Fiscal Year 2020
Annual Report
ADVANCED DRAINAGE SYSTEMS, INC
ads-pipe.com
ADS Annual Report 2020 / 1
Dear Fellow Shareholders
Fiscal 2020 was a transformative year for Advanced Drainage Systems.
We achieved record financial performance; successfully executed on
our commitments and growth strategy; returned over $100 million to
shareholders; completed a large, highly strategic acquisition; implemented
a new capital structure; and built a strong foundation for our Environmental,
Social and Governance (ESG) program. These accomplishments and our
continued execution position us well for the future to deliver sustainable,
long-term growth.
As of this publication, the world is navigating through the coronavirus (COVID-19) pandemic
with changes to everyday lives and the way we do business. During this time, ADS and
Infiltrator facilities remain open as stormwater management and onsite septic solutions
are critical to the well-being of the communities we serve and essential to the economic
recovery expected to follow. We take this responsibility very seriously and are committed
to protecting employee health and safety while providing these essential products and
services. I’m proud of the entire Company’s efforts over these difficult past few months to
come together and support each other as well as the communities we serve. Our industry-
leading position and proven business resiliency give me confidence that we will successfully
manage through these unprecedented times and emerge stronger than before.
Successfully Executing the Plan
We ended Fiscal 2020 with $1.67 billion in revenue and $362 million of Adjusted EBITDA, up
21% and 56% year-over-year, respectively. Our domestic construction market sales outpaced
the growth in their end markets by 600 basis points, driven by continued execution of
material conversion and water management solutions, as well as focus on key growth
states. Sales in our domestic agriculture market also increased by 35% as we capitalized
on favorable industry dynamics by successfully implementing organizational changes,
introducing new products and executing with greater focus.
Adjusted EBITDA margin expanded 480 basis points to 21.6%, driven by the traditional
ADS levers of strong sales growth, disciplined pricing and favorable material and recycling
costs as well as the contribution from the acquisition of Infiltrator Water Technologies. We
are also building additional profitability levers focused on fundamental improvements to
transportation and logistics as well as continuous improvement in manufacturing, which
started to gain traction towards the end of the year. These will be important initiatives that
drive better delivery performance, quality and operational results.
2
2
/ ADS Annual Report 2020
/ ADS Annual Report 2020 The outstanding financial results of the past year allowed us to achieve our long-term Adjusted EBITDA and cash
conversion targets one year ahead of plan while also remaining on track to achieve our long-term revenue target.
The domestic business is exceeding expectations due to outperformance in the construction markets while the
international business has faced challenges, primarily from the market decline in Mexico. Despite the International
segment being difficult from a demand perspective, we improved International EBITDA by 3.5% in FY20 led by the
Canada and Exports businesses. The fundamentals of the ADS and Infiltrator businesses built on material conversion,
Allied product growth, focus on key states that drive construction spending, new products, material recycling expertise
and scale, plus the focus on continuous improvement and supply chain execution remain the right activities to focus
on in the stormwater and on-site septic markets.
Transformative Acquisition and Improved Capital Structure
The most notable event of Fiscal 2020 was the acquisition of Infiltrator Water Technologies, a leader in on-site septic
wastewater treatment. This strategic acquisition combined the leaders in stormwater and on-site septic wastewater
management. Infiltrator and ADS have highly complementary businesses with similar go-to-market distribution
strategies, innovation and most importantly a shared commitment to material science and recycling. This acquisition
was the natural evolution of more than 15 years of mutual partnership. Since closing the acquisition, we have an even
greater appreciation for Infiltrator’s world-class operations and are pleased that their performance to date is better
than initially planned. The synergy plans, focused on recycling, procurement and material science, are on pace to
deliver targeted synergies of $20 to $25 million by the third year following the close of the acquisition. We are excited
about the fundamental strengths that Infiltrator adds to the Company for sales growth, margin expansion and cash
flow generation.
To fund this acquisition, significant changes were made to ADS’ capital structure. We issued $300 million of equity and
$1.05 billion of debt with maturities into 2027, with favorable market reaction to both offerings. Immediately following
the acquisition we had a leverage ratio of 4.4 times Adjusted EBITDA, which is above our target leverage range of 2 to
3 times. We made a commitment to get back within the targeted range by the end of calendar 2020 and achieved
this one year ahead of schedule with a leverage ratio at 2.7 times in March 2020 by issuing the equity, early payment of
$50M of the term loan and strong cash flow performance of the business. We continue to focus on reducing leverage
to the lower end of the target range to protect and enhance our already strong balance sheet and liquidity position.
Looking Ahead
Fiscal 2021 started similarly to how the prior year ended with strength across the majority of our businesses and end
markets. Demand and business activity remained fairly stable into the first quarter, but we expect market conditions
may be less favorable in the second half of the year. Accordingly, a cost reduction and efficiency program was
implemented to get ahead of what could be a potentially difficult demand environment. We continue to closely
follow the markets, work the plan and make the necessary adjustments to operate the ADS and Infiltrator businesses.
We are committed to providing a safe and healthy work environment for employees and took this to a new level over
the past few months. In response to the pandemic, we implemented appropriate health protocols across all of the
ADS and Infiltrator facilities and closely following guidelines from the Centers for Disease Control and Prevention (CDC)
as well as federal, state and local governments. We also continue to prioritize investments in safety, highlighted by the
$4 million approved for safety-related capital projects in Fiscal 2020.
ADS Annual Report 2020 / 3
ADS Annual Report 2020 / 3
Beyond safety, we made other investments in ADS’ Environmental, Social and Governance (ESG) program last year,
which will continue to be a priority as we move through Fiscal 2021 and beyond. I am excited to announce that we
began tracking energy usage and emissions output by setting up processes and procedures to gather this data
efficiently throughout our network. We will report on this data as well as our recycling efforts, fleet efficiency and safety
metrics, as recommended by the Sustainability Accounting Standards Board (SASB), in our Fiscal 2020 Sustainability
Report. We have made significant progress on sustainability related objectives and are excited to continue to build a
best-in-class ESG program.
As we continue to adjust to what the new normal will look like in Fiscal 2021 and beyond, we are focused on the safety
and well-being of employees. We will also maintain flexibility to adjust our strategy and operating levers to maximize
value creation with a focus on delivering operational improvements, executing our material conversion and water
management solutions strategies, expanding in key states where construction growth remains active and becoming
a more sustainable company. Though we are facing new challenges as a company and as a nation, our goal remains
the same: driving shareholder value through sales growth, margin improvement and cash flow generation while
maintaining a healthy balance sheet. Furthermore, we are working to strategically position the business to respond to
changes in demand as well as ensuring the capability to ramp up quickly when economic recovery occurs.
Finally, I want to thank the customers and the communities we serve for entrusting ADS with their water
management needs, our shareholders for their ongoing support and most of all, our employees, whose adherence
to new health protocols and work with management in this new environment have ultimately driven our success
and ability to service ADS and Infiltrator customers. I am confident we will emerge a stronger business as market
conditions improve.
Sincerely,
D. Scott Barbour
President and CEO
4 / ADS Annual Report 2020
4
/ ADS Annual Report 2020 Letter from the Chairman
Dear Fellow Shareholders,
The ADS Board is focused on value creation.
In this past fiscal year, the board made the decision to declare a $75 million special
dividend to all shareholders and take an important step to winddown the ESOP. Notably,
ADS has returned $200 million to shareholders through dividends and share repurchases
since going public. Further, ADS preserved the financial strength to pursue the Infiltrator
Water Technologies acquisition, announced last August, as well as fund substantial capital
investments as part of our three-year growth plan.
ADS also continued to deliver strong financial performance, growing Adjusted EBITDA by 56%
to $362 million in Fiscal 2020.
The board also took steps to strengthen governance and respond to shareholder priorities.
These governance enhancements included a proposal to declassify the board over the next
three years, at which point all directors would stand for election on an annual basis. The
board also approved the proposal to eliminate the supermajority vote requirement for charter
and bylaw changes that require shareholder approval. In addition, the board introduced
the majority vote standard for the uncontested election of our directors (with a plurality
carveout for contested elections). These actions follow best practices and establish greater
accountability to our shareholders.
Additionally, as part of our governance work, the board established an Environmental,
Social and Governance (ESG) board sub-committee to develop and review ADS’ corporate
citizenship, sustainability programs and ESG policies. The sub-committee will be led by
Michael Coleman, the former Mayor of Columbus, Ohio, who has a unique experience in
driving sustainability programs and ESG initiatives. The sub-committee will periodically review
the Company’s sustainability strategy and performance, as well as its reporting and disclosure
practices. This is an important step in advancing ADS’ ESG program by providing enhanced
focus, oversight and accountability at the board level.
Finally, the board is working to ensure that ADS has experienced, diverse and independent
directors. In Fiscal 2020, ADS welcomed an exceptional leader, Manuel Perez de la Mesa, to
our board of directors. Manny is a respected industry veteran who brings deep experience
in industrial distribution, strategic planning, and international operations. The board is also
proposing that shareholders approve a new director, Anesa Chaibi, at the annual shareholder
meeting. Anesa has broad general management experience in variety of industries with a
deep understanding of the water industry gained during her time at HD Supply and General
Electric. ADS governance is strengthened with these two outstanding leaders.
Collectively, the actions taken this year by the company and the board will help ADS sustain
long-term growth and deliver shareholder value. On behalf of the board, you have our
commitment to continue to focus on driving value creation.
C. Robert Kidder
Chairman of the Board of Directors
ADS Annual Report 2020 / 5
ADS Annual Report 2020 / 5
Company Snapshot
Advanced Drainage Systems, Inc. (ADS) is 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.
$1.7
billion
2020
Revenue
Leader in
stormwater
management
solutions
Leader in
Onsite septic
wastewater
management
550
million
Pounds of recycled
plastic purchased
in FY20
Industry’s
Largest
Service
Network
4,950
Total Number
of Employees
$4
million
approved for Safety
related capital
projects in FY20
Engineering
and Installation
Support Services
Complementing our
Best-in-Class
Products
Significant
Footprint
Spanning the U.S.,
Canada, Mexico and
South America
3,000+
Distribution
Partners
Spotlight on ADS’ Agriculture Business
Fiscal 2020 saw significant growth in our domestic agriculture market
sales, as we capitalized on favorable industry dynamics through
improved execution. We successfully implemented organizational
changes and introduced new products, further capitalizing on the 20%
agriculture market growth driven by prevented plant acres and pent
up-demand. ADS’ agriculture sales outpaced the market by 15% as we
generated broad-based growth across the Untied States. We made
incredible progress this year and look forward to building on these
achievements in the years to come.
6
6
/ ADS Annual Report 2020
/ ADS Annual Report 2020 Key Financial Highlights
FY 2020 Revenue
(Figures in millions)
CAGR: 6.7%
FY 2020 Adjusted EBITDA1
(Figures in millions)
CAGR: 17.9%
$1,180
$1,291
$1,257
$1,330
$1,385
$1,674
$187
$193
$210
$232
$362
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
1 EBITDA adjustments exclude one-time transaction costs
and certain non-cash items.
FY 2020 Sales by Geography
FY 2020 Sales by Product Category
91%
Domestic
6%
3%
Canada
Other
International
64%
Pipe
24%
Allied
12%
On-Site
Septic
FY 2020 Domestic Revenue Growth vs. End Market
End Market
% of Domestic Sales
Market Performance2
ADS Sales
Non-Residential
Construction
Residential
Construction3
Infrastructure
Construction
Agriculture
52%
32%
8%
8%
+3%
+2%
+1%
+20%
+7%
+76%
+6%
+35%
Organic4 construction market sales outperformed overall end markets by 600 basis points
1 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.
2 Based on management estimates.
3 Includes Infiltrator Water Technologies results.
4 Organic results represent the legacy ADS business and exclude Infiltrator Water Technologies results.
ADS Annual Report 2020 / 7
ADS Annual Report 2020 / 7
Infiltrator Water Technologies Overview
Infiltrator Overview
• Leading national provider of onsite septic
wastewater treatment products
• Market leader in leachfield chambers and
systems, septic tanks and accessories
• Sophisticated and scaled internal recycling
capabilities complementary to ADS
• Best-in-class manufacturing technologies
• Strong commitment to innovation
A Compelling
Strategic Acquisition
Builds on ADS’ core strengths and enhances
position as a leader in water management solutions
Expands and diversifies ADS’ addressable
opportunity into hIghly related and attractive
on-site septic business
Shared go-to-market distribution strategy founded
on driving conversion from traditional materials
Complementary cultures, similar growth strategies
and a shared commitment to innovation
Strengthens ADS’ commitment to sustainability
with best-in-class polypropylene (PP) and
polyethylene (PE) recycling capabilities
Enhances ADS’ growth, margin and cash flow profile
as well as expected to generate significant synergies
8
8
/ ADS Annual Report 2020
On-Site
Wastewater Overview
• The On-site wastewater industry was an
estimated $1.2 billion in 2018
• Approximately 30% of the new North
American single-family homes utilize
septic systems
• Replacement systems make up
approximately one third of overall
demand
• Traditionally, wastewater systems have
been comprised of pipe and stone leach
fields and concrete septic tanks
Infiltrator Water Technologies Wastewater System
1
2
3
4
Piping/Transfer: wastewater is fed through piping systems
into an underground tank located outside of the home
Septic Tank (Primary Treatment): stores and treats solids
while releasing clarified effluent into the leach field
Leach field (Secondary Treatment): stores and allows
infiltration of effluent into soil; naturally treated and
returned to the local aquifer
Controls: flow control units and devices can be
incorporated to better treat the effluent on sites with poor
soil conditions
/ ADS Annual Report 2020 Storming the Field at KIPP Columbus
Advanced Drainage Systems donated
300
StormTech chambers
to build a stormwater retention system
below the athletic campus.
On October 24, 2019, KIPP (“Knowledge Is Power Program”) Columbus, a free college preparatory public school serving
nearly 2,000 students from 6 weeks old through the 12th grade from under-served communities, held a ribbon
cutting ceremony at their newly constructed football field in Columbus, OH. The following day, the school’s first class
of graduating seniors hosted their first and only home football game of the year. This milestone event was a long time
coming and marked the unwavering commitment of school leaders through a number of construction obstacles.
KIPP works with families and communities to create joyful,
academically excellent schools that prepare students with the skills
and confidence to pursue the paths they choose - college, career, and
beyond - so they can lead fulfilling lives and create a more just world.
Nationally, there are 242 KIPP schools serving more than 100,000
students and more than 12,000 KIPP alumni who are graduating from
college at a rate of three times their peers. Founded in 2008 with 50
students in the 5th grade, KIPP Columbus has grown to serve nearly
2,000 students from birth through twelfth grade. The spring of 2020
represents a landmark for KIPP Columbus as they celebrate their first
class of graduating seniors from KIPP Columbus High School.
When the project first broke ground, contractors quickly discovered
six feet of peat, or soil material consisting of decaying plants, below
the surface. With its low strength level and high compressibility,
contractors knew quickly the peat had to be removed. However, the
removal and replacement presented its own challenges, including
unexpected associated costs and build time and more importantly,
a new way to manage stormwater on the build site given the high
water retention of peat.
As part of Advanced Drainage Systems’ continued commitment that began in 2008 when we helped to initially build
the KIPP Columbus High campus, we donated 300 StormTech chambers to build a stormwater retention system
under the athletic campus last year. The system went in fast, enabling construction to continue and eventually finish
in time for that one and only home football game of 2019.
Advanced Drainage Systems is proud to be a part of this milestone for KIPP Columbus as we strive to be a good
community partner where our employees live and work.
Go Jaguars!
ADS Annual Report 2020 / 9
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 one of the 5 largest plastic recycling companies in North America. In Fiscal 2020, ADS and Infiltrator purchased
over half a billion pounds of recycled plastic, keeping it out of landfills and further preventing over 730 million pounds
of Greenhouse Gas emissions (GHG) from being released into the atmosphere. Our industry-leading resin blending
programs convert this recycled plastic into pipe, chambers and other products that can support America’s stormwater
management and on-site septic needs.
In fiscal 2020, we consumed
29%
of the recycled pigmented HDPE
bottles in the United States.
The amount of recycled plastic we consumed in fiscal 2020
reduced our Greenhouse Gas emissions by over 730 million
pounds, which amounts to taking
70,000
cars off the road.
In fiscal 2020,
we consumed
29% of the
recycled
pigmented
HDPE bottles
in the United
States.
<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
centers.
At the recycling
centers,
materials are
sorted and
packed into
bales. The bales
are then taken
to our recycling
facilities.
We sort, shred and
wash the material,
turning it into
clean plastic
flakes. We test all
plastic material
for quality
assurance.
Flake may be
further pelletized
and is then
used in the
manufacturing
process.
ADS pipe
products are
installed in
storm water
systems that are
designed
to last over
100 years
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.
100+
years
LIFE SPAN
10
10
/ ADS Annual Report 2020
/ ADS Annual Report 2020 Sustainability By-the-Numbers
ENVIRONMENTAL
5th Largest
recycling company
in North America
66%
of pipe revenue derived
from remanufactured
products
550 Million¹
pounds of
recycled plastic
purchased
44%¹ increase
in purchased
recycled plastic
7% decrease
in greenhouse
gas emissions
(sales weighted)
3% decrease
in energy intensity
(NMFR)
11% decrease
in near-miss
frequency rate
(NMFR)
4% increase
in payload
efficiency
SOCIAL & GOVERNANCE
ADS
Philanthropic
Foundation
Established in 2020
$2 Million
donated to charitable
organizations
OPERATIONAL
$4 Million
approved for safety-
related capital projects
in FY20
12% decrease
in scrap rate
16% decrease
in downtime rate
2% increase
in fleet MPG
400+
employees
participated in
leadership training
Engaged with
40% of institutional
shareholder base around
corporate governance
effectiveness and
sustainability efforts
2 enhancements
made to corporate
governance program
ESG Board of
Directors
Sub-Committee
Established in 2020
1 Includes Infiltrator Water Technologies purchases.
ADS Annual Report 2020 / 11
Board of Directors
Executive Officers
Robert Kidder
Chairman
Scott Barbour
Director, President and
Chief Executive Officer
Michael Coleman
Partner
Ice Miller LLP
Robert M. Eversole
Managing Director
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
Manuel J. Perez de la Mesa
Retired President and Chief Executive Officer
Pool Corporation
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
Roy E. Moore, Jr.
Executive Vice President, Infiltrator
Kevin C. Talley
Executive Vice President and
Chief Administrative Officer
Ronald R. Vitarelli
Executive Vice President,
Engineering and Business Development
Chairman Emeritus
Joe Chlapaty
Chlapaty Investments LLC
Retired Chairman, President and
Chief Executive Officer
Advanced Drainage Systems
12
/ ADS Annual Report 2020 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, 2020
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. ☐
Accelerated Filer
Smaller Reporting Company
☐
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 $1,540 million as of September 30, 2019, 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, 2019.
As of May 19, 2020, the registrant had 69,338,180 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 19, 2020, 392,994 shares of unvested restricted common stock were
outstanding and 21,559,132 shares of ESOP preferred stock, convertible into 16,583,284 shares of common stock, were outstanding. As of May
19, 2020, 86,314,458 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, 2020.
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 ..........................................................................................
74
Item 15. Exhibits and Financial Statement Schedules ..................................................................................
75
Item 16. Form 10-K Summary .........................................................................................................................
80
PART IV
ii
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:
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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 the
adverse impact on the U.S. and global economy of the COVID-19 global pandemic, and the impact of
COVID-19 in the near, medium and long-term on our business, results of operations, financial position,
liquidity or cash flows, and other 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;
uncertainties surrounding the integration of acquisitions and similar transactions, including the
acquisition of Infiltrator Water Technologies and the integration of Infiltrator Water Technologies;
our ability to realize the anticipated benefits from the acquisition of Infiltrator Water Technologies;
risks that the acquisition of Infiltrator Water Technologies and related transactions may involve
unexpected costs, liabilities or delays;
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;
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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, including risks associated with new
markets and products associated with our recent acquisition of Infiltrator Water Technologies; our
ability to achieve the acquisition component of our growth strategy;
the risk associated with manufacturing processes;
our ability to manage our assets;
the risks associated with our product warranties;
our ability to manage our supply purchasing and customer credit policies;
the risks associated with our self-insured programs;
our ability to control labor costs and to attract, train and retain highly qualified employees and key
personnel;
our ability to protect our intellectual property rights;
changes in laws and regulations, including environmental laws and regulations;
our ability to project product mix;
the risks associated with our current levels of indebtedness, including borrowings under our existing
credit agreement and outstanding indebtedness under our existing senior notes;
the nature, cost and outcome of any future litigation and other legal proceedings, including any such
proceedings related to our acquisition of Infiltrator Water Technologies as may be instituted against the
Company and others;
fluctuations in our effective tax rate, including from the Tax Cuts and Jobs Act;
changes to our operating results, cash flows and financial condition attributable to the Tax Cuts and Jobs
Act;
our ability to meet future capital requirements and fund our liquidity needs;
the risk that information may arise that would require the Company to make adjustments or revisions or
to restate further the financial statements and other financial data for certain prior periods and any future
periods;
any delay in the filing of any filings with the SEC;
the review of potential weaknesses or deficiencies in the Company’s disclosure controls and procedures,
and discovering further weaknesses of which we are not currently aware or which have not been
detected;
additional uncertainties related to accounting issues generally; 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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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. The term “Infiltrator Water Technologies” refers to Infiltrator
Water Technologies Ultimate Holdings, Inc., our wholly owned subsidiary. The term “Legacy ADS” refers to the
combined entity excluding Infiltrator Water Technologies.
