of the promised goods. In substantially all of the
Company’s contracts with customers, control is transferred to the customer upon delivery. The Company
recognizes revenue in an amount that reflects the consideration the Company expects to be entitled to in
exchange for those goods or services.
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 to
deliver products to customers for the fiscal years ended March 31, 2019, 2018, and 2017 were $131.3 million,
$120.7 million, and $110.5 million, respectively, and are included in Cost of goods sold. Shipping costs billed
to customers were $7.7 million, $6.3 million, and $5.5 million during 2019, 2018 and 2017, respectively, and
are included in Net sales.
Stock-Based Compensation - See “Note 17. Stock-Based Compensation” for information about our stock-
based compensation award programs and related accounting policies.
Advertising - The Company expenses advertising costs as incurred. Advertising costs are recorded in Selling
expenses in the Consolidated Statements of Operations. The total advertising costs were $3.8 million, $4.1
million, and $3.1 million for the fiscal years ended March 31, 2019, 2018, and 2017, 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 $42.4 million, $41.3 million, and $39.5 million
for the fiscal years ended March 31, 2019, 2018, and 2017, respectively, of which employees contributed $6.7
million, $5.9 million, and $5.1 million, respectively.
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Advanced Drainage Systems, Inc.
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 $0.5 million per occurrence or claim
incurred. Amounts expensed during the period, including an estimate for claims incurred but not reported at
year end, were $2.3 million, $2.2 million, and $1.8 million, for the years ended March 31, 2019, 2018, and
2017, respectively.
ADS is also self-insured for workers’ compensation insurance with stop-loss coverage for claims that exceed
$0.3 million per incident up to the respective state statutory limits. Amounts expensed, including an estimate
for claims incurred but not reported, were $2.8 million, $1.3 million, and $2.1 million for the fiscal years
ended March 31, 2019, 2018, and 2017, 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. Valuation allowances are established against
deferred tax assets when it is more likely than not that the realization of those deferred tax assets will not
occur. 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.
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%, 25.4%, and 23.5% of fiscal 2019, 2018 and 2017 net
sales, respectively. The Company’s customer base is diversified across the range of end markets that it serves.
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally
of Receivables. The Company provides its products to customers based on an evaluation of the customers’
financial condition, generally without requiring collateral. Exposure to losses on Receivables is principally
dependent on each customer’s financial condition. The Company performs ongoing credit evaluations of its
customers. The Company monitors the exposure for credit losses and maintains allowances for anticipated
losses. Concentrations of credit risk with respect to Receivables are limited due to the large number of
customers comprising the Company’s customer base and their dispersion across many different geographies.
One customer, Ferguson Enterprises, accounted for approximately 19.1% and 17.6% of Receivables at
March 31, 2019 and 2018, respectively.
F-19
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Advanced Drainage Systems, Inc.
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 Guidance
Cloud Computing - On August 29, 2018, the Financial Accounting Standards Board (the “FASB”) issued an
accounting standard update (“ASU”) to provide guidance on implementation costs incurred in a cloud
computing arrangement (“CCA”) that is a service contract. The ASU, which was released in response to a
consensus reached by the Emerging Issues Task Force at its June 2018 meeting, aligns the accounting for such
costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software.
Specifically, the ASU includes in its scope implementation costs of a CCA that is a service contract and
clarifies that a customer should apply CCA guidance to determine which implementation costs should be
capitalized in such a CCA. The Company adopted this update effective July 1, 2018 on a prospective basis.
The new standard did not have a material impact on the Consolidated Financial Statements.
Revenue Recognition - In May 2014, the FASB issued an ASU 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 ASU 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 ASUs 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 adopted these standards on April 1, 2018 using the modified retrospective
transition method. See “Note 3. Revenue Recognition” for further information on the adoption of the revenue
recognition ASUs.
Cash Flow Classification - In August 2016, the FASB issued an ASU 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 adopted this
update effective April 1, 2018 using the retrospective method. The new standard did not have an impact on the
Consolidated Financial Statements.
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Advanced Drainage Systems, Inc.
Goodwill Impairment - In January 2017, the FASB issued an ASU 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 effective 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 adopted this update effective April 1, 2018. The new standard did not have an impact on the
Consolidated Financial Statements.
Definition of a Business - In January 2017, the FASB issued an ASU 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 adopted this update effective April 1, 2018. The new standard did not
have an impact on the Consolidated Financial Statements.
Stock-Based Compensation - In May 2017, the FASB issued an ASU to clarify when modification accounting
should be applied for changes to the terms or conditions of share-based payment awards. The amendments
clarify that modification accounting guidance should only be applied if there is a change to the value, vesting
conditions, or award classification and would not be required if the changes are considered non-substantive.
The amendments are effective for annual periods beginning after December 15, 2017, including interim
periods within those periods. The Company adopted this update effective April 1, 2018. The new standard did
not have an impact on the Consolidated Financial Statements.
Fair Value Measurement – In August 2018, the FASB issued an ASU that was intended to improve the
effectiveness of disclosures in notes to financial statements. The standard removed, modified and added
certain disclosure requirements related to fair value measurements. This standard was effective for fiscal years
beginning after December 15, 2019. The standard required the use of the retrospective transition method for
specific amendments within the ASU and the prospective treatment of other amendments. Early adoption was
permitted. The Company early adopted this ASU, effective for the Company’s Annual Report on Form 10-K
for the year ending March 31, 2019. The Company applied the new standard to “Note 9. Fair Value
Measurement” in the notes to the Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Adopted
Leases - In February 2016, the FASB issued Accounting Standard Codification (“ASC”) 842, Leases, which
amends the guidance for leases. This standard 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 standard 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. This standard is effective for fiscal years beginning
after December 15, 2018, including interim periods within those years. Early adoption of this standard is
permitted. The standard allows 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. In July 2018, the FASB amended ASC 842 to provide another
transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during
the period of adoption. The Company has implemented a new software solution to improve the process of
tracking and accounting for leases under the current and new standards. The Company will adopt this standard
effective April 1, 2019 using the modified retrospective transition method which does not require adjustments
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Advanced Drainage Systems, Inc.
to comparative periods or require modified disclosures for those periods. The Company has elected the
transition relief practical expedients. The transition relief practical expedient package permits the Company to
not reassess (1) whether any expired or existing contracts are or contain a lease, (2) the lease classification for
any expired or existing lease or (3) initial direct costs for any existing lease. The Company is continuing to
finalize new processes and internal controls required to comply with the new lease standard. The adoption of
ASC 842 will not have a material impact on the Statement of Operations or Statement of Cash Flows. The
accounting for capital leases will remain substantially unchanged. The recording of right-of-use assets and
lease liabilities is expected to have a material impact on the Company’s Consolidated Balance Sheet.
Measurement of Credit Losses - In June 2016, the FASB issued an ASU which provides amended guidance on
the measurement of credit losses on financial instruments, including trade receivables. This standard requires
the use of an impairment model referred to as the current expected credit loss model. This standard 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.
Hedge Accounting – In August 2017, the FASB issued an ASU which expands an entity’s ability to apply
hedge accounting for non-financial and financial risk components and provides a simplified approach for fair
value hedging of interest rate risk. The standard also refines how entities assess hedge effectiveness. This
standard is effective for fiscal years beginning after December 15, 2018, including interim periods within
those years, and early adoption is permitted. The Company will adopt this standard effective April 1, 2019.
The new standard did not have an impact on the Consolidated Financial Statements.