We are the leading manufacturer of innovative water management solutions in the stormwater and on-site
septic waste water industries, providing superior drainage solutions for use in the construction and agriculture
marketplace. Our innovative products are used across a broad range of end markets and applications, including non-
residential, infrastructure and agriculture applications. We have established a leading position in many of these end
markets by leveraging our national sales and distribution platform, overall product breadth and scale and
manufacturing excellence.
On July 31, 2019, we completed the acquisition (the “Acquisition”) of Infiltrator Water Technologies, a
leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use
in residential applications. Infiltrator Water Technologies products are used in on-site water treatment systems in the
United States and Canada. Infiltrator Water Technologies has been a longstanding supplier and customer of the
Company for over 15 years of StormTech and ARC Septic Chambers.
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 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 polyvinyl
chloride, or 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 increasing acceptance of thermoplastic pipe products in international markets represents an
attractive growth opportunity. We further believe our extensive national footprint in the United States creates a cost
and service advantage compared to our HDPE pipe producing competitors, the largest of which has only eight
HDPE pipe manufacturing plants in the United States and Canada and, according to the December 23, 2019 ranking
by Plastics News of Pipe, Profile & Tubing Extruders, had estimated sales of $140 million, or approximately 12
times less than our net sales for the fiscal year ended March 31, 2020.
The Acquisition strengthens our position as an industry leading provider of plastic storm water and plastic
wastewater solutions globally. The Acquisition adds scale in the on-site wastewater industry. We estimate that the
storm water industry is an approximately $6.0 billion industry. We estimate that the on-site septic market is a
roughly $1.2 billion industry and that approximately 30% of new North American single-family homes utilize septic
systems. On a combined basis, we estimate that we had an addressable market opportunity of approximately $7
billion.
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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 2020 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
Pipe - We have a leading domestic and international manufacturing and distribution infrastructure, serving
customers in all 50 U.S. states, Canada, Mexico and approximately 80 other countries through 64 manufacturing
plants and 32 distribution centers, including eight manufacturing plants and five 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.
Allied and Other - 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. In addition to the extrusion of pipe, and blow molding and injection molding of fittings, we also use a variety
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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 material 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.
Infiltrator Water Technologies – We produce septic chambers, tanks and accessories at our six manufacturing
facilities. which include 23 injection molding machines ranging in size from approximately 750 tons to 6,000 tons.
Our molds and machines have been designed to maximize interchangeability to optimize flexibility, maximize
efficiency and minimize downtime.
We have developed extensive expertise in molding very large parts including chambers in excess of 130
pounds and tank halves weighing in excess of 240 pounds. We have jointly designed all injection molds, built one of
the largest injection molds in world and designed and built its own injection molding machines. Additionally, we
have extensive experience designing, installing and programing automation cells which are heavily incorporated
throughout the molding operation.
EZflow is produced at five facilities throughout the U.S. using steam expansion. Using steam expansion, these
plants convert profile extruded polystyrene bead, having been injected with gas, into an EPS aggregate, or synthetic
stone. The bead used to produce the aggregate can be either purchased through a third-party supplier or produced on
a tandem extruder in one of our other facilities and then shipped to the EZflow manufacturing facilities. Once
expanded, the bead is formed into various diameter bundles with various design capabilities to meet targeted market
needs.
Presby Environmental Enviro- Septic and Advanced Enviro-Septic systems are produced in one of our
manufacturing facilities. Enviro-Septic and Advanced Enviro-Septic are manufactured on two production lines.
Each production line includes corrugated pipe extrusion, pipe perforation, and a sewing cell where the geotextile
fabrics and plastic fiber are wrapped around the pipe and sewn together to produce the finished product. The fiber
for all products is manufactured on-site through fiber extrusion, stretching and drying. The EnviroFin are
manufactured on an independent production line which includes fabric layout, fiber roll and pipe insertion, and
fabric boding via adhesives. All coupling adapters and end caps required to complete field installation are injection
molded on-site and shipped with the various products as required. Enviro-Septic and Advanced Enviro-Septic are
cut to 10’ lengths and packaged in racks for shipping.
Delta Treatment Systems manufactures residential advanced wastewater treatment products including Ecopod
and Whitewater product lines within our facility. The manufacturing process includes assembling contract-
manufactured components along with commercially available components into finished wastewater treatment
products. In addition, manufacturing produces sub-component assemblies to be used in commercial packaged
treatment plants designed by Delta Treatment Systems.
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 Assurance Control - We have two internal quality assurance 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
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area, various national and international 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 several state Departments of Transportation (“DOT”) and municipal agencies
conduct both scheduled and unscheduled audits/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 approximately 350 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 – For our ADS legacy business, we also operate an in-house fleet of approximately 725 tractors. Our
effective shipping radius is approximately 300 miles from one of our manufacturing plants or distribution centers.
The combination of a dedicated fleet and team of company drivers allows greater flexibility and responsiveness in
meeting dynamic customer jobsite delivery expectations. We strive to achieve less than three-day lead-time on
deliveries and have the added benefit of redeploying fleet and driver assets to respond to short-term regional spikes
in sales activity. For deliveries that are outside an economic delivery radius of our truck fleet, common carrier
deliveries are tendered using a customized software platform to ensure that lowest delivered freight costs are
achieved. In addition, in the United States and Canada, approximately 12% of our pipe volume is sold on a pick-up
or walk-in basis at our plant and yard locations, further leveraging our footprint and lowering freight cost per pound
and per revenue dollar.
Our North American truck fleet incorporates approximately 1,350 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.
In addition, we are pleased to announce that as of March 2020 we have committed to work towards a more cost-
effective and environmentally efficient fleet by becoming an official U.S. EPA SmartWay partner.
Facility Network - Our scale and extensive network of Pipe and Allied Products 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. The optimized
design of our Infiltrator Water Technologies chambers and tanks provide the ability to nest products, enabling us to
manufacture products from one location and efficiently ship throughout North America.
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”), plastic leach field chambers and
systems, septic tanks and accessories (or “Infiltrator Water Technologies”), and a variety of additional water
management products (“Allied Products & Other”) 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, Infiltrator Water Technologies and Allied Products & Other.
Pipe
Infiltrator Water Technologies
International
Allied Products & Other
2020
2019
2018
56.9 %
10.1 %
8.9 %
24.1 %
62.7 %
—
11.6 %
25.7 %
63.5 %
—
11.7 %
24.8 %
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Pipe
Dual Wall Corrugated Pipe - Our N-12 pipe is a dual wall HDPE pipe with a corrugated exterior for strength and a
smooth interior wall for hydraulics and flow capacity. Our N-12 pipe competes in the storm sewer and drainage
markets that are also served by concrete pipe.
Our N-12 pipe is available in 17 different diameters ranging from 2” to 60” and in sections ranging from 10’ to 30’
in length. N-12 provides joint integrity, with integral bell and spigot joints for fast push-together installation, and is
sold either with watertight or soil-tight coupling and fitting systems.
Our corrugated polyethylene pipe offers many benefits including ease of installation, job-site handling and
resistance to corrosion and abrasion. Corrugated pipe can easily be cut or coupled together, providing precise laying
lengths while minimizing installation waste and difficulty.
HP Storm Pipe and SaniTite HP Pipe - Our HP Storm pipe utilizes polypropylene resin, which provides
(i) increased pipe stiffness relative to HDPE; (ii) higher Environmental Stress Crack Resistance (“ESCR”); and
(iii) improved thermal properties, which improves joint performance. These improved physical characteristics result
in a reduced need for select backfill, which creates installation savings for customers and expands the range of
possible product applications.
Our SaniTite HP pipe utilizes the same polypropylene resins as our HP Storm pipe but includes a smooth third
exterior wall in 30” to 60” pipe. The highly engineered polypropylene resin along with the triple wall design enables
SaniTite HP to surpass the 46 pounds per square inch (“psi”), stiffness requirement for sanitary sewer applications.
SaniTite HP offers cost and performance advantages relative to reinforced concrete pipe (such as improved
hydraulics and better joint integrity) and PVC pipe (such as impact resistance).
Single Wall Corrugated Pipe - Our single wall corrugated HDPE pipe is ideal for drainage projects where flexibility,
light weight and low cost are important. Single wall HDPE pipe products have been used for decades in agricultural
drainage, highway edge drains, septic systems and other construction applications. In the agricultural market,
improved technology has highlighted the favorable impact of drainage on crop yields. For homeowners, it is an
economical and easily installed solution for downspout run-off, foundation drains, driveway culverts and general
lawn drainage. Single wall pipe is also used for golf courses, parks and athletic fields to keep surfaces dry by
channeling away excess underground moisture.
Standard single wall products are available in 2” to 24” diameters and sold in varying lengths. Pipe with 2” to 6”
diameters is typically sold in coils ranging from 25’ to over 3,000’ in length, while larger diameter pipe is typically
sold in 20’ lengths. Pipe can be either perforated or non-perforated depending on the particular drainage application.
Triple Wall Corrugated Pipe and Smoothwall HDPE Pipe - Our ADS-3000 Triple Wall pipe, small diameter triple
wall corrugated pipe, consists of a corrugated polyethylene core molded between a smooth white outer wall and a
smooth black inner wall. This combination of the three wall design adds strength and stiffness, while reducing
weight as compared to PVC 2729. Triple Wall is produced in two sizes, 3” and 4”, and sold through our distribution
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.
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Infiltrator Water Technologies
Infiltrator Water Technologies is the leading designer and manufacturer of highly engineered plastic chambers,
synthetic aggregate leachfields, combined treatment and dispersal systems, plastic tanks, advanced treatment
systems, and related accessories that are used in septic systems. The on-site wastewater (septic) market is heavily
reliant on rural homes and communities that do not have access to centralized sewer and will require an on-site
wastewater or septic solution. On-site wastewater technologies are scalable and can easily meet the needs of
churches, schools, light commercial and small community construction projects.
Leachfield Products – Our Quick4 and ARC line of septic leachfield chambers are injection molded using recycled
polyolefin materials. There are 10 Quick4 chamber models available to meet a wide variety of regulatory and market
needs. There are five ARC chamber models available to meet a majority of regulatory and market needs. The
Quick4 and ARC chambers are engineered for strength and performance, easy to install, and offer the user greater
design flexibility, including a smaller footprint, as compared with traditional stone and pipe products. The product
advantages are cost savings on labor, materials and time savings on the job.
EZflow - EZflow synthetic aggregate bundles replace stone and pipe leachfields for effluent and drainage
applications. The EZflow proprietary products are a modular design that incorporates recycled polystyrene
aggregate bundles and corrugated polyethylene pipe that act as a replacement to the traditional materials stone and
pipe. EZflow septic systems are designed to improve infiltrative performance by eliminating fines and reducing
compaction and embedment associated with crushed stone installation methods. EZflow drainage products use the
same polystyrene media and polyethylene pipe with an additional geotextile barrier commonly used in drainage
applications.
Tank Products – Our IM-Series line of septic tanks are injection-molded polypropylene plastic tanks manufactured
from recycled materials. IM-Series septic tanks are available in 500, 1,000, and 1,500-gallon capacities for
wastewater storage. Our IM-Tank is the only two-piece construction, injection molded tank design in North
America. In comparison to traditional concrete tanks, our IM-Series septic tanks are easier to transport to the jobsite
and require less time and energy to install. IM-Series tanks are efficiently shipped in two halves that nest together
and are assembled locally by certified wholesale distributors prior to being sold to a septic system installer.
Infiltrator Water Technologies offers a complete line of tank riser and safety accessory components.
Our IM-Series line of potable tanks are injection-molded polypropylene plastic tanks manufactured from virgin
materials suitable for water reuse and drinking water storage. IM-Series potable tanks are available in 500, 1,200,
and 1,750-gallon capacities for water storage. IM-Series potable tanks are commonly used in water cistern
applications, such as rainwater harvesting systems. IM-Series tanks are efficiently shipped in two halves that nest
together and are assembled by certified wholesale distributors prior to being sold to a contractor or homeowner.
Advanced Treatment Systems – Our Delta Treatment Systems’ (“Delta”) advanced wastewater treatment systems
have been manufactured since the 1960s. Delta provides wastewater treatment solutions for residential and
commercial systems with daily flows up to 100,000 gallons per day. The Delta product line includes Whitewater,
ECOPOD, EA, and Package Treatment Plants. All Delta products are available in modular sizes to treat varying
daily flows of wastewater. Delta products for residential use fall under a certification protocol administered by NSF.
Delta products for commercial applications are custom designed and manufactured for the requirements of the
project.
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Combined Treatment Dispersal Systems - Our Presby Environmental Enviro-Septic and Advanced Enviro-Septic
systems are proprietary combined treatment and dispersal systems made with a twelve-inch diameter corrugated
extrusion product that is encapsulated in fibrous materials and geotextiles. These systems when installed in a bed of
sand have been proven to remove up to 98% of wastewater contaminants without using any electricity or
replacement media, recycling clean water into the environment and recharging natural water supplies. Advanced
Enviro-Septic and Enviro-Septic are wastewater treatment systems that combine treatment and dispersal in the same
small footprint and at a reduced cost with minimal long-term maintenance. Advanced Enviro-Septic and Enviro-
Septic are patented and patent-pending.
Our Advanced Treatment Leachfield (“ATL”) product is an alternative combined treatment and dispersal
system that provides passive advanced wastewater treatment. The ATL is a profile of polystyrene aggregates and
geotextiles installed in a bed of sand. The ATL system provides installers a low maintenance alternative to
mechanical advanced treatment systems.
Allied Products & Other
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. The
ARC chamber products are manufactured by Infiltrator Water Technologies.
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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.
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
1,100 million pounds of virgin and recycled resin annually from approximately 470 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.
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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 2020, 81% of our non-virgin HDPE raw
material needs were internally processed (enhanced) through our GLP operations.
Infiltrator Water Technologies is a world-class manufacturer of plastic solutions in the on-site septic industry
with leading positions in each of its core product offerings. Our combined business benefits from Infiltrator Water
Technologies’ differentiated recycling capabilities and position as one of the largest consumers of post-industrial
plastic in the United States. In 1991, Infiltrator Water Technologies manufactured the first chamber from 100%
recycled materials and in 1995, formally launched the Champion Recycling facility which sources and processes
consistent materials ranging from post-industrial resins to used carpet, at attractive prices. Sourcing recycled content
is less volatile from a pricing perspective than virgin resin, and we estimate that more than 55% of our combined
material purchases will be recycled inputs rather than virgin resin (which represents the remaining roughly 42%).
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 2020 net sales. Ferguson Enterprises (“Ferguson”) accounted for 13.4% and Core and Main
accounted for 10.9% of fiscal 2020 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 150 employees is supplemented by the employees of our
manufacturing plants, distribution centers and drivers of our tractor-trailers. We staff and operate three regional
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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
Pipe and Allied Products & Other - We have one of the largest and most experienced sales and engineering
forces in the industry, with more than 450 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
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.
Infiltrator Water Technologies - The Infiltrator Water Technologies salesforce works to pull through business
to over 1,500 distribution points in the U.S. and Canada. Most of our distributors are plumbing or waterworks
wholesalers. Relationships with individual distribution points are managed by our Infiltrator Water Technologies
direct salesforce. Key national, regional, and buying group distributor relationships are managed by our Infiltrator
Water Technologies sales leadership team. Training provided by our salesforce to distributors is a significant driver
of product adoption and penetration. Sales representatives train distribution staff on effective sales methods and
attend joint customer meetings/sales calls.
We have largest team of experienced sales, technical service, and regulatory affairs professionals in the onsite
wastewater industry. Over 60 professionals educate wastewater decision makers and installers to drive the
acceptance and use of Infiltrator products in residential and commercial wastewater treatment systems.
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.
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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. In the septic tank and drainfield sector, we
compete with Tank Holding, Orenco Systems, Eljen as well as smaller local producers. 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, Prinsco, Southeast Culvert and Pacific Corrugated.
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, 2020, in our domestic and international operations the Company and its consolidated
subsidiaries had approximately 4,950 employees, consisting of approximately 3,400 hourly personnel and
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approximately 1,550 salaried employees. As of March 31, 2020, approximately 225 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 75 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.
Our Infiltrator Water Technologies products are used primarily in on-site septic and decentralized wastewater
treatment systems. The products used in these systems cannot be sold without a regulatory approval. Infiltrator
Water Technologies was the first in the industry to institute a formal regulatory management department in 1998 as
part of the sales function. We have a dedicated regulatory team with a track record of gaining favorable regulatory
approvals and advancing policy and legislation. Over the past 10 years the team has successfully embarked in over
100 regulatory initiatives increasing the addressability and size of markets across the U.S. and Canada.
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.”
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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
The COVID-19 pandemic, efforts to mitigate the pandemic, and the related weakening economic conditions, have
impacted our business and could have a significant negative impact on our operations, liquidity, financial
condition and financial results.
In the last quarter of our fiscal 2020, a novel strain of coronavirus, COVID-19, started to impact the global
economic environment causing extreme volatility and uncertainty in global markets. On March 11, 2020, the World
Health Organization declared COVID-19 to be a global pandemic and we started to see certain impacts to our
business. The COVID-19 pandemic has negatively impacted the global economy and lowered equity valuations, in
addition to disrupting global supply chains and workforce participation. Quarantines and "stay in place" orders, the
timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers,
labor shortages or other disruptions to our supply chain or our customers will adversely impact our sales and
operating results and has resulted in some project delays.
In addition, the pandemic has resulted in an economic downturn that could affect the ability of our customers
to obtain financing for projects and therefore impact demand for our products and services. Order lead times could
be extended or delayed and our pricing or pricing of suppliers for needed materials could increase. Some critical
materials, products or services may become unavailable if the regional or global spread were significant enough to
prevent alternative sourcing.
To date, we have experienced some delays in state and municipal construction projects due to COVID-19.
While manufacturing and manufacturing-related industries are considered an "essential service" in most jurisdictions
in which we operate, site closures or project delays have occurred and increased social distancing and health-related
precautions are required on many work sites, which may cause additional project delays and additional costs to be
incurred. We have also experienced the temporary closure of many of our customer's retail locations and we
temporarily shut down our factories in this segment to comply with government "stay in place" orders. We expect
this global pandemic to have an impact on our revenue and our results of operations, the size and duration of which
we are currently unable to predict. Additionally, if future revenue were to fall below forecasted levels or if market
conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, we could incur a non-
cash impairment charge that would negatively impact our net earnings for the fiscal period in which the charge was
recorded.
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The global outbreak of COVID-19 continues to rapidly evolve. The extent to which COVID-19 will impact
our business will depend on future developments, which are highly uncertain and cannot be predicted with
confidence, such as the ultimate severity and spread of the disease, the duration of the outbreak, travel restrictions
and social distancing requirements in the United States and other countries, business closures or business disruptions
and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a
global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to
change, especially if a second wave of COVID-19 occurs later in 2020. Given the speed and frequency of
continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of
the impact to our results of operations, liquidity or financial position. To the extent that our customers and suppliers
are adversely impacted by the coronavirus outbreak, this could reduce the availability, or result in delays, of
materials or supplies, or delays in customer payments, which in turn could materially interrupt our business
operations and/or impact our liquidity.
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
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, including disruptions resulting from the impact of the evolving
COVID-19 pandemic. 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
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slowdown and severe recession in recent years. Furthermore, the U.S. and global economy as well as the markets in
which we operate face the adverse impact of the COVID-19 global pandemic, which will impact our business,
results of operations, financial position, liquidity and cash flows, as referenced above. The difficult conditions in
these markets and the overall economy affect our business in a number of ways. For example:
•
•
•
•
The volatility of the United States economy in general (including as a result of COVID-19) can have an
adverse effect on our sales that are dependent on the non-residential construction market. Continued
uncertainty about current economic conditions may 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 5.2% from 2014 to 2019, 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, and may be further adversely impacted by the
COVID-19 pandemic, which in turn would result in 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. The evolving COVID-19 pandemic is
also expected to adversely impact the markets in which we operate. While we operate in many markets, our business
is particularly impacted by changes in the economies of the United States, Canada and Mexico, which represented
91.1%, 5.5% and 2.3%, respectively, of our net sales for fiscal 2020 and collectively represented 98.9% of our net
sales for fiscal 2020.
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
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materials which our high performance thermoplastic corrugated pipe products are designed to replace. For example,
our N-12 and SaniTite HP products face competition from concrete, steel and PVC pipe products in the small- and
large-diameter size segments of the market.
Our ability to successfully compete and grow depends largely on our ability to continue to convert the current
demand for concrete, steel and PVC pipe products into demand for our high performance thermoplastic corrugated
pipe and Allied Products. Our thermoplastic pipe typically has an installed cost advantage of approximately 20%
over concrete pipe. However, depending upon certain factors such as the size of the pipe, the geography of a
particular location and then-existing raw material costs, the initial cost of our thermoplastic pipe may be higher than
the initial cost of alternative products such as concrete, steel and PVC pipe products. To increase our market share,
we will need to increase material conversion by educating our customers about the value of our products in
comparison to existing alternatives, particularly on an installed cost basis, working with government agencies to
expand approvals for our products and working with civil engineering firms which may influence the specification
of our products on construction projects. No assurance can be given that our efforts to increase or maintain the
current rate of material conversion will be successful, and our failure to do so would have a material adverse effect
on our business, financial condition, results of operations and cash flows.
We also expect that new competitors may develop over time. No assurance can be given that we will be able
to respond effectively to such competitive pressures. Increased competition by existing and future competitors could
result in reductions in sales, prices, volumes and gross margins that would materially adversely affect our business,
financial condition, results of operations and cash flows. Furthermore, our success will depend, in part, on our
ability to maintain our market share and gain market share from competitors.
Certain of our competitors have financial and other resources that are greater than ours and may be better able
to withstand price competition, especially with respect to traditional products. In addition, consolidation by industry
participants could result in competitors with increased market share, larger customer bases, greater diversified
product offerings and greater technological and marketing expertise, which would allow them to compete more
effectively against us. Moreover, our competitors may develop products that are superior to our products or may
adapt more quickly to new technologies or evolving customer requirements. Technological advances by our
competitors may lead to new manufacturing techniques and make it more difficult for us to compete. In many
markets in which we operate there are no significant entry barriers that would prevent new competitors from
entering the market, especially on the local level, or existing competitors from expanding in the market. In addition,
because we do not have long-term arrangements with many of our customers, these competitive factors could cause
our customers to cease purchasing our products.
In addition, our contracts with municipalities are often awarded and renewed through periodic competitive
bidding. We may not be successful in obtaining or renewing these contracts on financially attractive terms or at all,
which could adversely affect our business, financial condition, results of operations and cash flows.
Our results of operations could be adversely affected by the effects of weather.
Although weather patterns affect our operating results throughout the year, adverse weather historically has
reduced construction activity in our third and fourth fiscal quarters. In contrast, our highest volume of net sales
historically has occurred in our first and second fiscal quarters.
Most of our business units experience seasonal variation as a result of the dependence of our customers on
suitable weather to engage in construction projects. Generally, during the winter months, construction activity
declines due to inclement weather, frozen ground and shorter daylight hours. In addition, to the extent that
hurricanes, severe storms, floods, other natural disasters or similar events occur in the geographic regions in which
we operate, our results of operations may be adversely affected. We anticipate that fluctuations of our operations
results from period to period due to seasonality will continue in the future.
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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 2020. 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. Our customers may also face economic challenges due disruptions
in the economy caused by the evolving COVID-19 pandemic which may in turn impact our ability to collect from
any customers facing disruption. 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.
We may be unable to successfully integrate our and Infiltrator Water Technologies’ businesses in order to realize
the anticipated benefits of the acquisition or do so within the intended timeframe.
We will be required to devote significant management attention and resources to the ongoing integration the
business practices and operations of Infiltrator Water Technologies with our business. We may be unable to realize
the planned synergies from the acquisition or other benefits in the timeframe that we expect or at all. We continue to
assess synergies that we may realize as a combined company, the realization of which will depend on a number of
factors.
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The success of the acquisition, including anticipated synergies, benefits and cost savings, will depend, in part,
on our ability to successfully combine and integrate our current operations with Infiltrator Water Technologies’
business. If we experience difficulties with the integration process or other unforeseen costs, the anticipated benefits
and cost savings of the acquisition may not be realized fully or at all, or may take longer to realize than expected.
The integration planning and implementation process will result in significant costs and divert management attention
and resources. These integration matters could have an adverse effect on our combined company for an
undetermined period after completion of the acquisition. In addition, the actual cost savings of the acquisition could
be less than anticipated, or otherwise offset by other factors.
Additional difficulties we may encounter as part of the integration process include the following:
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the costs of integration and compliance and the possibility that the full benefits anticipated to result from
our acquisition of Infiltrator Water Technologies will not be realized;
any delay in the integration of management teams, strategies, operations, products and services;
diversion of the attention of each company’s management as a result of our acquisition of Infiltrator Water
Technologies;
differences in business backgrounds, corporate cultures and management philosophies that may delay
successful integration;
the ability to retain key employees;
the ability to create and enforce uniform standards, controls, procedures, policies and information systems;
the challenge of integrating complex systems, technology, networks and other assets of Infiltrator Water
Technologies into those of ours in a seamless manner that minimizes any adverse impact on customers,
suppliers, employees and other constituencies;
potential unknown liabilities and unforeseen increased expenses or delays associated with the acquisition,
including costs to integrate Infiltrator Water Technologies beyond current estimates; and
the disruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in
standards, controls, procedures and policies.
Any of these factors could adversely affect each company’s ability to maintain relationships with customers,
suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or
could reduce each company’s earnings or otherwise adversely affect our business and financial results after the
acquisition. These risks are not limited to our acquisition of Infiltrator Water Technologies and could also apply to
our future acquisitions.
Our results after our acquisition of Infiltrator Water Technologies may suffer if we do not effectively manage our
expanded operations following the acquisition.
Following our acquisition of Infiltrator Water Technologies, the size and complexity of our business increased
significantly beyond the previous size of either our or Infiltrator Water Technologies’ previously existing business.
Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial
challenges for management, including challenges related to the management and monitoring of new operations and
new types of manufacturing processes and products and associated increased costs and complexity. There can be no
assurances that we will be successful after completion of the acquisition or that we will realize the expected benefits
currently anticipated from our acquisition of Infiltrator Water Technologies.
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The business of Infiltrator Water Technologies may underperform relative to our expectations.
We may not be able to maintain the levels of revenue, earnings or operating efficiency that we and Infiltrator
Water Technologies have achieved or might achieve separately. The business and financial performance
of Infiltrator Water Technologies is subject to certain risks and uncertainties, including the risk of the loss of, or
changes to, its relationships with its customers. We may be unable to achieve the same growth, revenues and
profitability that Infiltrator Water Technologies has achieved in the past.
The unaudited pro forma financial information related to the acquisition may not accurately reflect our financial
position or results of operations.
The unaudited pro forma financial information contained in “Note 4. Acquisitions” to the notes to our
unaudited financial statements included in this Annual Report and the unaudited pro forma financing information
included in our Current Report on Form 8-K dated August 1, 2019, was presented for illustrative purposes only and
may not be an indication of what our financial position or results of operations would have been had the Merger
been completed on the dates indicated. The unaudited pro forma financial information was derived from our audited
and unaudited historical financial statements along with those of Infiltrator Water Technologies, and certain
adjustments and assumptions were made regarding the combined company after giving effect to the Merger. The
assets and liabilities of Infiltrator Water Technologies were measured at fair value based on various preliminary
estimates using assumptions that Infiltrator Water Technologies’ management believed to be reasonable utilizing
information currently available. The process for estimating the fair value of acquired assets and assumed liabilities
requires the use of judgment in determining the appropriate assumptions and estimates. These estimates and
assumptions may be revised as additional information becomes available and as additional analyses are performed.
Differences between preliminary estimates in the pro forma financial information and the final acquisition
accounting will occur and could have a material impact on the pro forma financial information and the combined
company’s financial position and future results of operations. In addition, the assumptions used in preparing the pro
forma financial information may not prove to be accurate, and other factors may affect our financial condition or
results of operations following the Merger. Any potential decline in our financial condition or results of operations
may cause significant variations in the trading price of our common stock following the Merger.
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.
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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
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
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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
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, pandemics (including the current COVID-19 pandemic),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.
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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, 2020 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
commenced by government authorities. The outcome of some of these legal proceedings and other contingencies
could require us to take actions which would adversely affect our operations or could require us to pay substantial
amounts of money. Additionally, defending against these lawsuits and proceedings may involve significant expense
and diversion of management’s attention and resources from other matters.
Because our business is working capital intensive, we rely on our ability to manage our supply purchasing and
customer credit policies.
Our operations are working capital intensive, and our inventories, accounts receivable and accounts payable
are significant components of our net asset base. We manage our inventories and accounts payable through our
purchasing policies and our accounts receivable through our customer credit policies. If we fail to adequately
manage our supply purchasing or customer credit policies, our working capital and financial condition may be
adversely affected.
Our 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, 2020, 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, 2020
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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
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, 2020. 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.
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.
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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,
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.
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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, including “ransomware” 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. “Ransomware,” are
electronic security breaches through which an attacker gains access to an organization’s computer files, renders
them temporarily inaccessible and threatens to permanently delete them if a cash ransom is not paid. 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
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
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restricted stock, stock options and/or performance-based restricted stock units 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
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
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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
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
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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
Our level of indebtedness could adversely affect our business, financial conditions or results of operations and
prevent us from fulfilling our obligations under the agreements governing the terms of our indebtedness.
As of March 31, 2020, we had, on a consolidated basis, total indebtedness (excluding finance lease
obligations) of approximately $1,100 million (excluding $8.5 million of outstanding letters of credit), excluding
$241.5 million of undrawn availability under the revolving credit facility (the “Revolving Credit Facility”) portion
of our existing senior secured credit facility with Barclays Bank PLC as administrative agent, and the several lenders
from time to time party thereto (the "Senior Secured Credit Facility”). Our indebtedness could have risks. For
example, it could:
• make it more difficult for us to satisfy our obligations with respect to the Company's existing 5.0% senior
notes due 2027 (the "Senior Notes") and our Senior Secured Credit Facility;
•
•
•
•
•
•
increase our vulnerability to and compromise our flexibility to plan for, or react to, general adverse
economic, industry or competitive conditions, including interest rate fluctuations, because a portion of our
borrowings, will be at variable rates of interest;
cause us to be unable to meet the financial covenants contained in our debt agreements, or to generate cash
sufficient to make required debt payments, which circumstances would have the potential of accelerating
the maturity of some or all of our outstanding indebtedness;
require us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital
expenditures, acquisitions, joint ventures and investments and other general corporate purposes, that could
improve our competitive position, results of operations or share price;
require us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms,
to meet payment obligations;
expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest;
increase our vulnerability to downturns or adverse changes in general economic, industry or competitive
conditions and adverse changes in government regulations;
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•
•
•
place us at a competitive disadvantage compared to our competitors that do not have the same level of
indebtedness as we do and competitors that may be in a more favorable position to access additional capital
resources;
limit our ability to execute business development and acquisition activities to support our strategies;
limit our ability to obtain additional indebtedness or equity financing for working capital, capital
expenditures, service line development, debt service requirements, acquisitions and general corporate or
other purposes due to applicable financial and restrictive covenants in our debt agreements; and
•
limit our ability to refinance our substantial indebtedness on more favorable terms.
We expect to pay expenses and to pay principal and interest on current and future debt from cash provided by
from operating activities. Therefore, our ability to meet these payment obligations will depend on future financial
performance and cash availability, which is subject in part to numerous economic, business and financial factors
beyond our control. If our cash flow and capital resources are insufficient to fund our debt obligations, we may be
forced to reduce or delay expansion plans and capital expenditures, limit payment of dividends, sell material assets
or operations, obtain additional capital or restructure our debt.
We borrowed under our new Credit Agreement to finance our acquisition of Infiltrator Water Technologies. Any
failure by us to comply with operating and financial restrictions and covenants under the Senior Secured Credit
Facility could result in the accelerated maturity of debt obligations, which could materially and adversely affect
our liquidity.
In connection with our acquisition of Infiltrator Water Technologies, we replaced our previous credit
agreement and financing under a shelf arrangement with the Senior Secured Credit Facility, which was used to
finance the acquisition of Infiltrator Water Technologies. The credit agreement under the Senior Secured Credit
Facility (the "Credit Agreement”) contains numerous restrictive covenants that limit our discretion in the operation
of our business, which could, in turn, have a materially adverse effect on our business, financial condition and
results of operations. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to
make required repayments under the Credit Agreement, or if we fail to comply with the requirements of the
covenant pertaining to limitations on our indebtedness, we could trigger an event of default under the Credit
Agreement. Any default that is not cured or waived could result in the acceleration of the obligations under the
Credit Agreement. Any such default which actually causes an acceleration of obligations could have a material
adverse effect on our liquidity and financial condition. Additionally, the covenants in the Credit Agreement may
restrict the conduct of our business, which could adversely affect our business by, among other things, limiting our
ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be
beneficial to our business. Our ability to comply with covenants contained in the Credit Agreement may be affected
by events beyond our control, including prevailing economic, financial and industry conditions.
The Credit Agreement governing our Senior Secured Credit Facility and the Indenture governing our Senior
Notes each permit us and our subsidiaries to incur substantial additional indebtedness. This could exacerbate the
risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness, including additional secured
debt, in the future. Although the terms of the Indenture governing the Senior Notes and the Credit Agreement
governing our Senior Secured Credit Facility contain restrictions on the incurrence of additional indebtedness, these
restrictions are subject to a number of qualifications and exceptions and the indebtedness incurred in compliance
with these restrictions could be substantial. As of March 31, 2020, after giving effect to the Transactions, we would
have had, on a consolidated basis, total indebtedness (excluding finance lease obligations) of $1,100 million
(excluding $8.5 million of outstanding letters of credit), excluding $241.5 million of undrawn availability under the
Revolving Credit Facility portion of the Senior Secured Credit Facility. In addition, the Indenture governing the
Senior Notes allows us to issue additional notes under certain circumstances and to incur other types of
indebtedness, which will also be guaranteed by the subsidiary guarantors. In addition, the Indenture does prevent us
from incurring certain other liabilities that do not constitute “Indebtedness” (as defined in the Indenture). If new debt
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or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries new face could
intensify.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other
actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations and to fund working capital,
planned capital expenditures and expansion efforts and any strategic alliances or acquisitions we may make in the
future depends on our financial condition and operating performance, which are subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. We may not be able
to assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our debt.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced
to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, restructure or
refinance our debt or sell assets. These alternative measures may not be successful and may not permit us to meet
our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt
service obligations, 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. We may not be able to consummate those dispositions
or to obtain the proceeds sought from them, and these proceeds may not be adequate to meet any debt service
obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity. Any
refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations, and we cannot assure you that we will be able to refinance any
of our debt on commercially reasonable terms or at all.
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
Senior Secured Credit Facility 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.
The agreements and instruments governing our indebtedness impose or will impose restrictions that may limit
our operating and financial flexibility.
The operating and financial covenants and restrictions in each of the Credit Agreement that governs the Senior
Secured Credit Facility and the Indenture that governs the Senior Notes may adversely affect our ability to finance
our future operations or capital needs or engage in other business activities that may be in our interest. The
agreements governing our indebtedness will restrict, subject to certain important exceptions and qualifications, our
and our subsidiaries’ ability to, among other things:
•
•
incur additional debt or issue certain disqualified stock and preferred stock;
create liens;
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•
•
•
•
•
•
pay dividends or distributions or redeem or repurchase equity;
prepay subordinated debt or make certain investments;
transfer and sell assets;
engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of their
assets;
enter into agreements that restrict dividends, loans and other distributions from our subsidiaries; and
enter into transactions with affiliates.
These covenants could have the effect of limiting our flexibility in planning for or reacting to changes in our
business and the markets in which we compete. In addition, the agreements governing our Senior Secured Credit
Facility will require us to comply with a financial maintenance covenant. Operating results below current levels or
other adverse factors, including a significant increase in interest rates, could result in our being unable to comply
with the financial covenant contained in the Credit Agreement. If we violate covenants under the Credit Agreement
and are unable to obtain a waiver from our lenders, our indebtedness under our Senior Secured Credit Facility would
be in default and could be accelerated by our lenders. Because of cross-default provisions in the agreements and
instruments governing our debt, a default under one agreement or instrument could result in a default under, and the
acceleration of, our other debt.
If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to
refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, on terms
that are acceptable to us, or at all. If our indebtedness is in default for any reason, our business, financial condition
and results of operations could be materially and adversely affected. In addition, complying with these covenants
may also cause us to take actions that are not favorable to holders of the Senior Notes and may make it more
difficult for us to successfully execute our business strategy and compete against companies that are not subject to
such restrictions.
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 la w
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.
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 (including the
economic impact of the COVID-19 pandemic); changes in our customers’ preferences; new regulatory
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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, 2020, we have 69.3 million outstanding shares of common stock, including 0.4 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, 2020, there were stock options outstanding to purchase a total of approximately
1.4 million shares of our common stock. In addition, approximately 1.8 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.
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, 2020, there
were approximately 21.6 million shares of convertible preferred stock held by our ESOP, which in aggregate could
be converted into approximately 16.5 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.
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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 19, 2020, our directors, officers and principal stockholders and their affiliates collectively own
approximately 50% 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 19, 2020 is approximately 62%, 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
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
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Advanced Drainage Systems, Inc.
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 64 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
52
4
4
4
—
64
Distribution
Centers
21
5
—
5
1
32
Total
73
9
4
9
1
96
(1) Manufacturing plants and distribution centers in Mexico and South America are owned or leased by our
joint ventures.
(2) Manufacturing plants and distribution centers owned or leased by our South America joint venture are not
consolidated.
(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 and lease an office space in Old Saybrook, Connecticut for
our Infiltrator Water Technologies headquarters.
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Advanced Drainage Systems, Inc.
Our network of 64 manufacturing plants consist of 45 that are owned and 19 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, 2020, our in-house fleet consist of approximately 725 tractors and approximately 1,350
trailers that are specially designed to haul our lightweight pipe and fittings products.
Item 3.
Legal Proceedings
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of
our business, including but not limited to commercial disputes, environmental matters, employee related claims,
intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures.
The Company does not believe that such litigation, claims, and administrative proceedings will have a material
adverse impact on our financial position or our results of operations. The Company records a liability when a loss is
considered probable, and the amount can be reasonably estimated.
Item 4.
Mine Safety Disclosures
Not applicable.
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Advanced Drainage Systems, Inc.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information for Common Stock
Our common stock is listed and traded on the NYSE under the symbol “WMS”.
During each quarter of fiscal 2020, the Board of Directors approved a quarterly cash dividend of $0.09 per
share to all common stockholders. 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. In addition, during each quarter of fiscal 2019 and fiscal 2018, the Board of Directors approved a quarterly
cash dividend of $0.08 per share and $0.07 per share, respectively, to all common stockholders.
During the first quarter of fiscal 2021, the Company declared a quarterly cash dividend of $0.09 per share of
common stock. The dividend is payable on June 15, 2020 to stockholders of record at the close of business on June
1, 2020.
Holders of Record
As of May 19, 2020, we had 574 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 March 31, 2015 through March 31, 2020 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 March 31, 2015 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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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
Cost of goods sold - ESOP special dividend
compensation
Gross profit
Selling expenses
General and administrative expenses
Selling, general and administrative - ESOP special
dividend compensation
Loss on disposal of assets and
costs from exit and disposal activities
Intangibles amortization
Income from (loss) operations
Interest expense
Derivative losses (gains) and other expense
(income), net
(Loss) income before income taxes
Income tax expense
Equity in net (income) loss of unconsolidated
affiliates
Net (loss) income
Less: net income attributable to noncontrolling
interest
Net (loss) income attributable to ADS
Weighted average common shares outstanding:
Basic
Diluted
Net (loss) income per share
Basic
Diluted
Cash dividends declared per share
2020
2019
2018
2017
2016
$ 1,673,805 $ 1,384,733 $ 1,330,354 $ 1,257,261 $ 1,290,678
1,188,716 1,057,766 1,027,873 961,451 1,005,326
—
168,610
—
316,479 326,967 302,481 295,810 285,352
88,478
117,068
92,504
154,270
92,764
91,475
98,392 110,950
96,335
89,692
—
—
78,142
—
—
—
—
3,647
5,338
7,880
57,010
(95,349 ) 129,413
18,618
82,711
15,003
8,068
88,254
15,262
8,509
8,548
76,328
17,467
1,554
(815 )
(179,614 ) 111,610
30,049
14,092
(3,950 )
76,942
11,411
(5,970 )
64,831
24,615
812
9,224
94,334
18,460
16,575
59,299
23,498
(1,909 )
(191,797 )
95
81,466
739
64,792
4,308
35,908
5,234
30,567
1,377
(193,174 )
3,694
77,772
2,785
62,007
2,958
32,950
5,515
25,052
63,820
63,820
57,025
57,611
55,696
56,334
54,919
55,624
53,978
55,176
$
(3.21 ) $
(3.21 )
1.36
1.23 $
1.22
0.32
1.00 $
0.99
0.28
0.51 $
0.50
0.24
0.40
0.39
0.20
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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 finance 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 (3)
Net cash (used in) provided by financing
activities (4)
Other financial data:
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA Margin (Non-GAAP)
Capital expenditures
Free Cash Flow (Non-GAAP)
2020
2019
2018
2017
2016
8,891 $
6,450 $
17,587 $
$ 174,233 $
6,555
427,998 260,228 237,210 184,812 187,378
2,369,888 1,042,159 1,043,242 1,046,285 1,037,316
1,089,368 208,602 270,900 310,849 312,214
56,809
1,585,306 541,524 609,433 695,850 723,080
247,097 102,322 109,550 112,825 111,747
537,485 398,313 324,259 237,610 202,489
58,710
59,963
61,555
44,501
$ 306,189 $ 151,678 $ 137,120 $ 104,239 $ 135,342
(49,018 )
(1,150,470 )
(61,259 )
(30,445 )
(42,544 )
1,011,572 (117,655 )
(94,953 )
(42,825 )
(82,964 )
$ 361,868 $ 231,960 $ 210,230 $ 193,371 $ 187,340
21.6 %
67,677
16.8 %
43,412
238,512 108,266
15.8 %
41,709
95,411
15.4 %
46,676
57,563
14.5 %
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.
(3) We acquired Infiltrator Water Technologies on July 31, 2019.
(4) Financing activities are described in detail in the section “Liquidity and Capital Resources”.
Non-GAAP Measures
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin – EBITDA, Adjusted EBITDA and Adjusted
EBITDA Margin, 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. We calculate Adjusted EBITDA Margin as
Adjusted EBITDA divided by net sales.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin 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.