Except for the pronouncements described above, there have been no new accounting pronouncements issued
or adopted since the filing of the fiscal 2018 Form 10-K that have significance, or potential significance, to the
Consolidated Financial Statements.
2.
LOSS ON DISPOSAL OF ASSETS AND COSTS FROM EXIT AND DISPOSAL ACTIVITIES
In fiscal 2018, the Company initiated restructuring activities (the “2018 Restructuring Plan”), which
continued throughout fiscal 2019, including closing underutilized manufacturing facilities, reducing
headcount, optimizing product offerings and eliminating nonessential costs, designed to improve the
Company’s cost structure. The Company closed one and four manufacturing facilities in the fiscal years
ended March 31, 2019 and 2018, respectively. 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, 2019, 2018, and 2017:
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Advanced Drainage Systems, Inc.
(Amounts in thousands)
Accelerated depreciation
Plant severance
Headcount reduction
Product optimization
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
2019
2018
2017
430 $
131
306
283
475
1,625 $
3,759 $
2,041
4,133
1,351
159
11,443 $
—
—
—
—
—
—
2,022
3,560
8,509
$
3,647 $
15,003 $
8,509
Approximately $1.2 million and $0.4 million for fiscal year ended March 31, 2019, related to the Domestic
and International reporting segment, respectively, and $11.0 million and $0.4 million for the fiscal year ended
March 31, 2018 of the Total 2018 Restructuring Plan activities related to the Domestic and International
reporting segment, respectively.
A reconciliation of the beginning and ending amounts of restructuring liability related to the 2018
Restructuring Plan for the fiscal years ended March 31, 2019 and 2018 is as follows:
(Amounts in thousands)
Balance at beginning of year
Expenses
Non-cash expenses
Payments
Balance at end of year
2019
2018
3,901 $
1,625
(713 )
(3,117 )
1,696 $
—
11,443
(4,882 )
(2,660 )
3,901
$
$
The Company had $0.6 million and $0.5 million of long-term severance liability related to the restructuring
activities recorded in Other liabilities in the Consolidated Balance Sheet as of March 31, 2019 and March 31,
2018, respectively.
Periodically, the Company will dispose of equipment, including equipment accounted for as capital leases.
The net loss on the disposition of the equipment was $2.0 million, $3.6 million, and $8.5 million during fiscal
2019, 2018 and 2017, respectively.
3.
REVENUE RECOGNITION
On April 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”), and
all related amendments using the modified retrospective transition method. The adoption of ASC 606 did not
impact the opening retained earnings balance or cause a material shift in the amount or timing of revenue
recognition. Results for reporting periods beginning after April 1, 2018 are presented under ASC 606, while
prior period amounts were not adjusted and continue to be reported in a consistent manner with historical
accounting policies.
The Company generates revenue by selling pipe and related water management products primarily to
distributors, retailers, buying groups and co-operative buying groups. Products are shipped predominately by
the Company’s internal fleet, and the Company does not provide any additional revenue generating services
after product delivery. Payment terms and conditions vary by contract.
Revenue is recognized at the point in-time obligations under the terms of a contract with a customer are
satisfied, which generally occurs upon the transfer of control of the promised goods. In substantially all of the
Company’s contracts with customers, control is transferred to the customer upon delivery. The Company
recognizes revenue in an amount that reflects the consideration the Company expects to be entitled to in
exchange for those goods or services. Revenue is presented in the Consolidated Statements of Operations net
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Advanced Drainage Systems, Inc.
of allowances for returns, rebates, discounts, and taxes collected concurrently with revenue-producing
activities.
Refer to “Note 21. Business Segments Information” for the Company’s disaggregation of Net sales by
reportable segment. The disclosure of Net sales by reportable segment is aligned by geographical region and
product type and best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are
affected by economic factors.
Significant Judgments - The Company’s performance obligation under contracts with customers is to sell
and deliver pipe and related water management products. The Company’s contracts with customers may
contain multiple performance obligations by promising to deliver multiple products to the customer. For these
contracts, the Company accounts for individual performance obligations separately if they are distinct. The
transaction price is allocated to the separate performance obligations on a relative standalone selling price
basis.
The Company’s products are generally sold with a right of return, and the Company may provide credits or
incentives, which are accounted for as variable consideration when estimating the amount of revenue to
recognize. Variable consideration is estimated at contract inception and updated at the end of each reporting
period as additional information becomes available and only to the extent that it is probable that a significant
reversal of any incremental revenue will not occur.
Contract Balances - The Company recognizes a contract asset representing the Company’s right to recover
products upon the receipt of returned products and a contract liability for the customer refund. The adoption of
this standard resulted in the Company recording a contract asset for estimated inventory returns. On April 1,
2018, the estimated inventory returns 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 following table presents
the balance of the Company’s contract asset and liability as of March 31, 2019 and April 1, 2018:
Contract asset - product returns
Refund liability
March 31,
2019
April 1,
2018
$
(In thousands)
646 $
1,372
577
1,468
Practical Expedients and Exemptions - The Company expenses incremental costs to obtain a contract (e.g.
sales commissions) when incurred as the amortization period would have been one year or less. These costs
are recorded within selling expenses on the Consolidated Statements of Operations.
The Company elected the accounting policy election permitted by ASC 606 to account for shipping and
handling costs as activities to fulfill the promise to transfer the goods when these activities are performed after
a customer obtains control of the goods. Revenue is recognized at the point of shipment.
The Company elected the accounting policy to exclude from the transaction price all sales taxes that are
assessed by a governmental authority and that are imposed on and concurrent with a specific revenue-
producing transaction and collected by the Company from a customer, for example, sales, use, value added,
and some excise taxes.
Further, the Company does not disclose the value of unsatisfied performance obligations for contracts with an
original expected length of one year or less.
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Advanced Drainage Systems, Inc.
4.
ACQUISITIONS
Fiscal 2019 Acquisition of Noncontrolling interest in BaySaver
BaySaver Technologies LLC (“BaySaver”) was 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. During
the third quarter of fiscal 2019, ADS purchased the remaining 35% ownership interest in BaySaver for a
purchase price of $8.8 million. The purchase of the remaining 35% ownership interest was reflected as a
reduction in the Redeemable noncontrolling interest in subsidiary in the Consolidated Balance Sheets and as a
financing activity in the Consolidated Statement of Cash Flows. Additionally, resulting from this transaction,
the Company recorded a $0.6 million non-cash adjustment to deferred taxes. BaySaver is now a wholly-owned
subsidiary of ADS.
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 increased 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 was
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 a trade name of $0.2 million (seven-year useful life). The
following table contains unaudited pro forma Consolidated Statements of Operations information assuming
the acquisition occurred on April 1, 2015 and includes adjustments for amortization of intangibles and
depreciation of fixed asset. This unaudited pro forma information is presented for illustrative purposes only
and is not indicative of what actual results would have been if the acquisition had taken place on April 1, 2015
or of future results. In addition, the unaudited pro forma consolidated results are not projections of future
results of operations of the combined company nor do they reflect the expected realization of any cost savings
or synergies associated with the acquisition.
(Amounts in thousands)
Net sales
Net income attributable to ADS
$
Proforma
2017
1,266,602
33,634
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Advanced Drainage Systems, Inc.
Unaudited pro forma net income attributable to ADS for the fiscal year ended March 31, 2017 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.
5.
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 production equipment
Transportation equipment
Construction in progress
Total cost
Less: accumulated depreciation
Property, plant and equipment, net
2019
199,810 $
560,858
221,721
19,749
1,002,138
(603,247 )
398,891 $
$
$
2018
200,459
568,779
211,431
6,607
987,276
(587,895 )
399,381
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)
2019
2018
2017
$
59,869 $
63,044 $
58,692
(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.
6.
LEASES
Capital Leases - The Company leases certain buildings and transportation equipment including its fleet of
trucks and trailers, under capital lease agreements.
Leased assets 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
$
2019
5,357 $
220,279
225,636
(114,856 )
2018
6,124
208,475
214,599
(110,346 )
$
110,780 $
104,253
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
2019
2018
2017
$
5,215 $
19,155
4,086 $
18,511
3,864
17,415
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, 2019:
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Advanced Drainage Systems, Inc.
(Amounts in thousands)
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: amount representing interest(a)
Present value of net minimum lease payments
Current maturities of capital lease obligations
Long-term capital lease obligations
Total lease obligation
$
$
$
$
26,604
22,507
18,064
11,721
7,143
8,198
94,237
9,565
84,672
23,117
61,555
84,672
(a) 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, 2019, are
summarized below (amounts in thousands):
Future operating lease payments
2020
2021
$ 4,159 $ 2,924 $ 1,814 $
2022
2023
690 $
2024
Thereafter
325 $ 2,236
Total rent expense was $6.5 million, $6.6 million, and $6.6 million in the fiscal years ended March 31, 2019,
2018, and 2017, respectively.
7.
INVENTORIES
Inventories as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Raw materials
Finished goods
Total Inventories
2019
2018
$
$
47,910 $
216,630
264,540 $
54,909
208,883
263,792
The Company had no work-in-process inventories as of March 31, 2019 and 2018.
During fiscal years ended March 31, 2019 and 2018, the Company incurred production-related general and
administrative costs included in the cost of finished goods inventory of $29.4 million and $27.0 million,
respectively, of which $8.2 million and $6.5 million remained in inventory at March 31, 2019 and 2018,
respectively.
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Advanced Drainage Systems, Inc.
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill - The carrying amount of goodwill by reportable segment is as follows:
(Amounts in thousands)
Balance at March 31, 2017
Acquisition
Currency translation
Balance at March 31, 2018
Currency translation
Balance at March 31, 2019
Domestic
$
International
Total
90,002 $
2,103
—
92,105 $
—
92,105 $
—
348
10,564 $ 100,566
2,103
348
10,912 $ 103,017
(379 )
10,533 $ 102,638
(379 )
$
$
Intangible Assets - Intangible assets as of March 31, 2019 and 2018 consisted of the following:
Gross
Intangible
2019
Accumulated
Amortization
Net
Intangible
Gross
Intangible
2018
Accumulated
Amortization
Net
Intangible
(Amounts in thousands)
Definite-lived intangible assets
Developed technology
Customer relationships
Patents
Non-compete and other contractual
155
agreements
Trademarks and tradenames
15,978
Total definite lived intangible assets 81,877
$ 27,580 $
29,851
8,313
(19,922 ) $ 7,658 $ 27,580 $
(23,000 ) 6,851 31,035
(5,561 ) 2,752 7,512
(17,405 ) $ 10,175
(20,567 ) 10,468
(4,956 ) 2,556
17
(138 )
607
(7,968 ) 8,010 15,969
(56,589 ) 25,288 82,703
(567 )
40
(6,678 ) 9,291
(50,173 ) 32,530
Indefinite-lived intangible assets (a)
Trademarks
Total Intangible assets
11,889
$ 93,766 $
— 11,889 11,907
(56,589 ) $ 37,177 $ 94,610 $
— 11,907
(50,173 ) $ 44,437
(a) Indefinite-lived intangible assets decreased as a result of foreign currency translation.
The gross intangible asset value of customer relationships and non-compete and other contractual agreements
decreased due to intangible assets fully amortized in fiscal 2018. Patents increased as a result of asset
acquisitions and developed patents during fiscal 2019.
The following table presents the weighted average amortization period for definite-lived intangible assets at
March 31, 2019:
Developed technology
Customer relationships
Patents
Non-compete and other contractual agreements
Trademarks and tradenames
Weighted Average
Amortization
Period
(in years)
11.0
8.7
8.5
7.0
13.4
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Advanced Drainage Systems, Inc.
The following table presents the future intangible asset amortization expense based on existing intangible
assets at March 31, 2019:
(Amounts in thousands)
Amortization expense
2020
2023
$ 6,037 $ 5,895 $ 4,310 $ 2,534 $ 2,517 $ 3,995 $ 25,288
Thereafter Total
2021
2024
Fiscal Year
2022
9.
FAIR VALUE MEASUREMENT
When applying fair value principles in the valuation of assets and liabilities, the Company is required to
maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not
changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during
the fiscal years presented. The fair value estimates take into consideration the credit risk of both the Company
and its counterparties.
When active market quotes are not available for financial assets and liabilities, ADS uses industry standard
valuation models. Where applicable, these models project future cash flows and discount the future amounts to
a present value using market-based observable inputs including credit risk, interest rate curves, foreign
currency rates and forward and spot prices for currencies. In circumstances where market-based observable
inputs are not available, management judgment is used to develop assumptions to estimate fair value.
Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future
cash flows based on internal and external inputs.
Recurring Fair Value Measurements
The assets, liabilities and mezzanine equity carried at fair value as of the fiscal years ended March 31 were as
follows:
(Amounts in thousands)
Assets:
Derivative assets — diesel fuel contracts
Interest rate swaps
$
Total assets at fair value on a recurring basis $
Liabilities:
Derivative liability - diesel fuel contracts
Foreign exchange forward contracts
Contingent consideration for acquisitions
Total liabilities at fair value on a recurring
basis
$
March 31, 2019
Total
Level 1
Level 2
Level 3
189 $
1,088
1,277 $
283 $
60
203
— $
—
— $
— $
—
—
189 $
1,088
1,277 $
283 $
60
—
—
—
—
—
—
203
$
546 $
— $
343 $
203
March 31, 2018
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
— $
—
— $
— $
—
596 $
2,801
3,397 $
—
—
—
116 $
—
—
578
$
694 $
— $
116 $
578
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Advanced Drainage Systems, Inc.
Quantitative Information about Level 3 Fair Value Measurements
(Amounts in thousands)
Liabilities & Mezzanine Equity
Contingent consideration for
acquisitions
Liabilities & Mezzanine Equity
Contingent consideration for
acquisitions
Fair
Value
at 3/31/19
$
203
Valuation
Technique(s)
Discounted
cash flow
Fair
Value
at 3/31/18
$
578
Valuation
Technique(s)
Discounted
cash flow
Unobservable Input
Weighted Average Cost of
Capital (“WACC”)(a)
Quantifiable
Input
9.50%
Unobservable Input
Weighted Average Cost of
Capital (“WACC”)(a)
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.
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3)
for the fiscal years ended March 31, 2019 and 2018 were as follows:
Balance at March 31, 2017
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2018
Asset acquisition
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2019
Contingent
consideration
1,348
39
(809 )
578
40
(6 )
(409 )
203
$
$
$
There were no transfers in or out of Level 3 for the fiscal years ended March 31, 2019 and 2018.
Valuation of Contingent Consideration for Acquisitions - 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 13. Debt”) were $100.0 million and $98.9 million, respectively, as of March 31, 2019 and $125.0
million and $122.3 million, respectively, at March 31, 2018. 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.
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Advanced Drainage Systems, Inc.