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Advanced Drainage Systems, Inc.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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,
Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin, 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, Adjusted EBITDA and Adjusted EBITDA Margin on a supplemental basis. Our measure of
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin
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
Loss on disposal of assets or
businesses
ESOP and stock-based compensation expense
ESOP special dividend
compensation (a)
Transaction costs (b)
Inventory step up related to the Acquisition
Strategic growth and operational improvement
initiatives (c)
COVID-19 related expenses (d)
Restatement-related costs (e)
Other adjustments (f)
Adjusted EBITDA
Adjusted EBITDA Margin
2020
2019
2017
2018
$ (191,797 ) $ 81,466 $ 64,792 $ 35,908 $ 30,567
124,940 71,900 75,003 72,355 71,009
82,711 18,618 15,262 17,467 18,460
14,092 30,049 11,411 24,615 23,498
29,946 202,033 166,468 150,345 143,534
2016
5,338
8,509
32,395 21,828 18,845 17,875
3,647 15,003
246,752
22,896
7,880
—
699
—
—
1,362
—
—
372
—
812
4,382
—
—
—
6,659
5,081
8
4,913
—
—
4,227 24,026 27,970
(7,756 ) 10,642
4,325
$ 361,868 $ 231,960 $ 210,230 $ 193,371 $ 187,340
3,450
—
(1,924 )
2,227
—
—
—
—
21.6 %
16.8 %
15.8 %
15.4 %
14.5 %
(a)
In the first quarter of fiscal 2020, the Company paid a special dividend of $1.00 per share. The dividend was
used to pay back a portion of the ESOP loan resulting in $246.8 million in additional stock-based
compensation. See “Note 19. Net Income Per Share and Stockholders’ Equity” for additional information.
(b) Represents expenses recorded related to legal, accounting and other professional fees incurred in connection
with business or asset acquisitions and dispositions.
(c) 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.
Includes expenses in connection with our response to the COVID-19 pandemic including pandemic pay, see
“Note 16. Employee Benefit Plans” for additional information, and crisis management.
(d)
(e) 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.
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Advanced Drainage Systems, Inc.
(f)
Includes derivative fair value adjustments, foreign currency transaction (gains) losses, the proportionate share
of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is
accounted for under the equity method of accounting, contingent consideration remeasurement, executive
retirement expense (benefit) and legal settlements. The other adjustments in fiscal 2020 also includes expenses
related to the ADS Mexicana’s investigation as described in “Note 15. Commitments and Contingencies”.
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 our Board of Directors to assess our
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
2020
2018
$ 306,189 $ 151,678 $ 137,120 $ 104,239 $ 135,342
(67,677 ) (43,412 ) (41,709 ) (46,676 ) (44,942 )
$ 238,512 $ 108,266 $ 95,411 $ 57,563 $ 90,400
2017
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, 2020 refers to fiscal 2020, which is the period from April 1, 2019 to March 31,
2020.
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 our joint venture for purposes of GAAP, except for our South American 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. With the acquisition of Infiltrator Water
Technologies in the second quarter of fiscal 2020, we are now a leading provider of plastic leach field chambers,
septic tanks and accessories for use primarily in residential applications.
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, related water management products and, after the
Acquisition, plastic leach field chambers and septic tanks. We refer to our plastic leach field chamber and septic
tank products as Infiltrator Water Technologies. Infiltrator Water Technologies shares a similar conversion strategy
as our Pipe products, gaining market share through conversion from traditional materials. Building on our core
drainage businesses, we have aggressively pursued attractive ancillary product categories such as storm chambers,
PVC drainage structures, fittings and filters, and water quality filters and separators, including our acquisition of
Infiltrator Water Technologies. We refer to our ancillary product categories as Allied Products & Other. Given the
scope of our overall sales and distribution platform, we have been able to drive growth within our Allied Products &
Other and believe there are significant growth opportunities going forward.
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Advanced Drainage Systems, Inc.
Executive Summary
Fiscal Year 2020 Results
•
•
•
•
•
Net sales increased 20.9% to $1,673.8 million
Net loss of $191.8 million as compared to net income of $81.5 million in the prior year
o
Includes $246.8 million of additional one-time ESOP stock-based compensation expense
Adjusted EBITDA increased 56.0% to $361.9 million
Cash provided by operating activities increased 101.9% to $306.2 million
Free cash flow increased 120.3% to $238.5 million
Net sales increased $289.1 million, or 20.9%, to $1,673.8 million, as compared to $1,384.7 million in the prior year.
Domestic pipe sales increased $85.8 million, or 9.9%, to $954.6 million. Allied & Other sales increased $47.9
million, or 13.5%, to $403.3 million. These increases were driven by strong performance in both the U.S.
construction and agriculture end markets. International net sales decreased $12.0 million or 7.5% to $148.6 million
as compared to $160.6 million in the prior year, driven primarily by a decrease in Mexico sales. Infiltrator Water
Technologies contributed an additional $211.0 million to net sales prior to the effects of intercompany eliminations.
As part of the Company’s capital allocation strategy, the Company paid a dividend of $1.09 per share in the first
quarter of fiscal 2020, including a $1.00 special dividend to all shareholders of record. The ESOP used a portion of
its proceeds to payback a portion of its loan from the Company, resulting in an allocation of approximately 11.6
million shares to participants and $246.8 million of non-cash, stock-based compensation expense. The Company
recorded $168.6 million of this expense in Cost of goods sold – ESOP special dividend compensation and $78.1
million of this expense in Selling, general and administrative – ESOP special dividend compensation.
Gross profit decreased $10.5 million to $316.5 million due to the $168.6 million ESOP compensation expense
described above. Excluding the ESOP special dividend compensation, gross profit increased $158.1 million, or
48.4%, primarily due to an increase in both pipe and allied product sales as well as favorable pricing and material
cost. Infiltrator Water Technologies contributed an additional $82.9 million of gross profit prior to the effects of
intercompany eliminations. This was partially offset by unfavorable inventory absorption cost due to the retention of
key manufacturing employees during the fourth quarter of fiscal 2019 despite lower production volume.
Impact of COVID-19
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and
it continues to spread throughout the United States and globally. The COVID-19 pandemic has resulted, and is likely
to continue to result, in significant economic disruptions and may have an adverse effect on our business. Significant
uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. While our
production facilities are operating as essential businesses, the Company may experience future impacts such as
reduced operations or temporarily closing facilities.
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Advanced Drainage Systems, Inc.
In efforts to maintain a safe work environment and help contain the spread of COVID-19, we have transitioned to a
work-from-home policy for those that are able and suspended all nonessential employee travel and events. We have
also proactively implemented further safety and risk mitigation practices, including:
•
•
•
•
Educating associates on COVID-19 related symptoms;
Regularly assessing deliveries and orders in virus “hot zones” and higher-risk geographic regions;
Employing strict social distancing practices across all departments and divisions; and
Instituting additional health screenings such as temperature checks at facilities, which currently all
remain open.
Importantly, we are following all guidelines and directives from governmental and regulatory agencies across
manufacturing facilities, distribution centers, and delivery fleets in order to continue operating safely and
responsibly, while meeting the needs of customers.
Factors deriving from the COVID-19 response that have or may negatively impact sales and operating profit in the
future include, but are not limited to: limitations on our ability to procure raw materials, declines in product demand,
limitations on our ability to meet delivery requirements and commitments, limitations on the ability of our
employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring
employees to remain at home and limitations on the ability of our customers to pay us on a timely basis.
While we may experience unfavorable impacts to our business, given the dynamic nature of these circumstances, the
full extent of the COVID-19 pandemic on our ongoing business, results of operations and overall financial
performance is difficult to forecast at this time. In fiscal 2020, we communicated to all hourly employees that each
of them would be entitled to the equivalent of two weeks, or 80 hours, of pandemic pay regardless of whether they
experienced any interruption of employment. We recognized pandemic pay costs and accrued pandemic pay liability
of $4.8 million in the fiscal year ended March 31, 2020. The cash payment of pandemic pay did not occur in fiscal
2020 and will occur at a future date. Also, we have deferred payment of the Company’s share of Social Security
payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
which allows for the deferral of these payments through the end of 2020 and requires repayment of the deferred
amounts in 2021 and 2022.
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;
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Advanced Drainage Systems, Inc.
•
•
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 products. 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, plastic leach field chambers, septic tanks 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 & Other - Our Allied Products & Other 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 & Other effectively. Our
comprehensive offering of Allied Products & Other also helps us increase pipe sales in certain markets. Our Allied
Products & Other are less sensitive to increases in resin prices since resin prices represent a smaller percentage of
the cost for Allied Products & Other.
Our leading position in the pipe market has allowed us to increase organic growth of our Allied Products &
Other. 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 1,100 million pounds of virgin and recycled resin annually from over
470 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.
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Advanced Drainage Systems, Inc.
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 81% of our recycled HDPE resin was internally processed
(enhanced) in fiscal 2020);
managing a resin price risk program that may entail 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
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
Following the acquisition of Infiltrator Water Technologies, we revised our reportable segments to reflect how
the Chief Operating Decision Maker (“CODM”) currently reviews financial information and makes operational
decisions. After the Acquisition, we operate our business in three distinct reportable segments: “Pipe”,
“International” and “Infiltrator Water Technologies.” “Allied Products & Other” represents our Allied Products and
all other business segments. “Pipe” and “Allied Products & Other” were previously disclosed as our Domestic
segment.
We generate a greater proportion of our net sales and gross profit in our Pipe segment, which consists of Pipe
product sales in all regions of the United States. We expect the percentage of total net sales and gross profit derived
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Advanced Drainage Systems, Inc.
from our other segments to continue to increase in future periods as we continue to expand non-Pipe product and our
international presence. 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.
Pipe – Our Pipe segment manufactures and markets high performance thermoplastic corrugated pipe throughout the
United States. We maintain and serve these markets through product distribution relationships with many of the
largest national and independent waterworks distributors, buying groups and co-ops, major national retailers as well
as an extensive network of hundreds of small to medium-sized distributors across the United States. For fiscal 2020,
2019 and 2018, we generated net sales attributable to our Pipe segment of $954.6 million, $868.8 million, and
$844.9 million, respectively.
Infiltrator Water Technologies –Infiltrator Water Technologies is a leading national provider of plastic leach field
chambers and systems, septic tanks and accessories, primarily for use in residential applications. Infiltrator Water
Technologies products are used in on-site septic wastewater treatment systems in the United States and Canada. We
acquired Infiltrator Water Technologies on July 31, 2019. We generated net sales to external customers attributable
to our Infiltrator Water Technologies segment of $211.0 million subsequent to the acquisition.
International - Our International segment manufactures and markets products in regions outside of the United
States, with a 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 2020, 2019, and
2018, we generated net sales attributable to our International segment of $148.6 million, $160.6 million, and
$155.9 million, respectively. Our investment in the South American Joint Venture is accounted for under the equity
method and is not consolidated for financial reporting purposes. The unconsolidated sales of the South American
Joint Venture were $52.5 million, $47.6 million, and $44.6 million, in fiscal 2020, 2019, and 2018, respectively.
Allied Products & Other – Our other operating segments manufacture a range of Allied Products & Other that are
complementary to our Pipe products. Our Allied Products & Other offer adjacent technologies to our core Pipe
offering, presenting a complete drainage solution for our clients and customers. For fiscal 2020, 2019 and 2018, our
other reporting units generated net sales of $403.3 million, $355.3 million and $329.6 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 in fiscal 2018.
Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin - EBITDA, Adjusted EBITDA and Adjusted
EBITDA Margin, 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. We calculate Adjusted EBITDA Margin as
Adjusted EBITDA divided by net sales.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin 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, Adjusted EBITDA and Adjusted EBITDA Margin 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,
Adjusted EBITDA and Adjusted EBITDA Margin contain certain other limitations, including the failure to reflect
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Advanced Drainage Systems, Inc.
our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being
depreciated and amortized. In evaluating EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, 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, Adjusted EBITDA and Adjusted EBITDA Margin on a supplemental basis. Our measure of
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not necessarily comparable to other similarly titled
captions of other companies due to different methods of calculation.
For a reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin to net income (loss), the
most comparable GAAP measure, see “Item 6. Selected Financial and Operating Data.”
The following table presents our Adjusted EBITDA for the Company prior to the Acquisition (“Legacy
ADS”), which consists of the combination of the Segment Adjusted Gross Profit for Pipe, Allied Products & Other,
and International plus the portion of corporate and selling expenses which impacts Adjusted EBITDA and Infiltrator
Water Technologies prior to the Acquisition (“Legacy Infiltrator Water Technologies”), which consists of the
combination of the Segment Adjusted Gross Profit for Infiltrator Water Technologies plus the portion of corporate
and selling expenses which impacts Adjusted EBITDA.
(Amounts in thousands)
Legacy ADS Adjusted EBITDA
Pipe Adjusted Gross Profit
International Adjusted Gross Profit
Allied Products & Other Adjusted Gross Profit
Unallocated corporate and selling expenses
Legacy ADS Adjusted EBITDA
Legacy Infiltrator Water Technologies Adjusted
EBITDA
2020
2019
2018
$
$
239,531 $ 191,002 $
37,191
36,999
168,729
201,206
(190,353 )
(164,962 )
287,383 $ 231,960 $
186,330
31,725
155,166
(162,991 )
210,230
Infiltrator Water Technologies Adjusted Gross Profit
Unallocated corporate and selling expenses
98,245
(21,865 )
—
—
Legacy Infiltrator Water Technologies Adjusted
EBITDA
$
76,380 $
— $
—
—
—
Intersegment eliminations
Consolidated Adjusted EBITDA
(1,895 )
—
361,868 $ 231,960 $
—
210,230
$
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 our Board of Directors to assess our
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.
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,
gross profit by segment, gross profit by segment as a percentage of total gross profit, Segment Adjusted Gross Profit
and Segment Adjusted Gross Profit as a percentage of total Adjusted Gross Profit by segment for the periods
presented.
(Amounts in thousands)
Net sales from external
customers by segment
Pipe
Infiltrator Water Technologies
International
International - Pipe
International - Allied Products & Other
Total International
Allied Products & Other
Total net sales
Gross profit by segment
Pipe
Infiltrator Water Technologies
International
Allied Products & Other
Intersegment Elimination
Total gross profit
Segment Adjusted Gross Profit
Pipe
Infiltrator Water Technologies
International
Allied Products & Other
Intersegment Elimination
Total Adjusted Gross Profit
2020
2019
2018
$ 952,603 56.9 % $ 868,805 62.7 % $ 844,875 63.5 %
169,348 10.1 %
— —
— —
9.0 %
8.9 % 119,207
6.5 % 122,836
108,624
2.4 %
2.8 %
36,715
2.7 %
37,766
39,957
8.9 % 160,602 11.6 % 155,922 11.7 %
148,581
403,273 24.1 % 355,326 25.7 % 329,557 24.8 %
$ 1,673,805 100.0 % $ 1,384,733 100.0 % $ 1,330,354 100.0 %
$ 179,722 56.8 % $ 131,445 40.2 % $ 127,083 42.0 %
— —
82,922 26.2 %
9.7 %
30,666
8.3 %
9.6 %
7.9 % 164,290 50.2 % 150,346 49.7 %
25,064
(0.6 )%
(1,895 )
— —
— —
— —
31,232
25,052
$ 316,479 100.0 % $ 326,967 100.0 % $ 302,481 100.0 %
$ 239,531 41.7 % $ 191,002 48.1 % $ 186,330 49.9 %
— —
98,245 17.1 %
6.4 %
36,999
— —
9.4 %
8.5 %
201,206 35.0 % 168,729 42.5 % 155,166 41.6 %
37,191
31,725
(1,895 )
(0.3 )%
— —
— —
$ 574,086 100.0 % $ 396,922 100.0 % $ 373,221 100.0 %
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Advanced Drainage Systems, Inc.
Fiscal Year Ended March 31, 2020 Compared with Fiscal Year Ended March 31, 2019
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, 2020 and 2019. We believe this
presentation is useful to investors in comparing historical results.
Consolidated Statements of Operations
data:
Net sales
Cost of goods sold
Cost of goods sold - ESOP special dividend
compensation
Gross profit
Selling expenses
General and administrative expenses
Selling, general and administrative - ESOP
special dividend compensation
Loss on disposal of assets and costs from exit
and disposal activities
Intangible amortization
(Loss) income from operations
Interest expense
Derivative losses (gains) and other expense
(income), net
(Loss) income before income taxes
Income tax expense
Equity in net (income) loss of unconsolidated
affiliates
Net (loss) income
Less: net income attributable to the non-
controlling interest
2020
2019
$ 1,673,805 100.0 % $ 1,384,733 100.0 %
1,188,716 71.0
1,057,766 76.4
168,610 10.1
316,479 18.9
7.0
117,068
9.2
154,270
— —
326,967 23.6
7.0
6.5
96,335
89,692
78,142
4.7
— —
5,338
57,010
(95,349 )
82,711
0.3
3.4
(5.7 )
4.9
3,647
7,880
129,413
18,618
0.3
0.6
9.3
1.3
1,554
0.1
(179,614 ) (10.7 )
0.8
14,092
(815 )
111,610
30,049
(0.1 )
8.1
2.2
(1,909 )
(0.1 )
(191,797 ) (11.5 )
95 —
5.9
81,466
Net (loss) income attributable to ADS
$ (193,174 ) (11.5 )% $
1,377
0.1
3,694
77,772
0.3
5.6 %
Net sales – Net sales increased by $289.1 million, of which $169.3 million represented sales from Infiltrator Water
Technologies. Net sales excluding Infiltrator Water Technologies are referred to as organic sales, a non-GAAP
measure.
2020
2019
(Amounts in thousands)
Pipe
Infiltrator Water Technologies
International
Intersegment
Net Sales
Net Sales
from External
Customers
Net Sales
$ 954,633 $
211,005 (41,657 ) 169,348
(2,030 ) $ 952,603 $ 868,805 $
—
Net Sales
Intersegment
Net Sales
Net Sales
from External
Customers
— $ 868,805
—
—
International - Pipe
International - Allied Products & Other
Total International
Allied Products & Other
Intersegment Eliminations
Total Consolidated
108,624
39,957
148,581
403,273
(43,687 ) 43,687
$ 1,673,805 $
39,957
— 108,624 122,836
—
37,766
— 148,581 160,602
— 403,273 355,326
—
—
— $ 1,673,805 $ 1,384,733 $
— 122,836
—
37,766
— 160,602
— 355,326
—
—
— $ 1,384,733
• Pipe net sales to all customers for fiscal 2020 increased by $85.8 million, or 9.9% compared to fiscal
2019. The increase was due to an increase in pipe volume resulting in a $91.1 million offset by a $7.7
million decrease as a result of price and product mix.
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Advanced Drainage Systems, Inc.
•
•
Infiltrator Water Technologies net sales to all customers increased by $211.0 million. The Company
acquired Infiltrator Water Technologies in fiscal 2020 and therefore did not report any Infiltrator
Water Technologies sales for fiscal 2019.
International net sales for fiscal 2020 decreased by $12.0 million, or 7.5%, compared to fiscal 2019.
International Pipe sales decreased by $14.2 million, attributable to volume decreases, offset by an
increase of $2.2 million in International Allied Product sales.
• Allied Products & Other net sales for fiscal 2020 increased $47.9 million, or 13.5%, compared to
fiscal 2019. The increase was due to the combination of both volume increases along with favorable
price and product mix.
Cost of goods sold and Gross profit - Cost of goods sold increased by $299.6 million, or 28.3%, and gross profit
decreased by $10.5 million, or 3.2%, in fiscal 2020 compared to fiscal 2019. The decrease in gross profit was
primarily due to the ESOP special dividend compensation expense of $168.6 million allocated to Cost of goods sold.
Gross profit excluding Infiltrator Water Technologies and ESOP special dividend compensation, referred to as
organic gross profit, a non-GAAP measure, increased by 23.6%.
Pipe
International
Allied Products & Other
Organic gross profit
Infiltrator Water Technologies
Cost of goods sold - ESOP special dividend
compensation
Intersegment eliminations
Total gross profit
Fiscal Year Ended March 31,
2020
2019
$ Variance
% Variance
(in thousands)
$ 179,722 $ 131,445
31,232
164,290
326,967
—
30,666
193,674
404,062
82,922
$
48,277
(566 )
29,384
77,095
82,922
(168,610 )
(1,895 )
—
—
$ 316,479 $ 326,967
(168,610 )
(1,895 )
(10,488 )
$
36.7 %
(1.8 )%
17.9 %
23.6 %
—
—
—
(3.2 )%
• Pipe gross profit increased primarily due to the increase in volume sold, offset by the decrease in the
price and product mix of net sales discussed above. The increase in Pipe gross profit was also
attributable to lower material and transportation costs, which was partially offset by higher labor and
overhead costs
• The Company acquired Infiltrator Water Technologies in fiscal 2020 and therefore did not report and
Infiltrator Water Technologies gross profit for fiscal 2019.
•
International gross profit decreased primarily due to the decreased net sales discussed above partially
offset by decreased material and transportation costs.
• Allied Products & Other gross profit increased primarily due to the increase in net sales discussed
above.
Selling expenses - Selling expenses for fiscal 2020 as a percentage of net sales were consistent with fiscal 2019.
General and administrative expenses - General and administrative expenses for fiscal 2020 increased $64.6 million
from the prior year. The increase was primarily due to an increase of $22.2 million in transaction costs primarily
related to the Acquisition, $13.4 million in general and administrative expenses at Infiltrator Water Technologies,
$16.0 million increase in salary, bonus, and stock-based compensation expenses to support growth and $3.2 million
of strategic growth and operational improvement initiative expenses.