Non-recurring Fair Value Measurements
Valuation of Investment in the South American Joint Venture - During the fourth quarter of the fiscal year
ended March 31, 2017, the Company recorded a $1.3 million 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. 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 11. Investment in Unconsolidated Affiliates.”
10.
INVESTMENT IN CONSOLIDATED AFFILIATES
ADS participates in one consolidated joint venture, ADS Mexicana, which is 51% owned by the Company’s
wholly-owned subsidiary ADS Worldwide, Inc. The equity owned by the Company’s joint venture partner is
shown as either Noncontrolling interest in subsidiaries in the Consolidated Balance Sheets and the joint
venture partner’s portion of net income is shown as Net income attributable to noncontrolling interest in the
Consolidated Statements of Operations. ADS participated in an additional joint venture, BaySaver. In the third
quarter of fiscal 2019, the Company acquired the noncontrolling interest in BaySaver. As a result, BaySaver is
a wholly-owned subsidiary of the Company after the acquisition. Prior to the acquisition, the equity owned by
the Company’s joint venture partner is shown as Redeemable noncontrolling interest in subsidiaries in the
Consolidated Balance Sheets and the joint venture partner’s portion of net income is shown as Net income
attributable to noncontrolling interest in the Consolidated Statements of Operations.
ADS Mexicana - ADS participates in joint ventures 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,
2019 and 2018. 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
2019
2018
$
$
$
$
18,683 $
17,054
1,396
37,133 $
6,581 $
1,264
7,845 $
24,616
18,855
1,314
44,785
8,979
1,343
10,322
BaySaver - BaySaver was established in July 2013 to design, engineer, manufacture, market and sell water
quality filters and separators used in the removal of sediment and pollution from storm water anywhere in the
world except New Zealand, Australia and South Africa. The Company acquired the remaining 35% ownership
interest in BaySaver in fiscal 2019. The acquisition of the additional interest in BaySaver is disclosed in “Note
4. Acquisitions”.
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The table below includes the assets and liabilities of BaySaver that are consolidated as of March 31, 2018. 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
3,761
216
10,470
14,447
820
820
$
$
$
$
11.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company participates in an unconsolidated joint venture, South American Joint Venture, which is 50%
owned by the Company’s wholly-owned subsidiary ADS Chile. Prior to April 2018, The Company
participated in an unconsolidated joint venture, Tigre-ADS USA, Inc. (“Tigre-ADS USA”), which was 49%
owned by the Company’s wholly-owned subsidiary ADS Ventures, Inc.
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 has concluded that it is appropriate to account for this investment 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. 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
2019
2018
$
10,467 $
504
12,343
817
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 the fiscal year ended March 31, 2017, the Company determined there was an
other-than-temporary decline in the fair value of its investment in the South American Joint Venture, resulting
from a further decline of unfavorable regional economic conditions. Accordingly, the Company recorded an
impairment charges of $1.3 million, reducing the carrying value of the investment to its fair value. Past
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impairment charges have 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 $4.0 million and $4.4 million as of
March 31, 2019 and 2018 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 $0.4 million,
$0.5 million and $0.4 million of amortization of the basis difference in fiscal 2019, 2018 and 2017,
respectively. The impairment charge is included in Equity in net loss of unconsolidated affiliates in the
Consolidated Statements of Operations.
Tigre-ADS USA - The former 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 represented a continuation of the activities of Tigre-ADS USA through its Janesville, Wisconsin
manufacturing facility. The Company was not required to consolidate Tigre-ADS USA as it was not the
primary beneficiary, although the Company did 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.
12. RELATED PARTY TRANSACTIONS
ADS Mexicana - ADS conducts business in Mexico and Central America through its joint venture ADS
Mexicana. ADS Mexicana’s Revolving Credit Facility expired on June 22, 2018 and was replaced by an
Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a borrowing capacity of
$12.0 million. The Intercompany Note matures on June 22, 2022. The other joint venture partner indemnifies
the Company for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are
determined by certain base rates or London Interbank Offered Rate (“LIBOR”) plus an applicable margin
based on the Leverage Ratio. As of March 31, 2019, there were no borrowings under the Intercompany Note.
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, 2019. 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, 2019 and 2018, the outstanding principal balance of the credit facility including
letters of credit was $12.3 million and $14.5 million, respectively. As of March 31, 2019, there were no U.S.
dollar denominated loans. The weighted average interest rate as of March 31, 2019 was 5.57% on Chilean
peso denominated loans.
ADS and the South American Joint Venture have entered into shared services arrangements in order to
execute the joint venture services. Occasionally, the South American Joint Venture enters into agreements for
pipe sales with ADS and its other related parties, which were $1.3 million and $2.1 million in the fiscal years
ended March 31, 2019 and 2018, respectively. ADS pipe sales to the South American Joint Venture were $1.2
million and $0.4 million in the fiscal years ended March 31, 2019 and 2018, respectively.
BaySaver - BaySaver Technologies LLC (“BaySaver”) was 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. During the third quarter, ADS purchased the remaining 35% ownership interest in BaySaver for a
purchase price of $8.8 million. The purchase of the remaining 35% ownership interest was reflected as a
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Advanced Drainage Systems, Inc.
reduction in the Redeemable noncontrolling interest in subsidiary in the Consolidated Balance Sheets and as a
financing activity in the Consolidated Statement of Cash Flows. Additionally, resulting from this transaction,
the Company recorded a non-cash adjustment to deferred taxes. BaySaver is now a wholly-owned subsidiary
of ADS.
Tigre-ADS USA - Tigre-ADS USA was 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
owned 49% of the outstanding shares of capital stock of Tigre-ADS USA. The joint venture represented a
continuation of the existing activities of Tigre-ADS USA through its Janesville, Wisconsin manufacturing
facility. 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. Following the exchange of Tigre-ADS USA shares, the Company
still considers Tigre-ADS USA a related party as a result of the Company’s joint venture in the South
American Joint Venture discussed above.
ADS purchased $0.3 million, $2.0 million and $1.6 million of Tigre-ADS USA manufactured products for use
in the production of ADS products during fiscal years 2019, 2018 and 2017, respectively.
13. 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
Senior Notes payable
Industrial revenue bonds
Equipment financing
Total
Unamortized debt issuance costs
Current maturities
Long-term debt obligations
Long-term Debt Modification
2019
2018
$
$
134,400 $
—
100,000
—
2,427
236,827
(2,293 )
(25,932 )
208,602 $
171,500
—
125,000
940
3,336
300,776
(3,028 )
(26,848 )
270,900
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, 2019 amounted to $8.5 million and reduce the
availability of the Revolving Credit Facilities. The amount available for borrowing for the Company was
$407.1 million at March 31, 2019.
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
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in effect. The average interest rate was 3.69% as of March 31, 2019. 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.
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.
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Advanced Drainage Systems, Inc.
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. On July 9, 2018, the Company amended the Second Amended and Restated Credit
Agreement (the “Credit Agreement”) and the Second Amended and Restated Private Shelf Agreement (the
“Private Shelf Agreement”) to amend the definition of Consolidated EBITDA and changed the timing of the
quarterly rate adjustments. In addition, the amendment to the Credit Agreement clarified the process of a
transition to replace LIBOR which is being phased out.
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. The average
interest rate was 2.74% as of March 31, 2019
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 matured on June
22, 2018. There were no borrowings under the Revolving Credit Facility – ADS Mexicana. Refer to “Note 12.