Selling, general and administrative – ESOP special dividend compensation – In fiscal 2020, ESOP special dividend
compensation expense of $78.1 million was allocated to selling, general and administrative expenses.
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Advanced Drainage Systems, Inc.
Loss on disposal of assets and costs from exit and disposal activities – In the fiscal year ended March 31, 2020, we
recorded $5.3 million of expense related to loss on disposal of assets and costs from exit and disposal activities
compared to $3.6 million in the year ended March 31, 2019. The increase is primarily due to $2.6 million of
Acquisition related severance and other costs. See “Note 2. Loss on Disposal of Assets and Costs from Exit and
Disposal Activities” for additional discussion.
Intangible amortization - Intangible amortization increased as a percentage of net sales primarily due to the addition
of intangible assets related to the Acquisition.
Interest expense - Interest expense increased $64.1 million in fiscal 2020 as compared to fiscal 2019. The increase
was primarily due to $33.2 million of the write-off of deferred financing costs and $4.2 million prepayment penalty
from the extinguishment of debt instruments. The remainder of the increase was due to increased debt levels offset
by changes in interest rates. See “Note 13. Debt” for additional discussion.
Derivative losses (gains) and other expense (income), net – Derivative losses (gains) and other expenses (income),
net, decreased by $2.4 million for fiscal 2020 compared to fiscal 2019. The decrease is primarily due to changes in
realized and unrealized diesel hedges.
Income tax expense – For the fiscal years ended March 31, 2020 and 2019, we had effective tax rates of (7.9%) and
26.9%, respectively. The decrease in the effective tax rate was primarily due to stock appreciation from the
additional ESOP shares allocated and the Acquisition. See “Note 18. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates
represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have
significant influence, but not control, over operations. The equity in net (income) loss of unconsolidated affiliates
increased to $1.9 million income for fiscal 2020 from a $0.1 million loss for fiscal 2019. Prior to the acquisition of
the noncontrolling interest of Baysaver in fiscal 2019, our proportionate share of income or loss in BaySaver was
included in equity in net (income) loss of unconsolidated affiliates.
Net income attributable to noncontrolling interest - Income attributable to noncontrolling interest decreased by $2.3
million from net income of $3.7 million in fiscal 2019 to $1.4 million in fiscal 2020. The change is primarily
attributable to fluctuations in the profitability of ADS Mexicana.
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Advanced Drainage Systems, Inc.
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
2019
2018
$ 1,384,733
1,057,766
326,967
96,335
89,692
100.0 % $ 1,330,354
76.4 1,027,873
23.6 302,481
92,764
98,392
7.0
6.5
100.0 %
77.3
22.7
7.0
7.4
3,647
7,880
129,413
18,618
(815 )
111,610
30,049
95
81,466
0.3
0.6
9.3
1.3
(0.1 )
8.1
2.2
—
5.9
15,003
8,068
88,254
15,262
(3,950 )
76,942
11,411
739
64,792
1.1
0.6
6.6
1.1
(0.3 )
5.8
0.9
0.1
4.9
3,694
77,772
$
0.3
5.6 % $
2,785
62,007
0.2
4.7 %
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.
2019
2018
(Amounts in thousands)
Pipe
Infiltrator Water Technologies
International
International - Pipe
International - Allied Products
& Other
Total International
Allied Products & Other
Intersegment Eliminations
Total Consolidated
Net Sales
$ 868,805 $
—
122,836
37,766
160,602
355,326
—
$ 1,384,733 $
Intersegment
Net Sales
Net Sales
from External
Customers
Net Sales
Intersegment
Net Sales
— $ 868,805 $ 844,875 $
—
—
—
Net Sales
from External
Customers
— $ 844,875
—
—
— 122,836 119,207
— 119,207
37,766
36,715
—
— 160,602 155,922
— 355,326 329,557
—
—
—
— $ 1,384,733 $ 1,330,354 $
36,715
—
— 155,922
— 329,557
—
—
— $ 1,330,354
• Pipe net sales to all customers for fiscal 2019 increased by $23.9 million, or 2.8% compared to fiscal
2018. The increase was due to price increases and changes in product mix of $49.3 million partially
offset by a pipe volume decrease of $15.9 million.
•
International net sales for fiscal 2019 increased by $4.7 million, or 3.0%, compared to fiscal 2018.
The decrease was primarily due to an increase in international pipe sales of $3.6 million, or 3.0%,
which was primarily attributable to price increases and changes in product mix, and a $1.1 million
increase in international Allied Products & Other net sales.
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Advanced Drainage Systems, Inc.
• Allied Products & Other net sales for fiscal 2019 increased $25.8 million, or 7.8%, compared to
fiscal 2018.
Cost of goods sold and Gross profit - Cost of goods sold increased $29.9 million, or 2.9%, to $1,057.8 million
during fiscal 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.
Pipe
International
Allied Products & Other
Organic gross profit
Infiltrator Water Technologies
Intersegment eliminations
Total gross profit
Fiscal Year Ended March
31,
2019
2018
$ Variance % Variance
31,232
(in thousands)
$ 131,445 $ 127,083
25,052
164,290 150,346
326,967 302,481
—
—
—
—
$ 326,967 $ 302,481
$
4,362
6,180
13,944
24,486
—
—
$ 24,486
3.4 %
24.7 %
9.3 %
8.1 %
—
—
8.1 %
• Pipe gross profit increased primarily due to the price increases and changes in product mix, offset by
the decrease in pipe volumes discussed above. The increase in Pipe net sales were offset by an
increase in material and transportation costs and increased labor and overhead.
•
International gross profit increased $6.2 million, or 24.7%, for fiscal 2019 as compared to 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.
• Allied Products & Other gross profit increased primarily due to the increase in net sales discussed
above and lower labor and overhead 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
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 finance 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
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Advanced Drainage Systems, Inc.
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 reform items and
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 2018.
Liquidity and Capital Resources
Historically we have funded our operations through internally generated cash flow supplemented by debt financings,
equity issuance and finance and operating leases. These sources have been sufficient historically to fund our primary
liquidity requirements, including working capital, capital expenditures, debt service and dividend payments for our
convertible preferred stock and common stock. 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.
The following table presents key liquidity metrics utilized by management. The table includes the Non-GAAP
measure, Free cash flow, which is further discussed and defined above.
(Amounts in thousands)
Net cash provided by operating activities
Capital expenditures
Free cash flow
Total debt (debt and finance lease obligations)
Cash
Net debt (total debt less cash)
Leverage ratio
2019
151,678
(43,412 )
108,266
$
2020
306,189 $
(67,677 )
238,512
1,162,206
174,233
987,973
2.7
The following table summarizes our available liquidity as of March 31, 2020:
(Amounts in thousands)
Revolver capacity
Less: outstanding borrowings
Less: letters of credit
Revolver available liquidity
March 31, 2020
$
350,000
100,000
8,505
241,495
$
In addition to the available liquidity above, we have the ability to borrow up to $1.3 billion under our Term Loan
Facility, subject to leverage ratio restrictions.
As of March 31, 2020, we had $10.8 million in cash that was held by our foreign subsidiaries. We continue to
evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely
reinvested.
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Debt and Equity Financing Transactions
As further described below, during the fiscal year ended March 31, 2020, the Company and certain of its
subsidiaries entered into a series of transactions that resulted in the refinancing of the existing external borrowings
of the Company with the new financings, as well as the completion of an underwritten public offering of common
stock. These financing activities were in connection with the completion of the Acquisition of Infiltrator Water
Technologies.
On July 29, 2019, the Company repaid in full all its outstanding indebtedness and other obligations under the Shelf
Note Agreement totaling $104.4 million by using borrowings from the Company’s existing credit facility under the
PNC Credit Agreement. Concurrently with the repayment, all security interests and liens securing the Shelf Note
Agreement were terminated and released, and the Shelf Note Agreement was terminated.
On July 31, 2019, the Company entered into the Base Credit Agreement with Barclays Bank PLC, as administrative
agent and the several lenders from time to time party thereto. The Company borrowed under the Credit Agreement
and the funds were used to (i) finance the Merger Consideration for the acquisition of Infiltrator Water
Technologies, (ii) repay the total outstanding amount under the existing PNC Credit Agreement, (iii) repay
outstanding amounts of existing indebtedness incurred by Infiltrator Water Technologies under its outstanding credit
facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the
Acquisition and the Credit Agreement.
Thereafter, on the Acquisition Closing Date, using borrowings of the Bridge Loan Facility and Bridge Revolving
Facility under the Bridge Credit Facility, the Company repaid in full all its indebtedness and other obligations under
the PNC Credit Agreement totaling $239.2 million. Concurrently with the repayment, all security interests and liens
securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was terminated.
On September 10, 2019, the Company closed the underwritten public offering of common stock (the “Common
Stock Offering”) and received net proceeds of approximately $293.6 million after deducting underwriting discounts
and offering expenses, the proceeds of which were used in part to repay outstanding borrowings under the Bridge
Credit Facility. On September 23, 2019, the Company issued $350.0 million aggregate principal amount of its
Senior Notes, the proceeds of which were used in part to repay outstanding borrowings under the Bridge Credit
Facility.
On September 24, 2019, the Company entered into the Senior Secured Credit Facility that amended certain pricing
and related terms under the Base Credit Agreement. In connection with the Senior Secured Credit Facility, the
Company also prepaid outstanding borrowings under the Term Loan Facility of the Senior Secured Credit Facility in
an aggregate principal amount of $600 million.
Working Capital and Cash Flows
During fiscal 2020, our net increase in cash amounted to $165.3 million compared to a net decrease of $8.7
million during fiscal 2019. Our sources of funds in fiscal 2020 were primarily driven by borrowings under the Term
Loan Facility, Senior Notes and Revolving Credit Facility, proceeds from our Common Stock Offering and an
increase in cash provided by operating activities. Our use of cash during fiscal 2020 was primarily related to the
Acquisition and repayment of our previous debt arrangements. Our source of funds in fiscal 2019 was primarily
driven by an increase in cash provided by operating activities due to increased income from continuing operations
and increased deferred tax liabilities. Additionally, repayments of our long-term debt and revolving credit facility,
cash dividend payments and payments of finance lease obligations impacted our cash position.
As of March 31, 2020, we had $415.7 million in liquidity, including $174.2 million of cash, $241.5 million in
borrowings available under our Revolving Credit Facility, excluding $8.5 million of outstanding letters of credit. We
believe that our cash on hand, together with the availability of borrowings under our Revolving Credit Facility 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.
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Advanced Drainage Systems, Inc.
As of March 31, 2020, we had consolidated indebtedness (excluding finance lease obligations) of
approximately $1,099.7 million, an increase of $862.9 million compared to March 31, 2019.
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 $428.0 million as of March 31, 2020, from $260.2 million as of March 31, 2019,
primarily due to an increase in cash of $165.3 million. The Company holds a favorable cash position and drew down
$100 million prior to March 31, 2020 on its revolving credit facility out of an abundance of caution to ensure
liquidity during the COVID-19 pandemic.
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.
Operating Cash Flows - During fiscal 2020, cash provided by operating activities was $306.2 million as compared
with cash provided by operating activities of $151.7 million for fiscal 2019. Cash flow from operating activities
during fiscal 2020 was primarily impacted by changes in working capital, including improved collections from
accounts receivable, faster inventory turns and extension of terms of our accounts payable.
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.
Investing Cash Flows - During fiscal 2020, cash used for investing activities was $1,150.5 million. The increase in
cash used for investing activities was primarily due to the Acquisition of Infiltrator Water Technologies, net of cash
acquired. Capital expenditures was $67.7 million compared to $43.4 million in fiscal 2019.
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 also received $13.6 million of proceeds from the sale of corporate-owned life insurance.
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Advanced Drainage Systems, Inc.
Financing Cash Flows – During fiscal 2020, cash provided by financing activities was $1,011.6 million, due to the
new Term Loan Facility, Senior Notes and Common Stock Offering. These cash inflows were offset by the
repayment of the PNC Credit Agreement and Prudential Senior Notes, the special and quarterly dividend payments
of $92.1 million and payments on our finance lease obligations of $27.1 million. The table below summarizes the
cash flows from the Acquisition, and the related debt and equity transactions.
(Amounts in thousands)
Bridge Loan Facility
Bridge Revolving Credit Facility
PNC Credit Agreement draw
Prudential Senior Notes payoff
PNC Credit Agreement payoff
Acquisition of Infiltrator Water Technologies,
fair value of consideration transferred
Common stock offering, net of offering costs
Bridge Loan Facility - payment
Proceeds from Senior Notes Issuance
Bridge Loan Facility - payment
Term Loan Facility
Bridge Loan Facility - payment
Debt issuance costs
Cash to Balance Sheet
Total
$
Sources
1,300,000 $
145,000
104,429
—
—
—
293,648
—
350,000
—
700,000
—
—
—
$
2,893,077 $
Uses
—
—
—
(104,429 )
(239,240 )
(1,146,526 )
—
(300,000 )
—
(300,000 )
—
(700,000 )
(34,606 )
(68,276 )
(2,893,077 )
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
finance lease obligations of $24.3 million, dividend payments of $26.1 million and the acquisition of all the
noncontrolling interest in BaySaver for $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 finance lease obligations of $24.2 million, dividend payments of $18.5 million and
repurchases of common stock of $7.9 million.
Capital Expenditures
Capital expenditures totaled $67.7 million for fiscal 2020. Infiltrator Water Technologies capital expenditures
for fiscal 2020 was $24.9 million of our total capital expenditures. Our capital expenditures were used primarily to
support facility improvements, equipment replacements, our recycled resin and operating efficiency initiatives and
technology.
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.
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We currently anticipate that we will make capital expenditures of approximately $60 to 65 million in fiscal
2021. Such capital expenditures are expected to be financed using funds generated by operations.
Employee Stock Ownership Plan (“ESOP”)
The Company established the Advanced Drainage Systems, Inc. ESOP (the “ESOP” or the “Plan”) effective
April 1, 1993 to enable eligible employees to acquire stock ownership in ADS in the form of redeemable convertible
preferred shares. The Plan was funded by an existing tax-qualified profit-sharing retirement plan, as well as a 30-
year term loan from ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than
March 2023, the 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 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 30%
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 (loss) income attributable to ADS
ESOP special dividend compensation
ESOP deferred stock-based compensation
2020
2019
2018
$ (193,174 ) $
246,752
20,126
77,772 $
—
15,296
62,007
—
11,724
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
2020
2019
2018
63.8
17.1
57.0
17.6
55.7
18.3
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The repayment of a significant portion of the ESOP loan had an impact on the Company’s net income per
share in fiscal 2020.
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 finance lease obligations.
Financing Transactions
PNC Term Loans - On June 22, 2017, we entered into the PNC Credit Agreement, which amends and restates the
original agreement dated as of June 12, 2013, which provided us with a $550 million revolving credit facility, which
is more fully described in our Fiscal 2019 Form 10-K. On the Closing Date, using borrowings of the new Term Loan
Facility the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling
$239.2 million under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens
held by the Collateral Agent (as defined in the PNC Credit Agreement) securing the PNC Credit Agreement were
terminated and released and the PNC Credit Agreement was terminated.
ADS Mexicana Revolving Credit Facility - The Company and ADS Mexicana entered into an Intercompany
Revolving Credit Promissory Note (the “Intercompany Note”) with a capacity of $12.0 million on June 22, 2018.
The Intercompany Note matures on June 22, 2022. The Intercompany Note indemnifies the ADS Mexicana joint
venture partner 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,
2020, there were no borrowings under the Intercompany Note.
Prudential Senior Notes - On June 22, 2017, we entered into the Shelf Note Agreement to provide for the issuance
of secured senior notes to the Shelf Note Lenders from time to time in the aggregate principal amount of up to $175
million, which is more fully described in our Fiscal 2019 Form 10-K. On July 29, 2019, the Company repaid in full
all of its and its subsidiaries indebtedness and other obligations totaling $104.4 million under the Shelf Note
Agreement using borrowings from the PNC Credit Agreement as in effect as of July 29, 2019. Concurrently with the
repayment, the Prudential Shelf Noteholders authorized and directed PNC Bank, National Association, in its
capacity as Collateral Agent (as defined in the Shelf Note Agreement) to release the security interests and liens
securing the Shelf Note Agreement and the Shelf Note Agreement was terminated.
Bridge Credit Facility – On July 31, 2019, we entered into the Base Credit Agreement with Barclays Bank PLC, as
administrative agent and the several lenders from time to time party thereto. The Base Credit Agreement provides
for up to $1.3 billion as a Term Loan Facility, up to $350 million as a Revolving Facility, up to $50 million as an
L/C Facility and up to $50 million, as a sublimit of the Revolving Facility.
On July 31, 2019, the Company borrowed under the Base Credit Agreement which was used to (i) finance the
Merger Consideration paid in connection with the closing of the acquisition of Infiltrator Water Technologies by us
which occurred on July 31, 2019 (the “Merger”), (ii) and repay the total outstanding amount as of the Closing Date
under the PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred by Infiltrator
Water Technologies under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain
transaction fees and expenses associated with the Acquisition and the Base Credit Agreement.
New Senior Secured Credit Facility - On September 24, 2019, the joint lead arrangers informed the Company that
the parties had successfully completed a syndication of the remaining balance of the Bridge Credit Facility. The
Senior Secured Credit Facility provided for a Term Loan Facility with an initial aggregate amount of $700 million,
up to $350 million as a Revolving Facility, and up to $50 million as a letter of credit facility, as a sublimit of the
Revolving Facility.
The Term Loan Facility must has an amortization feature equal to 1% of the original $700 million balance paid in
equal quarterly installments commencing on January 1, 2020 and continuing on the first day of each consecutive
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April, July, October and January thereafter. To the extent not previously paid, all then-outstanding amounts under
the Term Loan Facility are due and payable on the maturity date of the Term Loan Facility, which is September 26,
2026. Borrowings under the Revolving Facility are available beginning on the Closing Date and, to the extent not
previously paid, all then-outstanding amounts under the Revolving Facility are due and payable on the maturity date
of the Revolving Facility, which is September 29, 2024.
The Senior Secured Credit Facility includes customary representations, warranties, covenants and events of default.
At the option of the Company, borrowings under the Term Loan Facility and under the Revolving Facility (subject
to certain limitations) bear interest at either a base rate (as determined pursuant to the Senior Secured Credit
Facility) or at a Eurocurrency Rate, based on LIBOR (as defined in the Senior Secured Credit Facility), plus the
applicable margin as set forth therein from time to time. In the case of the Revolving Facility, the applicable margin
is based on the Company’s consolidated senior secured net leverage ratio (as defined in the Senior Secured Credit
Facility). All borrowings under the Term Loan Facility used to finance the Merger Consideration as described above
initially bear interest at a Eurocurrency Rate (as defined in the Senior Secured Credit Facility).
The Company’s obligations under the Credit Agreement have been secured by granting a first priority lien on
substantially all of the Company’s assets (subject to certain exceptions and limitations), and each of StormTech,
LLC, Advanced Drainage of Ohio, Inc. and Infiltrator Water Technologies, LLC (collectively the “Guarantors”) has
agreed to guarantee the obligations of the Company under the Senior Secured Credit Facility and to secure the
obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s assets (subject to
certain exceptions and limitations).
The Senior Secured Credit Facility requires, if the aggregate amount of outstanding exposure under the Revolving
Facility exceeds $122.5 million at the end of any fiscal quarter, the Company to maintain a consolidated senior
secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2020) not to exceed 4.25 to 1.00
for any four consecutive fiscal quarter periods.
The Senior Secured Credit Facility also includes other covenants, including negative covenants that, subject to
certain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Senior Secured Credit
Facility) ability to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of
their property; (iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose
of all or substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make
certain investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new
lines of business; (x) modify certain material contractual obligations, organizational documents, accounting policies
or fiscal year; or (xi) create or permit restrictions on the ability of any subsidiary of any Loan Party (as defined in
the Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.
The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory
prepayments (subject to certain exceptions and limitations): (i) annual prepayments (beginning with the fiscal year
ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii)
100% of the net cash proceeds from any non-ordinary course sale of assets and certain casualty or condemnation
events; and (iii) 100% of the net cash proceeds of indebtedness not permitted to be incurred under the Senior
Secured Credit Facility.
Issuance of Senior Notes due 2027 - On September 23, 2019, the Company issued $350.0 million aggregate
principal amount of its Senior Notes, pursuant to the Indenture among the Company, the Guarantors and the Trustee.
The Senior Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned
domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The Senior Notes
were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule
144A under the Securities Act or to persons outside the United States under Regulation S of the Securities Act.
Interest on the Senior Notes will be payable semi-annually in cash in arrears on March 31 and September 30 of each
year, commencing on March 31, 2020, at a rate of 5.000% per annum. The Senior Notes will mature on September
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30, 2027. The Company used the majority of the net proceeds from the offering of the Senior Notes for the
repayment of $300.0 million of its outstanding borrowings under the Company’s Bridge Credit Facility.
The Company may redeem the Senior Notes, in whole or in part, at any time on or after September 30, 2022 at
established redemption prices. At any time prior to September 30, 2022, the Company may also redeem up to 40%
of the Senior Notes with net cash proceeds of certain equity offerings at a redemption price equal to 105.000% of the
principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the
redemption date. In addition, at any time prior to September 30, 2022, the Company may redeem the Senior Notes,
in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed,
plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole”
premium.
The Indenture contains customary events of default, including, among other things, payment default, failure to
comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related
to bankruptcy events. The Indenture also contains customary negative covenants.