Related Party Transactions” for additional information on the Intercompany Note which replaced the
Revolving Credit Facility – ADS Mexicana. The average rate was 2.61% at March 31, 2017.
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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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,
fiscal 2018 and fiscal 2019. Principal payment of $25.0 million will be made in fiscal 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 final bond matured in February 2019, leaving the Company with no
current Industrial Revenue Bonds. The Company made principal payments of $0.9 million, $1.9 million and
$0.9 million in fiscal year ended March 31, 2019, 2018 and 2017, respectively.
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, 2019 are summarized below:
(Amounts in thousands)
Principal maturities
14. DERIVATIVE TRANSACTIONS
Fiscal Years Ending March 31,
2021
2022
2023
2020
$ 25,932 $ 963 $ 532 $ 134,400 $ — $ 75,000 $ 236,827
Thereafter Total
2024
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, 2019 and 2018 is presented below:
2019
Assets
Liabilities
(Amounts in thousands)
Diesel fuel option collars and swaps
Foreign exchange forward contracts
Interest rate swaps
(Amounts in thousands)
Diesel fuel option collars and swaps
Interest rate swaps
Receivables Other assets
$
127 $
—
566
62 $
—
522
Other accrued
liabilities
Other
liabilities
(82 )
—
—
(201 ) $
(60 )
—
2018
Assets
Liabilities
Receivables Other assets
$
573 $
311
23 $
2,490
Other accrued
liabilities
Other
liabilities
(38 )
—
(78 ) $
—
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Advanced Drainage Systems, Inc.
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)
2018
2019
2017
$
1,712 $
60
574
—
2,346 $
(2,801 ) $
—
(443 )
—
(3,244 ) $
(252 )
—
(2,642 )
(8,027 )
(10,921 )
(Amounts in thousands)
Interest rate swaps
Foreign exchange forward contracts
Diesel fuel option collars
Propylene swaps
Total net realized losses (gains)
15. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
Net Realized Losses (Gains)
2018
2017
2019
$
$
$
(329 ) $
(163 )
(698 ) $
—
(1,190 ) $
— $
—
(476 ) $
—
(476 ) $
—
—
1,893
6,671
8,564
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, 2019, the Company has agreed to
purchase resin over the period April 2019 through December 2019 at a committed purchase cost of $17.6
million.
Litigation and Other Proceedings
As previously disclosed in the Company’s fiscal 2018 Form 10-K, the Company’s historical accounting
practices were the subject of an investigation by SEC’s Division of Enforcement (the “Enforcement
Division”), which began in August 2015. That matter was resolved on July 10, 2018 via a settlement between
the Company and the SEC. Pursuant to the settlement, the Company consented to the entry of an
administrative order without admitting or denying the findings therein. The order required the Company to
cease and desist from committing or causing any violations and any future violations of certain provisions of
the federal securities laws and the rules promulgated thereunder and to pay a civil monetary penalty of $1.0
million, which payment has been made. The Company previously accrued an expense for the penalty amount
during fiscal 2018.
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. 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. On November 27, 2018, the plaintiff filed a motion for relief from final judgment and for leave to file an
amended complaint with the District Court. The defendants have opposed the plaintiff’s motion and are
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Advanced Drainage Systems, Inc.
awaiting a decision by the District Court. While it is reasonably possible that this matter ultimately could be
decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible
losses, but it could be material.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of
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 the Company’s financial position or results of operations. The Company
records a liability when a loss is considered probable, and the amount can be reasonably estimated.
Other Commitments and Contingencies
In March 2019, the Company initiated an internal investigation process, under the guidelines of the
Company’s Code of Business Conduct and Ethics, into its consolidated joint venture affiliate ADS
Mexicana’s senior management’s ethical and business conduct, as well as compliance of certain products
with, along with considerations into Mexican laws and regulations over the last 12 months. The Company has
concluded that the current estimate of probable losses resulting from the investigation is not material to our
consolidated financial statements, however due to the inherent uncertainties in determining the use,
installation application and location of our ADS Mexicana products sold, along with the consideration of
Mexican laws and regulations related to warranty and product liability obligations, the Company is unable to
determine the maximum potential future losses that may occur, which could be material to the consolidated
financial statements.
16. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (“ESOP”) - The Company established the Advanced Drainage
Systems, Inc. ESOP (the “ESOP” or the “Plan”) effective April 1, 1993. The Plan was funded through a
transfer of assets from our tax-qualified profit-sharing retirement plan, as well as a 30-year term loan from
ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than March 2023,
the ESOP committee can direct the shares of redeemable convertible preferred stock owned by the ESOP to 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 —
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Advanced Drainage Systems, Inc.
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 $19.90, $20.00, and $16.80 per share of redeemable convertible preferred stock at March 31,
2019, 2018, and 2017, respectively, resulting in an average annual fair value per share of $19.95, $18.40, and
$16.58 per share for the fiscal years ended March 31, 2019, 2018, and 2017, respectively. During the fiscal
years ended March 31, 2019, 2018, and 2017, the Company recognized compensation expense of $15.3
million, $11.7 million, and $9.6 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, 2019, 2018, and 2017, the Company recognized
compensation expense and the trustee retained $3.3 million, $3.2 million and $2.9 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, 2019 and 2018.
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, 2019, the applicable redemption value was $0.7818 per share as there were no unpaid cumulative
dividends.
Given that the event that may trigger redemption of the Redeemable convertible preferred stock (the listing or
quotation on a market more senior than the OTC Bulletin Board) is not solely within the Company’s control,
the redeemable convertible preferred stock is presented in the mezzanine equity section of the Consolidated
Balance Sheets. As of March 31, 2019, 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
liquidation value of $0.7818 per share) and is convertible at a rate of 0.7692 shares of common stock for each
share of Redeemable convertible preferred stock. The 2.5% annual dividend is payable in cash or additional
shares of the Redeemable convertible preferred stock. During the first quarter of fiscal 2018, the Board of
Directors approved the 2.5% annual dividend to be paid in cash on March 31, 2019 to stockholders of record
as of March 15, 2019. The Redeemable convertible preferred stock has a liquidation value of $0.7818 per
share that must be paid before any distribution or payment may be made to holders of common stock in the
event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of ADS.
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Advanced Drainage Systems, Inc.
Cash and stock dividends on allocated Redeemable convertible preferred stock for the fiscal years ended
March 31, 2019 and 2018, 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
2019
2018
$
$
$
$
1,903 $
10
1,913 $
134
10
144 $
7,392
0.0195
144 $
1,713
11
1,724
134
11
145
7,437
0.0195
145
In the fiscal years ended March 31, 2019 and 2018, 0.8 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, 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 (benefit) expense recorded related to the executive termination payments for the fiscal
years ended March 31, 2019, 2018, and 2017 was $(0.2) million, $1.5 million and $1.1 million, respectively,
and is included in General and administrative expenses in the Consolidated Statements of Operations. As of
March 31, 2019 and 2018, the executive termination payment obligation was $4.3 million and $6.1 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, 2019, 2018, and 2017. The Company has a defined contribution
postretirement benefit plan covering Canadian employees. The Company recognized costs of $0.4 million,
$0.7 million and $0.8 million in the fiscal years ended March 31, 2019, 2018, and 2017.
17. 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.
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Advanced Drainage Systems, Inc.
The Company recognized stock-based compensation expense in the following line items on the Consolidated
Statements of Operations for the fiscal years ended March 31, 2019, 2018, and 2017:
(Amounts in thousands)
Component of income before income taxes:
Cost of goods sold
Selling expenses
General and administrative expenses
Total stock-based compensation expense
2019
2018
2017
$
$
317 $
180
6,035
6,532 $
179 $
105
6,837
7,121 $
177
177
7,953
8,307
The following table summarizes stock-based compensation expense by award type for the fiscal years ended
March 31, 2019, 2018, and 2017:
(Amounts in thousands)
Stock-based compensation expense:
Liability-classified stock options
Equity-classified stock options
Restricted stock
Performance-based restricted stock units
Non-employee director
$
Total stock-based compensation expense
$
2019
2018
2017
— $
2,550
2,064
869
1,049
6,532 $
— $
4,148
1,741
—
1,232
7,121 $
4,936
108
1,945
—
1,318
8,307
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. 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
2000 and 2013 Stock Options Plans
2019
$25.75 - $27.99
30.3% - 31.1%
2.9% - 3.1%
2018
$19.35 - $22.95
32.1% - 35.6%
1.9% - 2.2%
2017
$18.70 - $28.17
29.6% - 33.0%
0.9% - 1.9%
6.0
1.1% - 1.2%
5.6 - 6.0
1.1% - 1.5%
0.5 - 5.1
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”) provided for the issuance of statutory and
non-statutory stock options to management based upon the discretion of the Board of Directors. The plan
generally provided 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, 2019.
The stock option activity for the fiscal year ended March 31, 2019 is summarized as follows:
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Advanced Drainage Systems, Inc.
(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)
135 $
—
(53 )
—
82
28
54
$
13.85
—
12.64
—
14.64
12.56
15.74
—
4.8
—
—
—
4.3
3.1
5.0
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2019:
(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
54 $
—
—
—
54 $
As of March 31, 2019, 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 2.3 years.
No options vested or were granted during the fiscal years ended March 31, 2019, 2018, and 2017. The
aggregate intrinsic value for options outstanding and currently exercisable as of March 31, 2019 was $0.9
million and $0.4 million, respectively. The total intrinsic value of options exercised during the fiscal years
ended March 31, 2019, 2018, and 2017 were $0.8 million, $0.5 million and $3.7 million, respectively.
2013 Plan - The Company’s 2013 stock option plan (“2013 Plan”) provided for the issuance of non-statutory
common stock options to management subject to the Board’s discretion. The plan generally provided 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. The
Company had no shares available for grant under the 2013 Plan as of March 31, 2019.
The stock option activity for the fiscal year ended March 31, 2019 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
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Number
of Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in
years)
1,502 $
—
(368 )
(14 )
1,120
999
121
$
16.27
—
14.57
17.31
16.81
15.91
24.17
—
5.9
—
—
—
4.9
4.6
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Advanced Drainage Systems, Inc.
All outstanding options are expected to vest.
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2019:
(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
8.42
—
8.63
8.77
7.68
439 $
—
(305 )
(13 )
121 $
As of March 31, 2019, there was a total of $0.8 million of unrecognized compensation expense related to
unvested stock option awards under the 2013 Plan that will be recognized as an expense as the awards vest
over the remaining weighted average service period of 1.1 years.
The aggregate intrinsic value for options outstanding and currently exercisable as of March 31, 2019 was
$10.0 million and $9.8 million, respectively. The total fair value of options that vested during the fiscal years
ended March 31, 2019, 2018, and 2017 were $2.6 million, $4.7 million, and $3.4 million, respectively. The
total intrinsic value of options exercised during the fiscal year ended March 31, 2019 was $4.4 million.
2008 Restricted Stock Plan
On September 16, 2008, the Board of Directors adopted the restricted stock plan, which provided 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. 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 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, 2019.
The information about the unvested restricted stock grants as of March 31, 2019 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
101 $
—
(55 )
(2 )
44 $
22.95
—
21.88
24.20
24.17
The Company expects all restricted stock grants to vest.
At March 31, 2019, there was approximately $0.9 million of unrecognized compensation expense related to
the restricted stock that will be recognized over the weighted average remaining service period of 1.1 years.
During the fiscal year ended March 31, 2018 and 2017, the weighted average grant date fair value of restricted
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Advanced Drainage Systems, Inc.
stock granted was $22.15 and $24.20, respectively. During the fiscal years ended March 31, 2019, 2018, and
2017, the total fair value of restricted stock that vested was $1.4 million, $2.9 million and $1.2 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 2.7 million shares available for awards as of March 31, 2019. 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, 2019 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 $
259
—
—
457
69
388
19.75
25.82
—
—
23.19
20.03
23.75
7.84
9.4
—
—
—
8.9
8.5
8.9
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2019:
(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
7.84
6.03
—
7.19
198 $
259
(69 )
—
388 $
As of March 31, 2019, there was a total of $2.0 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 2.0 years.
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Advanced Drainage Systems, Inc.
The aggregate intrinsic value for options outstanding and exercisable as of March 31, 2019 was $1.2 million
and $0.4 million, respectively. There were no options that were exercised during the fiscal year ended March
31, 2019.
The information about the unvested restricted stock grants as of March 31, 2019 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 $
134
(69 )
(1 )
172 $
19.91
26.59
20.08
25.75
25.02
At March 31, 2019, there was approximately $2.6 million of unrecognized compensation expense related to
the restricted stock that will be recognized over the weighted average remaining service period of 1.8 years.
During the fiscal year ended March 31, 2019, the total fair value of restricted stock that vested was $2.0
million. During the fiscal years ended March 31, 2018 and 2017, no restricted stock vested.
The information about the performance units granted under the 2017 Omnibus Plan 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
—
25.84
25.75
—
25.85
—
117 $
(2 )
—
115 $
At March 31, 2019, there was approximately $2.2 million of unrecognized compensation expense related to
the performance units that will be recognized over the weighted average remaining service period of 2.0 years.
For the performance units, 50% of the award is based upon the achievement of certain levels of Return on
Invested Capital for the performance period and 50% is based upon the achievement of certain levels of Free
Cash Flow for the performance period. The performance units have a 3-year performance period from April 1,
2018 through March 31, 2021. The performance units, and any accrued dividend equivalents, will be settled in
shares of the Company’s common stock, if the applicable performance and service conditions are satisfied.
During the fiscal year ended March 31, 2019, the weighted average grant date fair value of performance units
granted was $25.84. During the fiscal year ended March 31, 2019, the total fair value of performance units
that vested was $0.1 million. During the fiscal years ended March 31, 2018 and 2017, no performance units
vested.
18. 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
2019
2018
2017
$ 103,559 $
8,051
$ 111,610 $
72,109 $
4,833
76,942 $
59,543
5,288
64,831
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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
2019
2018
2017
$
11,575 $
3,998
2,050
17,623
17,107 $
3,541
2,242
22,890
11,745
1,795
(1,114 )
12,426
30,049 $
(11,236 )
(55 )
(188 )
(11,479 )
11,411 $
$
24,318
4,652
3,040
32,010
(5,887 )
(1,297 )
(211 )
(7,395 )
24,615
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
Uncertain tax position change
Impact of tax reform
Return to provision - federal and state
Qualified production activity deduction
Closure of Puerto Rico
Executive compensation
Credits and incentives
Other
Effective rate
2019
2018
2017
21.0 %
3.2
(0.3 )
4.6
(1.3 )
—
(0.2 )
—
—
1.1
(1.0 )
(0.2 )
26.9 %
31.5 %
5.4
0.7
3.6
0.3
(19.4 )
(5.0 )
(2.5 )
—
0.1
(0.5 )
0.6
14.8 %
35.0 %
4.1
1.3
4.1
(1.1 )
—
1.1
(3.3 )
(4.2 )
—
—
1.0
38.0 %
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
was 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 previously 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. During the year ended March 31, 2019, the Company finalized the accounting
for the Tax Act. During the year ended March 31, 2019, the Company did not make any material adjustments
to its provisional amounts included in its consolidated financial statements for the year ended March 31,
2018.