Covenant Compliance
The Senior Secured Credit Facility requires, if the aggregate amount of outstanding exposure under the
Revolving Facility exceeds $122.5 million at the end of any fiscal quarter, the Company to maintain a consolidated
senior secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2020) not to exceed 4.25 to
1.00 for any four consecutive fiscal quarter periods.
The Senior Secured Credit Facility also includes other covenants, including negative covenants that, subject to
certain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Credit Agreement) ability
to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of their property;
(iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose of all or
substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make certain
investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new lines
of business; (x) modify certain material contractual obligations, organizational documents, accounting policies or
fiscal year; or (xi) create or permit restrictions on the ability of any subsidiary of any Loan Party (as defined in the
Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.
The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory
prepayments (subject to certain exceptions and limitations): (i) annual prepayments (beginning with the fiscal year
ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii)
100% of the net cash proceeds from any non-ordinary course sale of assets and certain casualty or condemnation
events; and (iii) 100% of the net cash proceeds of indebtedness not permitted to be incurred under the Senior
Secured Credit Facility.
For further information, see “Note 13. Debt” to the Consolidated Financial Statements. We were in
compliance with our debt covenants as of March 31, 2020.
Contractual Obligations as of March 31, 2020
(Amounts in thousands)
Contractual obligations:
Long-term debt (1)
Interest payments (2)
Operating leases
Finance leases
Total
Payments Due by Period
Total
Less than
1 Year
1-3 Years 3-5 Years
More than
5 Years
$ 1,099,742 $
301,675 45,931 91,000 88,128
28,951
4,809
73,965 23,492 32,660 13,091
7,955 $ 14,532 $ 114,000 $ 963,255
76,616
6,075
4,722
$ 1,504,333 $ 85,889 $ 147,748 $ 220,028 $ 1,050,668
8,511
9,556
(1) The Secured Bank Loans mature in June 2027.
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Advanced Drainage Systems, Inc.
(2) Based on applicable rates and pricing margins as of March 31, 2020.
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, 2020. The maximum borrowing permitted under the South American Joint Venture’s credit facility
is $22 million. As of March 31, 2020, our South American Joint Venture had approximately $9.3 million of
outstanding debt subject to our guarantee, resulting in our guarantee of 50%, or $4.7 million, of that amount. We do
not believe that this guarantee will have a current or future effect on our financial condition, results of operations,
liquidity, or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated
financial statements requires management to make estimates and judgments that affect the reported amounts in our
consolidated financial statements and accompanying notes.
Certain of our accounting policies involve a higher degree of judgment and complexity in their application,
and therefore, represent the critical accounting policies used in the preparation of our financial statements. If
different assumptions or conditions were to prevail, the results could be materially different from our reported
results. We believe the following accounting policies may involve a higher degree of judgment and complexity in
their application and represent the critical accounting policies used in the preparation of our financial statements. For
additional discussion of our significant accounting policies, see “Note 1. Background and Summary of Significant
Accounting Policies” to our consolidated financial statements included in “Item 8. Financial Statements and
Supplementary Data” included in this Form 10-K.
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Advanced Drainage Systems, Inc.
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.
Effect if Actual Results Differ
from Assumptions
We performed our annual
impairment test for goodwill as of
March 31, 2020. We performed the
test for all reporting units with
goodwill, which include our
Domestic pipe reporting unit, the
International reporting units, the
Infiltrator Water Technologies
reporting unit, and the various Allied
Product reporting units.
Based on our analysis, the estimated
fair value of each reporting unit
exceeded its carrying value. Based
on our analysis, the estimated fair
value of each reporting unit
exceeded its carrying value.
However, the estimated fair value
exceeded the carrying value by less
than 20% for two of our reporting
units, Infiltrator Water Technologies
and Canada, which had goodwill
balances of $495.8 million and $9.9
million, respectively, at March 31,
2020. We utilized a discount rate of
14%, in determining the discounted
cash flows in our fair value analysis
and a long-term growth rate of 3.0%
and 2.0%, respectively. If our
discount rate were to increase by
150 basis points, the fair value of
these reporting units would fall
below carrying value, which would
indicate impairment of the goodwill.
In addition, these discounted cash
flow analyses are dependent upon
achieving forecasted levels of net
sales and profitability. If
performance were to fall below
forecasted levels, or if market
conditions were to decline in a
material or sustained manner,
impairment would be indicated at
these reporting units, and potentially
at our other reporting units.
Management forecasts considered
the impact of COVID-19 on net
sales and profitability, but, if we see
worse than expected impacts from
COVID-19 that will likely have a
negative impact on our forecasted
revenue and profitability and this,
Judgments and Estimates
Determining the fair value of a
reporting unit is judgmental in
nature and involves the use of
significant estimates and
assumptions.
• Reporting units - As a
result of the Acquisition of
Infiltrator Water
Technologies, we revised
our reportable segments
and allocated the goodwill
balance of $92.5 million
recorded on the former
Domestic reportable
segment to our revised
reporting units based on the
relative fair value. Our
Pipe reporting unit was
allocated approximately
$57.7 million of goodwill
from our former Domestic
reporting unit. No other
reporting unit was allocated
more than $10 million of
goodwill.
• These estimates and
assumptions include
revenue growth rates and
EBITDA 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.
•
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Advanced Drainage Systems, Inc.
Policy
Judgments and Estimates
Effect if Actual Results Differ
from Assumptions
along with the decline in our stock
price and other market conditions,
could result in an indication of
impairment of goodwill in fiscal
2021.
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.
We did not record any impairment
charges for definite-lived intangible
assets in fiscal 2020, 2019, or 2018.
Due to the expected retirement of
the “Hancor” trademark in fiscal
2021, we accelerated the
amortization of our “Hancor”
trademark recording additional
amortization expense of $4.4
million.
We performed our annual
impairment test for indefinite-lived
intangible assets as of March 31,
2020. We determined for our
indefinite-lived intangible assets that
the fair value of the assets exceeded
its carrying value. Accordingly, we
did not incur any impairment
charges for indefinite-lived
intangible assets in fiscal 2020, 2019
or 2018. 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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Advanced Drainage Systems, Inc.
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, such as right of
return, credits or incentives, 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
or decrease, it could result in a
significant increase or decrease in
compensation expense.
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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.
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.
Performance-Based Restricted
Stock Units
As the Company forecasts the
performance metrics to target over
the vesting term, changes in forecast
could cause fluctuations in the stock-
based compensation expense.
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.
The Company also issues
performance-based restricted stock
units that vest over a term based on
the achievement of targets defined in
the award. The Company estimates
the amount of units that will vest by
forecasting the various performance
metrics.
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Advanced Drainage Systems, Inc.
Policy
Business Combinations –
Acquisitions, such as the acquisition
of Infiltrator Water Technologies,
are accounted for in accordance with
ASC 805, Business Combinations.
We recognize separately from
goodwill the assets acquired and the
liabilities assumed, at their
acquisition date fair values and
goodwill is defined as the excess of
consideration transferred over the
net of the acquisition date fair values
of the assets acquired and the
liabilities assumed.
During the measurement period,
which may take up to one year from
the acquisition date, adjustments due
to changes in the estimated fair
value of assets acquired and
liabilities assumed may be recorded
as adjustments to the consideration
transferred and related allocations.
Upon the conclusion of the
measurement period or the final
determination of the values of assets
acquired and liabilities assumed,
whichever comes first, any such
adjustments are charged to the
consolidated statements of
operations.
Recent Accounting Pronouncements
Judgments and Estimates
Fair values allocated to assets
acquired and liabilities assumed in
business combinations require
management to make significant
judgments, estimates, and
assumptions, especially with respect
to intangible assets. Management
makes estimates of fair values based
upon assumptions it believes to be
reasonable. These estimates are
based upon historical experience,
information obtained from the
management of the acquired
company, comparable transactions,
and market and industry
considerations and these estimates
are inherently uncertain. The
estimated fair values related to
intangible assets primarily consist of
customer relationships, patents and
developed technology, and
tradenames and trademarks.
Estimates in the discounted cash
flow models include, but are not
limited to, certain assumptions that
form the basis of the forecasted
results (e.g. revenue growth rates,
discount rate, royalty, customer
attrition rates and EBITDA).
Effect if Actual Results Differ
from Assumptions
These significant assumptions are
forward looking and could be
affected by future economic and
market conditions.
Customer Relationships - In addition
to revenue growth rates, EBITDA
and discount rate, a key input for
customer relationships is the
customer attrition rate. A higher than
expected customer attrition rate
could result in an impairment
charge.
Developed Technology – In addition
to revenue growth rates, discount
rate, royalty rate and an
obsolescence factor, the timing of
obsolescence of the acquired
technology could result in a shorter
useful life than originally
determined and an acceleration of
amortization expense.
Tradenames and Trademarks - The
most significant driver is revenue
growth rates, discount rate and
royalty rate. If revenue growth rates
are lower than expected, it could
result in an impairment charge.
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
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Advanced Drainage Systems, Inc.
$7.4 million based on our borrowings as of March 31, 2020. Assuming the Revolving Credit Facility is fully drawn,
each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately
$9.9 million, for the year ended March 31, 2020.
Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk consist principally of
accounts receivable. We provide our products to customers based on an evaluation of the customers’ financial
condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each
customer’s financial condition. We monitor the exposure for credit losses and maintain allowances for anticipated
losses. Concentrations of credit risk with respect to our accounts receivable are limited due to the large number of
customers comprising our customer base and their dispersion among many different geographies and end markets.
One customer has an accounts receivable balance equal to approximately 20% of our Receivables balance as of
March 31, 2020.
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.
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.
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Advanced Drainage Systems, Inc.
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.
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, 2020. 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, 2020
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).
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, 2020. 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. Due to 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.
Based on this assessment, management has concluded that the Company did not maintain effective internal
control over financial reporting as of March 31, 2020, due to the fact that the material weakness in the control
environment of our consolidated joint venture affiliate, ADS Mexicana, as previously identified in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2019, had not been remediated. This material weakness
was a result of the Company’s findings as part of its internal investigation conducted in fiscal year 2019 into ADS
Mexicana’s senior management’s ethical and business conduct, including compliance of certain products with
Mexican laws and regulations. We continue the process to remediate the underlying causes of the material weakness
as further described below. Accordingly this previously identified material weakness cannot be considered
remediated until the necessary controls have operated for a sufficient period of time and until management has
concluded, through testing, that the control is operating effectively.
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Advanced Drainage Systems, Inc.
We have excluded from the scope of our assessment of internal control over financial reporting the operations
and related assets of Infiltrator Water Technologies (“IWT”) which we acquired on July 31, 2019. At March 31,
2020 and for the period from acquisition through March 31, 2020, total assets, total revenues, and net loss subject to
IWT’s internal control over financial reporting represented 31%, 10%, and (5%) of consolidated total assets, total
revenues, and net loss, respectively of ADS as of and for the year ended March 31, 2020.
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, 2020 and this report is included herein.
Ongoing Remediation Process
We continue the process to remediate the underlying causes of the material weakness in the control
environment at ADS Mexicana. In fiscal year 2020 ADS Mexicana hired a new general manager and controller, as
well as a manager of financial reporting and compliance. The manager of financial reporting and compliance reports
to ADS finance personnel. Responsibilities within ADS Mexicana have been segregated among senior management
individuals responsible for sales; quality and product development; and manufacturing. Supplement training on ADS
Mexicana’s Code of Business Conduct and Ethics has been provided to ADS Mexicana personnel and additional
training has been provided to ADS Mexicana personnel who provide oversight of claims submitted to the Ethics
Hotline. We have leveraged new technology recently implemented at ADS Mexicana that we believe has
strengthened controls and allows for further oversight by ADS, Inc. The hiring of additional ADS Mexicana
personnel as described above occurred during fiscal year 2020, and will necessitate additional time in order for such
personnel to positively impact the control environment, improve process and execute controls for a sufficient period
of time such that the operating effectiveness of those changes can be demonstrated through testing.
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, 2020 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
As of March 31, 2020, management is in the process of evaluating and integrating the internal controls of the
acquired IWT business into the Company's existing operations. Other than the controls enhanced or implemented to
integrate the IWT business, there were no changes in our internal control over financial reporting identified in
management’s evaluation pursuant to Rules 13a15(d) or 15d-15(d) of the Exchange Act during the quarter ended
March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our 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 2020 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.
74
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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.”
75
Table of Contents
Advanced Drainage Systems, Inc.
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.1A
INDEX TO EXHIBITS
Description
Agreement and Plan of Merger, dated as of July 31, 2019, among Advanced Drainage Systems, Inc.,
ADS Ocean Merger Sub, Inc., Infiltrator Water Technologies Ultimate Holdings, Inc. and 2461461
Ontario Limited, an Ontario corporation (incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange Commission
on August 1, 2019).
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).
Description of Registrant's Securities.#
Indenture, dated September 23, 2019, among Advanced Drainage Systems, Inc., each of the guarantors
party thereto and U.S. Bank National Association, as trustee (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 September 23, 2019).
Form of 5.000% Senior Notes due 2027 (included with Indenture, dated September 23, 2019, among
Advanced Drainage Systems, Inc., each of the guarantors party thereto and U.S. Bank National
Association, as trustee) (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on
Form 8-K (File No. 001-36557) filed with the Securities and Exchange Commission on September 23,
2019).
Credit Agreement, dated as of July 31, 2019, by and among Advanced Drainage Systems, Inc.,
Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto,
Barclays Bank PLC and Morgan Stanley Senior Funding, Inc., as joint lead arrangers, joint
bookrunners, syndication agents and documentation agents (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 1, 2019).
First Amendment to Credit Agreement, by and among the Advanced Drainage Systems, Inc., the banks
and other financial institutions or entities parties thereto, constituting all the Lenders under the Credit
Agreement, the Issuing Lenders party thereto and Barclays Bank PLC, as administrative agent
(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 September 30, 2019).
76
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.2
10.3†
10.4†
Description
Advanced Drainage Systems, Inc. Guarantee and Collateral Agreement (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 1, 2019).
Advanced Drainage Systems, Inc. Non-Employee Director Compensation Plan (incorporated by
reference to Exhibit 10.8 to Amendment No. 4 to the Registrant’s Registration Statement on Form S-
1 (File No. 333-194980) filed with the Securities and Exchange Commission on July 2, 2014).
Advanced Drainage Systems, Inc. Amended 2000 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.9 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1
(File No. 333-194980) filed with the Securities and Exchange Commission on June 20, 2014).
10.4A†
First Amendment to Amended 2000 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the
Securities and Exchange Commission on August 15, 2014).
10.5†
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).
10.5A†
First Amendment to the 2008 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to Form
8-K filed February 10, 2017).
10.6†
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).
10.6A†
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).
10.6B†
Form of Amendment to Pre-2017 Stock Option Agreements (incorporated by reference to Exhibit
10.11B of Form 10-K filed May 10, 2017).
10.6C†
Form of Amendment to Pre-2017 Stock Option Agreements (incorporated by reference to Exhibit
10.11B of Form 10-K filed May 10, 2017).
10.7†
10.8†
10.8A†
10.8B†
10.9†
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).
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).
77
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.9A
10.10†
10.11†
10.12†
10.10†
Description
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).
10.10A†
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).
10.14†
10.14A†
10.15†
10.15A†
10.16†
10.17
Form of Non-Qualified Stock Option Agreement (other than for Joseph A. Chlapaty) pursuant to 2013
Stock Option Plan (incorporated by reference to Exhibit 10.19 to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 20, 2014).
Form of Non-Qualified Stock Option Agreement (for Joseph A. Chlapaty) pursuant to 2013 Stock
Option Plan (incorporated by reference to Exhibit 10.19A to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 20, 2014).
Form of Restricted Stock Agreement (other than for Joseph A. Chlapaty) pursuant to 2008 Restricted
Stock Plan (incorporated by reference to Exhibit 10.20 to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange
Commission on June 20, 2014).
Form of Restricted Stock Agreement (for Joseph A. Chlapaty) pursuant to 2008 Restricted Stock Plan
(incorporated by reference to Exhibit 10.20A to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-194980) filed with the Securities and Exchange Commission on
June 20, 2014).
Form of Director Stock Agreement (incorporated by reference to Exhibit 10.21 to Amendment No. 4 to
the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities
and Exchange Commission on July 2, 2014).
Participation Agreement, dated as of July 17, 2000, by and between ADS Worldwide, Inc., Grupo
Altima S.A. de C.V., and ADS Mexicana, S.A. de C.V. (formerly known as Sistemas Ecologicos de
Drenaje, S.A. de C.V.), as amended on April 19, 2010, May 19, 2011, May 24, 2011, April 26, 2013
and January 31, 2014 (incorporated by reference to Exhibit 10.22 to Amendment No. 2 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed with the Securities and
Exchange Commission on June 6, 2014).
78
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.18
Description
Interestholders Agreement, dated as of June 5, 2009, by and among Tubos y Plasticos ADS Chile
Limitada, Tigre Chile S.A., and Tuberias T-A Limitada, joined by Advanced Drainage Systems, Inc.
and Tigre S.A. — Tubos e Conexoes, as amended on July 31, 2009, October 2009, December 15,
2009, May 18, 2010, August 10, 2010, April 1, 2011 and January 25, 2012, with First Addendum to
Interestholders Agreement, dated as of June 27, 2011 (incorporated by reference to Exhibit 10.23 to
Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194980) filed
with the Securities and Exchange Commission on June 20, 2014).
10.18A
Second Addendum to Interestholders Agreement, dated as of December 1, 2013 but entered into on
September 30, 2014, by and among Tubos y Plasticos ADS Chile Limitada, Tigre Chile S.A., Tuberias
Tigre-ADS Limitada, Advanced Drainage Systems, Inc. and Tigre S.A. — Tubos e Conexoes
(incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 001-36557) filed with the Securities and Exchange Commission on November 10, 2014).
10.19†
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).
10.20†
10.21†
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Form of Restricted Stock Agreement (for Joseph A. Chlapaty) pursuant to 2008 Restricted Stock Plan
(incorporated by reference to Exhibit 10.3 to Form 8-K filed February 10, 2017).
Form of Restricted Stock Agreement (other than for Joseph A. Chlapaty) pursuant to 2008 Restricted
Stock Plan (incorporated by reference to Exhibit 10.4 to Form 8-K filed February 10, 2017).
Form of Non-Qualified Stock Option Agreement pursuant to 2013 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to Form 8-K filed February 10, 2017).
Advanced Drainage Systems, Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit
10.1 to our Current Report on Form 8-K, File No. 001-36557, filed on September 8, 2017).
Form of Restricted Stock Award Notice and Award Agreement pursuant to 2017 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, File No. 001-
36557, filed on September 8, 2017).
Form of Notice of Grant of Stock Options and Stock Option Award Agreement pursuant to 2017
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K,
File No. 001-36557, filed on September 8, 2017).
Form of Director Restricted Stock Award Notice and Award Agreement pursuant to 2017 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, File
No. 001-36557, filed on November 6, 2017).
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).
10.30†
Executive Employment Agreement, dated as of November 10, 2016, by and between Advanced
Drainage Systems, Inc. and Kevin C. Talley.
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Advanced Drainage Systems, Inc.
Exhibit
Number
10.31†
10.32†
Description
Amended and Restated Employment Agreement, effective as of May 27, 2015, by and between
Infiltrator Water Technologies, LLC and Roy E. Moore, Jr. #
Advanced Drainage Systems, Inc. Employee Stock Ownership Plan, as amended May 30, 2019
(incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q (File No.
001-36557) filed with the Securities and Exchange Commission on August 1, 2019.
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. #
101.LAB
XBRL Taxonomy Extension Label Linkbase. #
101.PRE
XBRL Taxonomy Extension Presentation Linkbase. #
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
† Management contract or compensatory plan.
#
Filed herewith.
Item 16.
Form 10-K Summary
None.
80
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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: June 1, 2020
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 June 1, 2020.
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/ Manuel J. Perez de la Mesa**
Manuel J. Perez de la Mesa
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
** 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
81
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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, 2020 and 2019 ............................................................................... F-6
Consolidated Statements of Operations for the fiscal years ended March 31, 2020, 2019 and 2018 ..................... F-7
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended March 31, 2020, 2019,
and 2018 ............................................................................................................................................................ F-8
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2020, 2019, and 2018 ................... F-9
Consolidated Statements of Stockholders’ Equity (Deficit) and Mezzanine Equity for the fiscal years ended
March 31, 2020, 2019, and 2018 ....................................................................................................................... F-10
Notes to Consolidated Financial Statements .......................................................................................................... F-16
Schedule II, Consolidated Valuation and Qualifying Accounts for the fiscal years ended March 31, 2020,
2019, and 2018................................................................................................................................................... F-61
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders 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, 2020 and 2019, the related consolidated statements of operations,
comprehensive income (loss), shareholders' equity (deficit) and mezzanine equity, and cash flows, for each of the
three years in the period ended March 31, 2020, and the related notes and the financial statement schedules 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, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended March 31, 2020, 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, 2020, 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 June 1, 2020, expressed an adverse opinion on the
Company's internal control over financial reporting because of material weakness.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective April 1, 2019, the Company adopted FASB Accounting
Standards Update (“ASU”), ASC 842 Leases, using the modified approach.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-1
Table of Contents
Acquisitions, Infiltrator Water Technologies, Customer Relationships Intangible— Refer to Note 4 to the
financial statements
Critical Audit Matter Description
On July 31, 2019, the Company completed its Acquisition of Infiltrator Water Technologies (IWT) for cash
consideration of $1,147.2 million. The Company records acquisitions resulting in the consolidation of an enterprise
using the acquisition method of accounting. Under this method, the Company allocated the fair value of purchase
consideration transferred to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values on the date of acquisition, including customer relationships intangible asset of approximately
$360.0 million. The fair value assigned is based on estimates and assumptions determined by management.