The Company recognized a provisional amount for revaluing its deferred tax attributes resulting in a $16.0
million tax benefit that was recorded for the fiscal year ended March 31, 2018. On the basis of revised
computations in filing the U.S. federal tax return during the third quarter, the Company recognized an
additional measurement-period adjustment of $0.4 million to deferred tax expense for the year ended March
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Advanced Drainage Systems, Inc.
31, 2019. A total deferred tax benefit of $15.6 million was recorded. The Company’s accounting for its
deferred tax attributes is now complete.
The Company had $26.5 million of undistributed earnings on its foreign subsidiaries subject to the deemed
mandatory repatriation. The Company recognized a provisional amount of $5.2 million of income tax
expense that was recorded for the fiscal year ended March 31, 2018. After the utilization of existing foreign
tax credits, the Company expected to pay additional U.S. federal taxes of approximately $1.0 million as of the
fiscal year ended March 31, 2018. On the basis of revised computations in filing the U.S. federal tax return
during the third quarter, the Company recognized an additional measurement-period adjustment of $0.6
million to income tax benefit for the year ended March 31, 2019. A total transition tax expense of $4.6
million was recorded. After the utilization of existing foreign tax credits, the Company paid an additional
U.S. federal taxes of $0.7 million. The Company’s accounting for the deemed mandatory repatriation tax is
now complete.
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, which
would primarily relate to withholding tax, 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 16)
Worker’s compensation
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
2019
2018
1,457 $
917
1,597
2,404
3,324
674
2,153
2,570
15,096
(281 )
14,815
1,647
53,676
4,255
862
60,440
45,625 $
1,126
891
1,696
3,558
3,596
1,299
732
2,886
15,784
(26 )
15,758
4,254
38,181
3,698
1,814
47,947
32,189
$
$
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
2019
2018
$
338 $
45,963
115
32,304
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Advanced Drainage Systems, Inc.
Accounting for Uncertain Tax Positions
As of March 31, 2019, The Company had unrecognized tax benefit of $5.7 million, which if resolved
favorably, would reduce income tax expense by $5.7 million. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits for the years ended March 31, 2019, 2018, and 2017 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
Settlements
Lapse of statute of limitations
Foreign translation adjustment
Balance at end of year
2019
2018
2017
7,593 $
164
(198 )
136
(200 )
(1,595 )
(219 )
5,681 $
6,196 $
81
—
5,108
—
(3,940 )
148
7,593 $
7,998
—
(1,786 )
80
—
(96 )
—
6,196
$
$
The short-term portion of the unrecognized tax benefit of $2.6 million at March 31, 2019 is recorded in Other
Accrued liabilities on the Company’s Consolidated Balance Sheet. The long-term portion of unrecognized tax
benefits are recorded in Other liabilities in the Company’s Consolidated Balance Sheets. These amounts
include potential accrued interest and penalties of $1.5 million and $2.1 million at March 31, 2019 and 2018,
respectively.
The Company believes that over the next twelve months, it is reasonably possible that up to $2.6 million of
unrecognized tax benefits could be resolved as the result of settlements of audits and the expiration of statutes
of limitation. Final settlement of these issues may result in payments that are more or less than this amount,
but the Company does not anticipate that the resolution of these matters will result in a material change to its
consolidated financial position or results of operations.
The Company is currently open to audit under the statute of limitations by the IRS for the fiscal years ended
March 31, 2016 through March 31, 2019. 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, 2015 through March 31, 2019. The foreign
income tax returns are open to audit under the statute of limitations for the years ended March 31, 2015
through March 31, 2019.
19. 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 certain 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, 2019, if dilutive. For purposes of the
F-49
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Advanced Drainage Systems, Inc.
calculation of diluted net income per share, stock options and unvested restricted stock are considered to be
potential common stock and are only included in the calculations when their effect is dilutive.
The Company’s redeemable common stock is included in the weighted-average number of common shares
outstanding for calculating basic and diluted net income per share.
The following table presents information necessary to calculate net income per share for the fiscal years ended
March 31, 2019, 2018, and 2017, 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 restricted stock - nonparticipating
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
2019
2018
2017
$
77,772 $
62,007
32,950
—
—
(1,560 )
(2,047 )
(1,858 )
(1,646 )
(69 )
(49 )
(73 )
75,656
60,100
29,671
(5,474 )
(4,514 )
(1,700 )
70,182
55,586
27,971
57,025
55,696
54,919
$
1.23 $
1.00
0.51
70,182
55,586
27,971
57,025
39
547
55,696
—
638
54,919
—
705
57,611
56,334
55,624
$
1.22 $
0.99
0.50
5,966
6,167
6,228
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Advanced Drainage Systems, Inc.
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, 2019, 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.
20. 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
Other
Total accrued liabilities
2019
2018
$
$
18,108 $
12,313
11,697
19,783
61,901 $
17,980
12,938
12,439
17,203
60,560
(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.
21. BUSINESS SEGMENT INFORMATION
ADS operates its business in two distinct operating and reportable segments based on the markets it serves:
“Domestic” and “International.” The Chief Operating Decision Maker (“CODM”) evaluates segment
reporting based on Net sales and Segment Adjusted EBITDA. The Company calculates Segment Adjusted
EBITDA as net income or loss before interest, income taxes, depreciation and amortization, stock-based
compensation expense, non-cash charges and certain other expenses. Beginning April 1, 2018, the Company
revised its allocation of allowances for returns, rebates, and discounts between Pipe and Allied Products for
segment reporting purposes. Prior to April 1, 2018, the Company allocated substantially all returns, rebates,
and discounts to Pipe net sales. These changes did not impact the Company’s previously reported consolidated
financial results. The prior period segment results and related disclosures have been recast to conform to the
current year presentation under the new allocation methodology.
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
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Advanced Drainage Systems, Inc.
partners in Mexico and South America. The Company’s joint venture strategy provides it with local and
regional access to new markets such as Brazil, Chile, Argentina, Peru and Colombia. The Company’s Mexican
joint venture, ADS Mexicana, primarily serves the Mexican and Central American markets, while its South
American Joint Venture, Tigre-ADS, is the primary channel to serve the South American markets. The
Company’s International product line includes single wall pipe, N-12 HDPE pipe, and High Performance PP
pipe. The Canadian market also sells our broad line of Allied Products, while sales in Latin America are
currently concentrated in fittings and Nyloplast.