We identified the valuation of the customer relationships intangible asset as a critical audit matter because of the
significant assumptions made by management to determine the fair value for purposes of the preliminary purchase
price allocation. Those assumptions included revenue growth rates and EBITDA (together, the “forecasts”), as well
as discount and customer attrition rates. Our performance of audit procedures to evaluate these assumptions required
a high degree of auditor judgment and an increased extent of audit effort, including the need to involve our fair value
specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to testing the assumptions identified above included the following, among others:
• We tested the operating effectiveness of management’s internal controls over revenue growth rates,
EBITDA, and the selection of the discount and customer attrition rates.
• We assessed the reasonableness of management’s forecasts by comparing the forecasted information used
to IWT’s historical results, peer company historical results and forecasts, industry historical results and
forecasts, and internal communications to management and the board of directors.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the following
significant valuation assumptions:
o Customer attrition rate by assessing the underlying data used in determining the rate and testing
the mathematical accuracy of the calculation.
o Discount rate by testing the source information underlying the determination of the discount rate
and testing the mathematical accuracy of the calculation.
Goodwill, Infiltrator Water Technologies Reporting Unit — Refer to Note 8 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves comparing the carrying value of each reporting unit
to the estimated fair value of the reporting unit. The Company’s determination of estimated fair value of the
reporting unit is determined by considering both the market approach and the income approach. The determination
of the estimated fair value requires management to make significant estimates and assumptions related to the
valuation of the reporting unit. Changes in these assumptions could have a significant impact on either the fair value
of the reporting unit, the amount of any goodwill impairment charge, or both. The Company’s consolidated goodwill
balance was $597.8 million as of March 31, 2020, of which $495.8 million was allocated to the IWT reporting unit,
which is the reporting unit that exhibits significant sensitivity to changes in estimates and assumptions given the
limited cushion between the carrying value and estimated fair value. As of March 31, 2020, the estimated fair value
of the IWT reporting unit exceeded its carrying value by less than 20%.
We identified the valuation of goodwill for IWT as a critical audit matter because of the significant assumptions
made by management to estimate its fair value. Those assumptions included revenue growth rates, EBITDA, and the
selection of the discount rate. Our performance of audit procedures to evaluate the assumptions required a high
degree of auditor judgment and an increased extent of audit effort, including the need to involve our fair value
specialists.
F-2
Table of Contents
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to testing the fair value of the IWT reporting unit focused on revenue growth rates,
EBITDA, and the selection of the discount rate and included the following procedures, among others:
• We tested the operating effectiveness of management’s internal controls over revenue growth rates,
EBITDA, and the selection of the discount rate.
• We assessed the reasonableness of management’s forecasts by comparing the forecasted information used
to IWT’s historical results, peer company historical results and forecasts, industry historical results and
forecasts, and internal communications to management and the board of directors.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the following
significant valuation assumptions:
o The discount rate, by testing the source information underlying the determination of the discount
rate and testing the mathematical accuracy of the calculation.
o The long-term revenue growth rate in the terminal period through industry and macroeconomic
benchmarking.
/s/ Deloitte & Touche LLP
Columbus, Ohio
June 1, 2020
We have served as the Company's auditor since 2002.
F-3
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, 2020, 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, 2020,
based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at Infiltrator Water Technologies Ultimate Holdings, Inc.
and subsidiaries, which was acquired on July 31, 2019, and whose financial statements constitute 31% of total
assets, 10% of net sales, and (5%) of net income (loss), respectively, included in the consolidated financial statement
as of and for the fiscal year ended March 31, 2020. Accordingly, our audit did not include the internal control over
financial reporting at Infiltrator Water Technologies.
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, 2020, of the
Company and our report dated June 1, 2020, expressed an unqualified opinion on those financial statements and
included an explanatory paragraph regarding the Company’s adoption of FASB ASC Topic 842, Leases, using the
modified approach.
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.
F-4
Table of Contents
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.
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, 2020, of the Company,
and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Columbus, Ohio
June 1, 2020
F-5
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 $5,035 and $7,653, 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 finance lease obligations
Accounts payable
Other accrued liabilities
Accrued income taxes
Total current liabilities
$
$
Long-term debt obligation (less unamortized debt issuance costs of $2,419 and $2,293,
respectively)
Long-term finance 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; 21,562 and 22,611 shares outstanding, respectively
Deferred compensation — unearned ESOP shares
Total mezzanine equity
Stockholders’ equity:
Common stock: $0.01 par value; 1,000,000 shares authorized; 69,810 and 57,964
shares issued, respectively; 69,319 and 57,490 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,
2020
2019
174,233 $
200,028
282,398
9,552
666,211
481,380
597,819
555,338
69,140
2,369,888 $
7,955 $
20,382
106,710
101,116
2,050
238,213
1,089,368
44,501
175,616
37,608
1,585,306
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
269,529
(22,432 )
247,097
282,638
(180,316 )
102,322
11,555
827,573
(10,461 )
(35,325 )
(267,619 )
525,723
11,762
537,485
2,369,888 $
11,436
391,039
(9,863 )
(25,867 )
17,582
384,327
13,986
398,313
1,042,159
See accompanying notes to consolidated financial statements.
F-6
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
Cost of goods sold - ESOP special dividend compensation
Gross profit
Operating expenses:
Selling
General and administrative
Selling, general and administrative - ESOP special dividend
compensation
Loss on disposal of assets and costs from exit and disposal
activities
Intangible amortization
(Loss) income from operations
Other expense:
Interest expense
Derivative loss (gains) and other expense (income), net
(Loss) income before income taxes
Income tax expense
Equity in net (income) loss of unconsolidated affiliates
Net (loss) income
Less: net income attributable to noncontrolling interest
Net (loss) income attributable to ADS
Weighted average common shares outstanding:
Basic
Diluted
Net (loss) income per share available to common stockholders:
$
$
Basic
Diluted
2020
Fiscal Year Ended March 31,
2019
$ 1,673,805 $ 1,384,733 $ 1,330,354
1,027,873
—
302,481
1,188,716
168,610
316,479
1,057,766
—
326,967
2018
117,068
154,270
96,335
89,692
92,764
98,392
78,142
—
—
5,338
57,010
(95,349 )
3,647
7,880
129,413
82,711
1,554
(179,614 )
14,092
(1,909 )
(191,797 )
1,377
(193,174 )
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
63,820
63,820
57,025
57,611
55,696
56,334
(3.21 ) $
(3.21 ) $
1.23 $
1.22 $
1.00
0.99
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Net (loss) income
Currency translation (loss) gain
Comprehensive (loss) income
Less: other comprehensive (loss) gain attributable to
noncontrolling interest, net of tax
Less: net income attributable to noncontrolling interest
Total comprehensive (loss) income attributable to ADS
Fiscal Year Ended March 31,
2019
$
2020
(191,797 ) $
(12,324 )
(204,121 )
(2,866 )
1,377
(202,632 ) $
$
81,466 $
(5,749 )
75,717
(1,129 )
3,694
73,152 $
2018
64,792
3,886
68,678
318
2,785
65,575
See accompanying notes to consolidated financial statements.
F-8
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:
Depreciation and amortization
Deferred income taxes
Loss on disposal of assets and costs from exit and disposal
activities
ESOP and stock-based compensation
ESOP special dividend compensation
Amortization of deferred financing charges
Inventory step up related to Infiltrator Water Technologies
acquisition
Fair market value adjustments to derivatives
Equity in net loss of unconsolidated affiliates
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
Acquisition of Infiltrator Water Technologies, net of cash acquired
Other investing activities
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from Term Loan Facility
Payments on Term Loan Facility
Proceeds from syndication of Term Loan Facility
Payments on syndicated Term Loan Facility
Proceeds from Senior Notes
Proceeds from Revolving Credit Agreement
Payments on Revolving Credit Agreement
Debt issuance costs
Proceeds from PNC Credit Agreement
Payments on PNC Credit Agreement
Payments on Prudential Senior Notes
Payments on Term Loan
Payments of notes, mortgages, and other debt
Payments on finance lease obligations
Proceeds from common stock offering, net of offering costs
Acquisition of noncontrolling interest in BaySaver
Cash dividends paid
Proceeds from option exercises
Repurchase of common stock
Other financing activities
Net cash provided by (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
Fiscal Year Ended March 31,
2019
2020
2018
$
(191,797 ) $
81,466 $
64,792
124,940
(2,924 )
71,900
12,813
75,003
(11,239 )
5,338
32,395
246,752
34,476
7,880
3,128
(1,909 )
(6,005 )
5,170
19,086
(1,929 )
31,588
306,189
(67,677 )
(1,089,322 )
6,529
(1,150,470 )
1,300,000
(1,300,000 )
700,000
(51,750 )
350,000
277,900
(177,900 )
(34,606 )
253,900
(388,300 )
(100,000 )
—
—
(27,119 )
293,648
—
(92,127 )
8,163
—
(237 )
1,011,572
(1,949 )
165,342
8,891
174,233 $
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 )
(24,284 )
—
(8,821 )
(26,148 )
5,908
—
(1,270 )
(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 )
—
11,264
(30,445 )
—
—
—
—
75,000
—
—
(2,268 )
487,850
(512,150 )
(25,000 )
(72,500 )
(1,905 )
(24,214 )
—
—
(18,478 )
9,087
(7,947 )
(2,428 )
(94,953 )
(585 )
11,137
6,450
17,587
$
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 gain
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
Stock-based compensation
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
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 $ 755,787 98,222 $ (436,984 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
666
90
—
—
318
(97,745 )
—
—
—
—
7
1
—
—
2
—
—
2
(72 )
—
—
(394 )
3,809
—
9,161
—
6,812
13,714
9,811
—
—
(81 )
153
—
—
1,753
(977 ) (433,852 ) (97,745 ) 434,829
(7,947 )
—
(8,277 ) $
400
—
413 $
—
(334 )
56,889 $ 11,426 $ 364,908
—
—
(24,815 ) $ (83,678 ) $
— 62,007
—
3,568
—
(1,724 )
— (15,685 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(134 )
—
—
—
—
—
—
—
—
(21,247 ) $ (39,214 ) $
222,703 $
62,007
3,568
(1,724 )
(15,685 )
—
3,809
(134 )
9,087
154
6,812
13,714
11,566
—
(7,947 )
(334 )
307,596 $
14,907 $
1,928
318
—
—
(490 )
—
—
—
—
—
—
—
—
—
—
16,663 $
237,610
63,935
3,886
(1,724 )
(15,685 )
(490 )
3,809
(134 )
9,087
154
6,812
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 gain
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 interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Exercise of common stock options
Restricted stock awards
Stock-based compensation
Reclassification of liability-classified awards
ESOP distributions in common stock
Acquisition of noncontrolling interest in BaySaver
Balance March 31, 2019
Common Stock
Paid-In
Amount Capital
Shares
56,889 $ 11,426 $ 364,908
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
420
127
—
—
528
—
5,712
—
5,908
—
6,532
—
8,604
(625 )
57,964 $ 11,436 $ 391,039
—
—
4
1
—
—
5
—
Common Stock
in Treasury
Shares
Amount
Accumulated
Other
Comprehensive Retained
(Deficit)
Income
Total ADS
Stockholders’
Equity
Non-
controlling
Interest in
Subsidiaries
Total
Stockholders’
Equity
413 $
—
—
—
—
—
—
—
52
9
—
—
—
—
474 $
(8,277 ) $
—
—
—
—
—
—
—
(1,372 )
(214 )
—
—
—
—
(9,863 ) $
(21,247 ) $ (39,214 ) $
— 77,772
—
(4,620 )
—
(1,913 )
— (18,336 )
—
—
—
—
—
—
—
—
—
—
—
(134 )
—
—
—
—
—
(593 )
(25,867 ) $ 17,582 $
307,596 $
77,772
(4,620 )
(1,913 )
(18,336 )
—
5,712
(134 )
4,540
(213 )
6,532
—
8,609
(1,218 )
384,327 $
16,663 $
2,862
(1,129 )
—
—
(4,410 )
—
—
—
—
—
—
—
—
13,986 $
324,259
80,634
(5,749 )
(1,913 )
(18,336 )
(4,410 )
5,712
(134 )
4,540
(213 )
6,532
—
8,609
(1,218 )
398,313
See accompanying notes to consolidated financial statements.
F-12
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 interest holder
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.
F-13
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2019
Net (loss) income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($1.36 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Special Dividend
Exercise of common stock options
Restricted stock awards
Stock-based compensation
ESOP distributions in common stock
Common Stock Offering
Other
Balance March 31, 2020
Common Stock
Shares
Amount
Paid-In
Capital
57,964 $ 11,436 $ 391,039
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,164
—
101,189
8,163
6
—
1
— 12,269
8 13,101
104 293,544
104
69,810 $ 11,555 $ 827,573
571
118
—
807
10,350
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
474 $
—
—
—
—
—
(9,863 ) $
—
—
—
—
—
(25,867 ) $ 17,582 $
— (193,174 )
—
(10,847 )
(80,821 )
—
(9,458 )
—
—
—
384,327 $
(193,174 )
(9,458 )
(10,847 )
(80,821 )
—
13,986 $
1,377
(2,866 )
—
—
(735 )
398,313
(191,797 )
(12,324 )
(10,847 )
(80,821 )
(735 )
—
—
7
10
—
—
—
—
(207 )
(391 )
—
—
—
—
—
—
—
—
—
(359 )
—
—
—
—
491 $ (10,461 ) $
(35,325 ) $ (267,619 ) $
8,164
(359 )
101,189
7,962
(390 )
12,269
13,109
293,648
104
525,723 $
—
—
—
—
—
—
11,762 $
8,164
(359 )
101,189
7,962
(390 )
12,269
13,109
293,648
104
537,485
See accompanying notes to consolidated financial statements.
F-14
Table of Contents
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
(Amounts in thousands)
Balance April 1, 2019
Net (loss) income
Other comprehensive loss
Redeemable convertible preferred stock dividends
Common stock dividend ($1.36 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for:
Compensation
Dividend
Special Dividend
Exercise of common stock options
Restricted stock awards
ESOP distributions in common stock
Common Stock Offering
Acquisition of noncontrolling interest in BaySaver
Balance March 31, 2020
Redeemable
Convertible
Preferred Stock
Deferred
Compensation –
Unearned ESOP
Shares
Shares
Amount
Shares
Amount
22,611 $
—
—
—
—
—
282,638
—
—
—
—
—
—
—
—
—
—
—
(1,049 )
—
—
(13,109 )
14,452 $
—
—
—
—
—
(957 )
—
(11,645 )
—
—
—
(180,316 ) $
—
—
—
—
—
11,962
359
145,563
—
—
—
Redeemable
Non-
Controlling
Interest in
Subsidiaries
Amount
Total
Mezzanine
Equity
— $
—
—
—
—
—
—
—
—
—
—
102,322
—
—
—
—
—
11,962
359
145,563
—
—
(13,109 )
—
21,562 $
—
269,529
—
1,850 $
—
(22,432 ) $
—
— $
—
247,097
See accompanying notes to consolidated financial statements.
F-15
Table of Contents
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, 2020 refers to fiscal 2020, which is the period from April 1,
2019 to March 31, 2020.
On July 31, 2019, the Company completed the Acquisition of Infiltrator Water Technologies. Infiltrator Water
Technologies is a leading national provider of plastic leach field chambers and systems, septic tanks and
accessories, primarily for use in residential applications. Infiltrator Water Technologies’ products are used in
on-site septic wastewater treatment systems in the United States and Canada. See “Note 3. Acquisitions” for
additional information on the Acquisition
The Company is managed and reports results of operations in three reportable segments: Pipe, Infiltrator
Water Technologies and International. The Company also reports the results of its Allied Products and all
other business segments as Allied Products & Other.
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, purchase accounting for the Acquisition, 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.
F-16
Table of Contents
Advanced Drainage Systems, Inc.
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, 2020 and
2019 are as follows:
(Amounts in thousands)
Trade receivables, net
Other miscellaneous receivables
Receivables, net
2020
195,968 $
4,060
200,028 $
2019
170,887
16,104
186,991
$
$
As of March 31, 2020 and 2019, Other miscellaneous receivables includes insurance recoverables of
approximately $3.2 million and $3.9 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.
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 there is 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 finance lease is recorded at 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 improvements
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.
F-17
Table of Contents
Advanced Drainage Systems, Inc.
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 comparison.
The fair value estimates are based on assumptions management believes to be reasonable but are inherently
uncertain. For the fiscal year ended March 31, 2020, the Company completed a quantitative fair value
assessment for all reporting units and determined no impairment charge was required. For all other fiscal years
presented, ADS completed a quantitative fair value assessment of the Canada 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 not more likely than not that its fair value is less than
its carrying amount. ADS applied the qualitative assessment to the former Domestic reporting unit for the
annual impairment tests performed as of March 31, 2019 and 2018. The qualitative assessment indicated that
no impairment charges were required for goodwill in the fiscal years ended March 31, 2019 and 2018.
Intangible Assets
Intangible Assets — Definite-Lived - Definite-lived intangible assets are amortized using the straight-line
method or an accelerated 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.
ADS completed a quantitative fair value measurement of indefinite-lived trademarks as of March 31, 2020.
The test indicated that the fair value of the indefinite-lived trademarks substantially exceeded the carrying
value, indicating that no impairment existed.
F-18
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Advanced Drainage Systems, Inc.
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 applied the qualitative assessment
to specific trademarks for the annual impairment tests performed as of March 31, 2019 and 2018. For the
qualitative 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 and 2018.
Other Assets - Other assets include operating lease right of use assets, 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. See “Note 6. Lease” for further information on
the operating lease right of use assets. The Company capitalizes development costs for internal use software.
Capitalization of software development costs begins in the application development stage and ends when the
asset is placed into service. The Company amortizes such costs using the straight-line method over estimated
useful lives of 2 to 10 years, which is included in General and administrative expense, Selling expense or Cost
of goods sold within the Consolidated Statements of Operations depending on the nature of the asset and its
intended use. Central parts represent spare production equipment items which are used to replace worn or
broken production equipment parts and help reduce the risk of prolonged equipment outages. The cost of
central parts is amortized on a straight-line basis over estimated useful lives of 3 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. 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)
Right of use assets - Operating leases
Investments in unconsolidated affiliates
Capitalized software development costs, net
Deposits
Central parts
Other
Total other assets
2020
24,875 $
9,250
11,045
3,842
6,745
13,383
69,140 $
2019
—
10,467
13,069
2,985
2,385
8,034
36,940
$
$
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
$
2020
2019
2018
3,116 $
87
85
2,659 $
73
1,419
2,156
47
1,688
F-19
Table of Contents
Advanced Drainage Systems, Inc.
Leases - The Company determines whether an arrangement contains a lease at inception by determining if the
contract conveys the right to control the use of identified plant, property, and equipment for a period of time in
exchange for consideration and other facts and circumstances as defined by ASC 842. For each lease which
has an accounting lease term of greater than 12 months, the Company records the right-of-use asset and lease
liability on the balance sheet. The accounting lease term includes cancellable and renewal periods which are
reasonably assured. The lease liability is measured utilizing the incremental borrowing rate unless the
Company can specifically determine the rate implicit in the lease. Leases are evaluated for appropriate
classification as operating or financing at lease inception. For leases classified as finance leases at lease
inception, the Company records a finance lease asset and lease financing obligation equal to the present value
of the minimum lease payments. The finance lease right of use 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 the operating lease right of use asset in other assets and operating lease obligation in other
accrued liabilities and other liabilities. Operating lease 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 does not have a material effect on the Company’s
results in any annual period. For the fiscal years ended March 31, 2020 and 2019, 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, 2020, 2019, and 2018 were $149.0 million,
$131.3 million, and $120.7 million, respectively, and are included in Cost of goods sold. Shipping costs billed
to customers were $7.9 million, $7.7 million, and $6.3 million during 2020, 2019 and 2018, 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 $4.9 million, $3.8
million, and $4.1 million for the fiscal years ended March 31, 2020, 2019, and 2018, respectively.
F-20
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Advanced Drainage Systems, Inc.
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 $50.3 million, $42.4 million, and $41.3 million
for the fiscal years ended March 31, 2020, 2019, and 2018, respectively, of which employees contributed $7.9
million, $6.7 million, and $5.9 million, respectively.
ADS is also self-insured for various other general insurance programs to the extent of the applicable
deductible limits on the Company’s insurance coverage. These programs include primarily automobile,
general liability and employment practices coverage with a deductible of $0.5 million per occurrence or claim
incurred. Amounts expensed during the period, including an estimate for claims incurred but not reported at
year end, were $2.5 million, $2.3 million, and $2.2 million, for the years ended March 31, 2020, 2019, and
2018, 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 $3.0 million, $2.8 million, and $1.3 million for the fiscal years
ended March 31, 2020, 2019, and 2018, 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 24.3%, 25.4%, and 25.4% of fiscal 2020, 2019 and 2018 net
sales, respectively. The Company’s customer base is diversified across the range of end markets that it serves.
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally
of Receivables. The Company provides its products to customers based on an evaluation of the customers’
financial condition, generally without requiring collateral. Exposure to losses on Receivables is principally
dependent on each customer’s financial condition. The Company performs ongoing credit evaluations of its
customers. The Company monitors the exposure for credit losses and maintains allowances for anticipated
losses. Concentrations of credit risk with respect to Receivables are limited due to the large number of
customers comprising the Company’s customer base and their dispersion across many different geographies.