The following table sets forth reportable segment information with respect to the amount of Net sales
contributed by each class of similar products in each of the fiscal years ended March 31:
(Amounts in thousands)
Domestic
Pipe
Allied Products
Total domestic
International
Pipe
Allied Products
Total international
Total net sales
2019
2018
2017
$ 868,805 $ 844,875 $ 794,807
307,429
1,224,131 1,174,432 1,102,236
355,326
329,557
122,836
37,766
160,602
122,724
32,301
155,025
$ 1,384,733 $ 1,330,354 $ 1,257,261
119,207
36,715
155,922
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
2019
2018
2017
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-52
$ 209,234 $ 191,629 $ 175,676
17,695
$ 231,960 $ 210,230 $ 193,371
18,601
22,726
$
$
$
$
$
$
$
$
$
$
18,352 $
266
18,618 $
14,929 $
333
15,262 $
17,049
418
17,467
28,816 $
1,233
30,049 $
9,199 $
2,212
11,411 $
21,786
2,829
24,615
64,450 $
7,450
71,900 $
66,978 $
8,025
75,003 $
63,747
8,608
72,355
— $
(95 )
(95 ) $
(2,427 ) $
1,688
(739 ) $
(505 )
(3,803 )
(4,308 )
39,647 $
3,765
43,412 $
39,562 $
2,147
41,709 $
39,642
7,034
46,676
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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
International
Total
Total identifiable assets
Domestic
International
Eliminations
Total
2019
2018
10,467 $
10,467 $
12,343
12,343
918,806 $
128,085
(4,732 )
1,042,159 $
904,718
142,822
(4,298 )
1,043,242
$
$
$
$
Reconciliation of Segment Adjusted EBITDA to Net income
(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
ESOP deferred stock-based compensation
Executive retirement expense (benefit)
Inventory step up related to PTI acquisition
Bargain purchase gain on PTI acquisition
Restatement-related costs (b)
Legal settlement
Impairment on investment in unconsolidated
affiliate(c)
Strategic growth and operational
improvement initiatives(d)
Transaction costs (e)
Segment Adjusted EBITDA
2019
2017
2018
Domestic International Domestic International Domestic International
790
$ 70,296 $
8,608
64,450
418
18,352
2,829
28,816
—
634
(1,629 )
—
11,170 $ 57,279 $
7,450 66,978
266 14,929
9,199
(443 )
—
7,513 $ 35,118 $
8,025 63,747
333 17,049
2,212 21,786
— (10,921 )
—
1,233
—
314
(1,748 )
2,823
824 14,248
755
4,793
3,716
—
(6 )
6,532
15,296
(178 )
—
—
(1,924 )
—
1,181
1,463
39
—
—
7,121
— 11,724
1,473
—
—
—
—
—
4,227
—
2,000
—
1,088
1,511
(265 )
—
8,307
—
9,568
—
1,092
—
525
—
—
(609 )
— 24,026
—
—
1,663
—
—
—
—
—
—
—
—
—
—
312
—
—
1,300
3,450
693
$ 209,234 $
—
6
—
1,362
22,726 $ 191,629 $
—
—
—
372
18,601 $ 175,676 $
—
—
17,695
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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 former Tigre-ADS USA Joint Venture, which are accounted for
under the equity method of accounting.
(b) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with the restatement of the prior period financial statements as reflected in the fiscal 2015 Form 10-K and
fiscal 2016 Form 10-K/A. The benefit recognized in fiscal 2019 is the result of insurance proceeds received in
fiscal 2019.
(c) Represents an other-than-temporary impairment of our investments in the former Tigre-ADS USA joint
venture and the South American Joint Venture.
(d) Represents professional fees incurred in connection with our strategic growth and operational improvement
initiatives, which include various market feasibility assessments and acquisition strategies, along with our
operational improvement initiatives, which include evaluation of our manufacturing network and
improvement initiatives.
(e) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with the debt refinancing and acquisitions and dispositions.
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
2019
2018
2017
$ 1,366,470 $ 1,313,917 $ 1,243,074
14,187
$ 1,384,733 $ 1,330,354 $ 1,257,261
18,263
16,437
2019
2018
$
$
401,276 $
10,467
411,743 $
401,470
12,343
413,813
(a) For segment reporting purposes, long-lived assets include Investments in unconsolidated affiliates, Central
parts and Property, plant and equipment.
22. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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:
2019
2018
2017
Interest
Income taxes
$
15,679 $
29,841
17,890 $
24,510
17,273
13,525
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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
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
2019
2018
2017
$
134 $
134 $
134
1,255
8,609
1,258
11,566
2,549
7,425
27,602
26,571
26,276
578
636
390
—
—
—
—
4,147
2,785
300
—
950
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth certain historical unaudited consolidated condensed quarterly financial
information for each of the quarters during the years ended March 31, 2019 and 2018. 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 2019
For the Three Months Ended
(in thousands, except per share amounts)
Net sales
Gross profit
Net income
Net 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, 2019
December
31, 2018
September
30, 2018
June 30,
2018
$ 272,218 $ 318,113 $ 406,555 $ 387,847
99,691
33,651
32,280
95,373
29,372
28,670
59,504
1,893
1,010
72,399
16,550
15,812
$
$
0.01 $
0.01 $
0.25 $
0.25 $
0.45 $
0.45 $
0.51
0.51
Fiscal 2018
For the Three Months Ended
March
31, 2018
December
31, 2017
September
30, 2017
June 30,
2017
$ 250,114 $ 320,832 $ 401,049 $ 358,359
86,739
18,474
17,742
89,801
17,959
17,863
48,115
(4,856 )
(5,703 )
77,826
33,215
32,105
$
$
(0.11 ) $
(0.11 ) $
0.52 $
0.51 $
0.29 $
0.29 $
0.29
0.28
(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.
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Advanced Drainage Systems, Inc.
24. SUBSEQUENT EVENTS
Dividends on Common Stock - During the first quarter of fiscal 2020, the Company declared a quarterly cash
dividend of $0.09 per share of common stock. The dividend is payable on June 14, 2019 to stockholders of
record at the close of business on June 3, 2019.
Special Dividend – During the first quarter of fiscal 2020, the Board of Directors approved a special dividend
of $1.00 per share payable on June 14, 2019 to stockholder of record at the close of business on June 3, 2019.
The dividend will be used to pay back a portion of the ESOP loan resulting in approximately 12 million shares
of redeemable convertible preferred stock being allocated to ESOP participants. Assuming a preferred share
fair value of $21.20, the Company will recognize approximately $245 million in additional stock-based
compensation expense. The stock-based compensation expense recognized will vary due to fluctuations in the
Company’s stock price through June 30, 2019. This additional expense will be recognized in Cost of goods
sold, Selling expenses and General and administrative expenses on the Company’s Consolidated Statement of
Operations in the first quarter of fiscal 2020.
Directors Not Standing for Re-Election - On May 22, 2019, Richard A. Rosenthal and Abigail S. Wexner
notified the Board of Directors of the Company of their respective decisions not to stand for re-election as
directors of the Company at the Company’s 2019 Annual Meeting of Stockholders. The decision by each of
Mr. Rosenthal and Ms. Wexner not to stand for re-election was not a result of any disagreement with the
Company or the Board of Directors.
* * * * * *
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Advanced Drainage Systems, Inc.
SCHEDULE II
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Valuation and Qualifying Accounts for the Fiscal Years Ended March 31, 2019,
Allowance for Doubtful Accounts:
2018 and 2017 (in thousands):
Year ended March 31,
2019
2018
2017
Balance at
beginning
of period
Charged
to
costs and
expenses
Charged
to
other
accounts (1)
$ 6,826 $ 1,154 $
10,431
503
2,940
7,956
(65 ) $
(391 )
(13 )
Balance at
end of
period
Deductions
(2)
(262 ) $ 7,653
6,826
(452 ) 10,431
(3,717 )
(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 11. Investment in Unconsolidated Affiliates” for additional information.
F-57
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 55 manufacturing plants and over 30
distribution centers. For more information, please visit ads-pipe.com.
Advanced Drainage System, Inc.
4640 Trueman Blvd.
Hilliard, OH 43026
www.ads-pipe.com