F-21
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Advanced Drainage Systems, Inc.
One customer, Ferguson Enterprises, accounted for approximately 18.2% and 19.1% of Receivables at
March 31, 2020 and 2019, respectively.
Derivatives - The Company recognizes derivative instruments as either assets or liabilities and measure those
instruments at fair value. ADS uses interest rate swaps, commodity options in the form of collars and swaps,
and foreign currency forward contracts to manage various exposures to interest rate, commodity price, and
exchange rate fluctuations. These instruments do not qualify for hedge accounting treatment. For the interest
rate swap executed on June 28, 2017, gains and losses resulting from the difference between the spot rate and
applicable base rate was 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
Leases - In February 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting
standard update (“ASU”) which amends the guidance for leases (“ASC 842”). 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. 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 adopted these standards effective April 1, 2019 using the transition method in the July 2018 ASU
which does not require adjustments to comparative periods or require modified disclosures for those periods
and includes transition relief practical expedients. See “Note 6. Leases” for further information on the
adoption of the new lease ASUs.
Hedge Accounting - In August 2017, the FASB issued an ASU which expanded an entity’s ability to apply
hedge accounting for non-financial and financial risk components and provided a simplified approach for fair
value hedging of interest rate risk. The standard also refined how entities assess hedge effectiveness. The
Company adopted this standard effective April 1, 2019. The new standard did not have an impact on the
Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Adopted
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 will adopt this
standard effective April 1, 2020. The Company’s adoption of the standard will not have a material impact on
the Company’s Consolidated Financial Statements.
F-22
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Advanced Drainage Systems, Inc.
Reference Rate Reform - In March 2020, the FASB issued an ASU that provides optional expedients and
exceptions related to financial reporting impacts related to the expected market transition from LIBOR to
another reference rates. The amendments are effective on March 12, 2020 and an entity may elect to adopt
prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on
the Consolidated Financial Statements.
Income Taxes – In December 2019, the FASB issued an ASU to simplify the accounting for income taxes by
removing certain exceptions to the general principles in ASC 740, Income Taxes and improve the
comparability of financial statements. The amendments in this ASU are effective for fiscal years beginning
after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of
this standard 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 2019 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
concluded during 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. The Company does not currently have a specified restructuring plan. 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, 2020, 2019, and 2018:
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, 2020, 2019, and 2018:
(Amounts in thousands)
Accelerated depreciation
Plant severance
Headcount reduction
Product optimization
Other restructuring activities
Total 2018 Restructuring Plan activities
Acquisition related severance and other costs
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
$
$
2020
2019
2018
— $
—
—
—
—
— $
2,557 $
430 $
131
306
283
475
1,625 $
— $
3,759
2,041
4,133
1,351
159
11,443
—
2,781
2,022
3,560
$
5,338 $
3,647 $
15,003
Approximately $1.2 million and $0.4 million for fiscal year ended March 31, 2019, related to the Pipe and
International reportable 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 Pipe and International reporting
segment, respectively.
All of the Company’s restructuring liability related to the Pipe reportable segment. A reconciliation of the
beginning and ending amounts of restructuring liability related to the 2018 Restructuring Plan for the fiscal
years ended March 31, 2020 and 2019 is as follows:
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Advanced Drainage Systems, Inc.
(Amounts in thousands)
Balance at beginning of year
Expenses
Non-cash expenses
Payments
Balance at end of year
2020
2019
$
$
1,696 $
—
—
(1,122 )
574 $
3,901
1,625
(713 )
(3,117 )
1,696
The Company had $0.1 million and $0.6 million of long-term severance liability related to the restructuring
activities recorded in Other liabilities in the Consolidated Balance Sheet as of March 31, 2020 and March 31,
2019, respectively.
Periodically, the Company will dispose of equipment, including equipment accounted for as finance leases.
The net loss on the disposition of the equipment was $2.8 million, $2.0 million, and $3.6 million during fiscal
2020, 2019 and 2018, 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
of allowances for returns, rebates, discounts, and taxes collected concurrently with revenue-producing
activities.
The Company disaggregates net sales by Domestic, International and Infiltrator Water Technologies and
further disaggregates Domestic and International by product type, consistent with its reportable segment
disclosure. This disaggregation level best depicts how the nature, amount, timing and uncertainty of revenue
and cash flows are affected by economic factors. Refer to “Note 21. Business Segments Information” for the
Company’s disaggregation of Net sales by reportable segment.
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.
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Advanced Drainage Systems, Inc.
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, 2020 and April 1, 2019:
Contract asset - product returns
Refund liability
March 31,
2020
April 1,
2019
$
(In thousands)
594 $
1,458
646
1,372
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.
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 2020 Acquisition of Infiltrator Water Technologies
On July 31, 2019 (the “Closing Date”), the Company completed its Acquisition of Infiltrator Water
Technologies pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated July 31, 2019.
Infiltrator Water Technologies manufactures and sells wastewater systems for homes and provides drainage
chambers for septic and storm water management. The total fair value of consideration transferred was
$1,147.2 million. The Merger Agreement was funded through the Bridge Loan Facility as further described in
“Note 13. Debt”. The results of operations of Infiltrator Water Technologies are included in the Consolidated
Statements of Operations after July 31, 2019.
The following table summarizes the consideration transferred and the preliminary purchase price allocation of
the assets acquired and liabilities assumed. The Company’s estimates and assumptions are subject to change
during the measurement period. The measurement period ends on July 31, 2020. Any changes to the
Company’s estimates or assumptions may result in material changes from the preliminary purchase price
allocations.
Adjustments
to
Purchase
Price
Initial
Amount
$
57,375 $
— $
Adjustments
to Property,
Plant and
Equipment
— $
Adjustments
to
Intangible
Assets
Tax
Adjustments
— $
Updated
Amount
57,375
— $
(Amounts in thousands)
Cash
Total current assets,
excluding cash
Property, plant and equipment
Goodwill
Intangible assets, net
Other assets
Total current liabilities
Deferred tax liabilities
Other liabilities
Total fair value of
consideration transferred
75,847
98,860
567,034
475,000
14,366
(22,756 )
(109,926 )
(9,274 )
$ 1,146,526 $
—
—
704
—
—
—
—
—
—
—
—
—
75,847
—
(6,575 )
92,285
6,575 (100,000 ) 21,528 495,841
— 575,000
— 100,000
14,366
—
—
—
—
—
(21,825 )
931
— (22,459 ) (132,385 )
—
(9,274 )
—
—
—
704 $
— $
— $
— $ 1,147,230
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Advanced Drainage Systems, Inc.
The fair value of consideration transferred includes $6.0 million of Infiltrator Water Technologies payable to
the Company and $6.6 million of Infiltrator Water Technologies receivable due from the Company.
The goodwill of $495.8 million represents the excess of consideration transferred over the fair value of assets
acquired and liabilities assumed and is attributable to expected revenue synergies, as well as operating
efficiencies and cost savings. The goodwill is not deductible for tax purposes and is assigned to the Infiltrator
Water Technologies segment.
Of the $132.4 million of preliminary purchase price allocated to deferred tax liabilities, $82.3 million related
to the step up of GAAP basis for fair market valuations, while the remaining $50.1 million were acquired
deferred tax liabilities. Of the total $82.3 million, $80.2 million was attributed to intangible assets. See “Note
18. Income Taxes” for additional information.
The purchase price excludes transaction costs. During the fiscal year ended March 31, 2020, the Company
incurred $22.9 million of transaction costs related to the Acquisition such as legal, accounting, valuation and
other professional services. The Company estimates approximately $7.3 million of transaction costs are not
deductible for tax purposes. These costs are included in general and administrative expenses in the
Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income.
The identifiable intangible assets recorded in connection with the closing of the Acquisition are based on
valuations including customer relationships, patents and developed technology, and tradename and trademarks
totaling $575.0 million. Customer relationships are amortized using an accelerated method over an estimated
useful life of 20 years. Patents and developed technology and tradename and trademarks are on a straight-line
basis over the respective useful lives of 10 and 20 years.
(Amounts in thousands)
Customer relationships
Patents and developed technology
Tradename and trademarks
Total identifiable intangible assets
$
Preliminary fair
value
Estimated useful
lives
360,000 20 years
150,000 10 years
65,000 20 years
$
575,000
The net sales to external customers of Infiltrator Water Technologies since the acquisition are included in the
Consolidated Statements of Operations for the fiscal year ended March 31, 2020 was $169.3 million. The
income before taxes of Infiltrator Water Technologies since the acquisition are included in the Consolidated
Statements of Operations for the fiscal year ended March 31, 2020 was $8.2 million
The unaudited pro forma information for the fiscal year ended March 31, 2020 presented below includes the
effects of the Acquisition as if it had been consummated as of April 1, 2017, with adjustments to give effect
to pro forma events that are directly attributable to the Acquisition. Adjustments include those related to the
amortization of acquired intangible assets, increases in interest expense due to additional borrowings incurred
to finance the Acquisition, transaction costs, the elimination of transactions between the Company and
Infiltrator Water Technologies and the estimated tax impacts thereof. The unaudited pro forma information
does not reflect any operating efficiency or potential cost savings that could result from the consolidation of
Infiltrator Water Technologies. Accordingly, the unaudited pro forma information is presented for
informational purposes only and is not necessarily indicative of the actual results of the combined company if
the Acquisition had occurred at the beginning of the period presented, nor is it indicative of the future results
of operations.
2020
2019
$ 1,760,208 $ 1,608,450 $ 1,520,571
(33,606 )
(145,244 )
27,411
2018
(Amounts in thousands)
Net sales
Net income (loss) attributable to ADS
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Advanced Drainage Systems, Inc.
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 $0.4 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. The acquisition of
DURASLOT, Inc. is included in Other investing activities on the Consolidated Statement of Cash Flows.
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
2020
253,379 $
631,932
208,037
19,925
1,113,273
(631,893 )
481,380 $
2019
199,810
560,858
221,721
19,749
1,002,138
(603,247 )
398,891
$
$
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)
2020
2019
2018
$
64,642 $
59,869 $
63,044
(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
ASC 842 Adoption - The Company adopted the provisions of ASC 842 beginning on April 1, 2019 using the
transition methodology in ASC 842 which does not require adjustments to comparative periods or require
modified disclosures. The Company elected the transition relief practical expedient package as described in
ASC 842-10-65-1. ASC 842 provides lessees with the option of electing an accounting policy, by class of
underlying asset, in which the lessee may choose not to separate nonlease components from lease components.
The Company elected this practical expedient for leases of certain classes of equipment, including forklifts
and fleet tractors and trailers. The Company also elected the accounting policy to not recognize the right-of-
use asset and lease liability for leases with an accounting lease term of twelve months or less (“Short-term
leases”). The adoption of ASC 842 resulted in the recording of $13.3 million of additional lease liabilities and
right-of-use assets to the beginning balance of the Company’s Consolidated Balance Sheet. Infiltrator Water
Technologies adopted ASC 842 on July 31, 2019 using the same methodology and policy elections taken by
the Company on April 1, 2019. The Infiltrator Water Technologies adoption of ASC 842 resulted in the
recording of $11.2 million of additional lease liabilities and corresponding right-of-use assets to the beginning
balance of the Company’s Consolidated Balance Sheet. At the date of adoption, ASC 842 did not have an
impact on the Company’s Consolidated Statement of Operations and Consolidated Statement of Cash Flows.
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Advanced Drainage Systems, Inc.
Nature of the Company’s Leases - The Company has operating and finance leases for plants, yards, corporate
offices, tractors, trailers and other equipment. The Company’s leases have remaining terms of less than one
year to 30 years. A portion of the Company’s real estate leases include an option to extend the leases for up to
5 years. The Company has included renewal options which are reasonably certain to be exercised in its right-
of-use assets and lease liabilities.
The Company’s lease payments are generally fixed. Certain equipment 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 finance leases and a corresponding finance lease
obligation was recorded. Therefore, no contingent obligation is needed.
For all leases with an initial expected term of more than 12 months, the Company recorded, at the adoption
date of ASC 842 or lease commencement date for leases entered into after the adoption date, a lease liability,
which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;
and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a
specified asset for the lease term. The Company will utilize its collateralized incremental borrowing rate
commensurate to the lease term as the discount rate for its leases, unless the Company can specifically
determine the lessor’s implicit rate. The incremental borrowing rate for each lease is determined based on the
Company’s credit rating, adjusted for the impacts of collateral, and the lease term.
Lease Cost - The components of lease cost for the year ended March 31, 2020 was:
(Amounts in thousands)
Operating lease cost
Operating lease cost
Operating lease cost
Short-term lease cost
Total operating lease cost
Finance lease cost
Income Statement Classification
2020
Cost of goods sold
General and administrative
Cost of goods sold
Amortization of right-of-use assets
Amortization of right-of-use assets
Interest on lease liabilities
Cost of goods sold
General and administrative
Interest expense
Total finance lease cost
$
$
$
5,548
1,204
2,393
9,145
17,059
2,543
4,344
23,946
Supplemental cash flow information related to leases for the fiscal year ended March 31, 2020 was as follows:
(Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
2020
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Finance leases(a)
$
6,572
4,675
27,119
10,529
5,078
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Advanced Drainage Systems, Inc.
(a) The Company acquired $27.6 million and $26.8 million of property, plant and equipment under finance
leases in the fiscal years ended March 31, 2019 and March 31, 2018, respectively.
Supplemental balance sheet information related to leases as of March 31, 2020 was as follows:
(Amounts in thousands)
Operating leases
Right-of-use assets
Current lease liabilities
Non-current lease liabilities
Total operating lease liabilities
Finance leases
Right-of-use assets
Current lease liabilities
Non-current lease liabilities
Total finance lease liabilities
Weighted average lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
Balance Sheet Classification
2020
Other assets
Other accrued liabilities
Other liabilities
Property, plant and equipment
Current maturities of finance lease
obligations
Long-term finance lease obligations
$ 24,875
7,757
17,173
$ 24,930
90,756
20,382
44,501
$ 64,883
6.97
10.72
3.57 %
5.36 %
The following is a schedule by year of future minimum lease payments on a rolling twelve-month basis under
operating and finance leases and the present value of the net minimum lease payments as of March 31, 2020:
(Amounts in thousands)
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
$
$
$
Operating
Leases
Finance Leases
23,492
19,478
13,182
8,355
4,736
4,722
73,965
9,082
64,883
8,511 $
5,717
3,839
2,768
2,041
6,075
28,951 $
4,021
24,930 $
Disclosures Related to Periods Prior to the Adoption of ASC 842 – Leased assets included in Property, plant
and equipment as of the fiscal year ended March 31, 2019 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 )
$
110,780
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Advanced Drainage Systems, Inc.
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
$
5,215 $
19,155
4,086
18,511
As of March 31, 2019, total contractual obligations for capital and operating leases were as follows:
(Amounts in thousands)
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
$
$
$
Operating
Leases
Finance Leases
26,604
22,507
18,064
11,721
7,143
8,198
94,237
9,565
84,672
4,159 $
2,924
1,814
690
325
2,236
12,148 $
—
12,148 $
7.
INVENTORIES
Inventories as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Raw materials
Finished goods
Total Inventories
2020
2019
$
$
66,524 $
215,874
282,398 $
47,910
216,630
264,540
The Company had no work-in-process inventories as of March 31, 2020 and 2019.
During fiscal years ended March 31, 2020 and 2019, the Company incurred production-related general and
administrative costs included in the cost of finished goods inventory of $38.8 million and $29.4 million,
respectively, of which $8.6 million and $8.2 million remained in inventory at March 31, 2020 and 2019,
respectively.
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill - The carrying amount of goodwill by reportable segment is as follows:
As Previously Reported
(Amounts in thousands)
Balance at March 31, 2018
Currency translation
Balance at March 31, 2019
Reallocation due to change in segments
Acquisition
Currency translation
Balance at March 31, 2020
Infiltrator
Water
Technologies
Domestic International Pipe
$ 92,105 $
—
$ 92,105 $
(92,105 )
—
—
$ — $
Allied
Products
& Other Total
— $ — $ 103,017
10,912 $ — $
—
(379 )
—
—
— $ — $ 102,638
10,533 $ — $
—
— 34,442
— 57,663
— 495,841
—
(660 )
(660 )
—
9,873 $ 57,663 $ 495,841 $ 34,442 $ 597,819
— 495,841
—
—
(379 )
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Advanced Drainage Systems, Inc.
Intangible Assets – Intangible assets as of March 31, 2020 and 2019 consisted of the following:
(Amounts in thousands)
Definite-lived intangible assets
Developed technology
Customer relationships
Patents
Non-compete and other contractual
agreements
Trademarks and tradenames
Total definite lived intangible assets
Indefinite-lived intangible assets (a)
Gross
Intangible
2020
Accumulated
Amortization
Net
Intangible
Gross
Intangible
2019
Accumulated
Amortization
Net
Intangible
$ 177,579 $
377,742
8,951
(32,437 ) $ 145,142 $ 27,580 $
(47,051 ) 330,691 29,851
2,532 8,313
(6,419 )
(19,922 ) $ 7,658
(23,000 ) 6,851
(5,561 ) 2,752
—
69,847
634,119
—
—
155
(4,736 ) 65,111 15,978
(90,643 ) 543,476 81,877
(138 )
17
(7,968 ) 8,010
(56,589 ) 25,288
Trademarks
Total Intangible assets
11,862
$ 645,981 $
— 11,862 11,889
(90,643 ) $ 555,338 $ 93,766 $
— 11,889
(56,589 ) $ 37,177
(a) Indefinite-lived intangible assets decreased as a result of foreign currency translation.
The gross intangible asset value of developed technology, customer relationships and trademarks and
tradenames increased as a result of the Acquisition. See “Note 4. Acquisitions” for additional information.
The following table presents the amortization expense and weighted average amortization period for definite-
lived intangible assets at March 31, 2020:
Amortization expense (in thousands)
Developed technology
Customer relationships
Patents
Non-compete and other contractual agreements
Trademarks and tradenames
$ 12,517 $
36,093
522
22
7,856
2,517 $
3,546
546
22
1,249
2,517
3,633
591
104
1,223
2020
2019
2018
Weighted
Average
Amortization
Period
(in years)
10.0
19.8
12.0
—
19.6
The following table presents the future intangible asset amortization expense based on existing intangible
assets at March 31, 2020:
(Amounts in thousands)
Amortization expense
2021
2024
$ 71,705 $ 61,305 $ 52,328 $ 48,200 $ 44,872 $ 265,066 $ 543,476
Thereafter Total
2022
2025
Fiscal Year
2023
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.
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Advanced Drainage Systems, Inc.
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
$
Total assets at fair value on a recurring basis $
Total
Level 1
Level 2
Level 3
March 31, 2020
36 $
36 $
— $
— $
36 $
36 $
Liabilities:
Derivative liability - diesel fuel contracts
Contingent consideration for acquisitions (a)
Total liabilities at fair value on a recurring
basis
$
2,228 $
60
— $
—
2,228 $
—
$
2,288 $
— $
2,228 $
—
—
—
60
60
(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
$
Total
Level 1
Level 2
Level 3
March 31, 2019
189 $
1,088
1,277 $
283 $
60
203
— $
—
— $
— $
—
—
189 $
1,088
1,277 $
283 $
60
—
—
—
—
—
—
203
$
546 $
— $
343 $
203
(a) The fair value of the contingent consideration for acquisitions is based on management’s estimate of
contractual payments based on future product certifications obtained.
The contingent consideration for acquisitions are recorded at their fair value based on a discounted cash flow
valuation technique. The Company’s unobservable input is the weighted average cost of capital (“WACC”)
which represents discount rates or rates of return estimates and assumptions that the Company believes would
be used by market participants when valuing these liabilities. The Company’s weighted average cost of
capital was approximately 9.5% as of March 31, 2020 and 2019.
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Advanced Drainage Systems, Inc.
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3)
for the fiscal years ended March 31, 2020 and 2019 were as follows:
Balance at March 31, 2018
Asset acquisition
Change in fair value
Payments of contingent consideration
liability
Balance at March 31, 2019
Payments of contingent consideration
liability
Balance at March 31, 2020
Contingent
consideration
578
40
(6 )
(409 )
203
(143 )
60
$
$
$
$
There were no transfers in or out of Level 3 for the fiscal years ended March 31, 2020 and 2019.
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 $350.0 million and $315.0 million, respectively, as of March 31, 2020 and $100.0
million and $98.9 million, respectively, at March 31, 2019. 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.
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 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 was 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
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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,
2020 and 2019. 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
2020
2019
$
$
$
$
18,357 $
12,438
1,317
32,112 $
6,350 $
1,131
7,481 $
18,683
17,054
1,396
37,133
6,581
1,264
7,845
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.
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.
Past 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 $3.7 million and $4.0 million as of
March 31, 2020 and 2019, respectively. The basis difference will be amortized over the estimated remaining
useful life of the underlying property, plant and equipment, 7 years. The Company recognized $0.3 million,
$0.4 million and $0.5 million of amortization of the basis difference in fiscal 2020, 2019 and 2018,
respectively. The impairment charge is included in Equity in net loss of unconsolidated affiliates in the
Consolidated Statements of Operations.
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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 Intercompany Note indemnifies the
ADS Mexicana joint venture partner 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, 2020 and 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, 2020. 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, 2020 and 2019, the outstanding principal balance of the credit facility including
letters of credit was $9.3 million and $12.3 million, respectively. As of March 31, 2020, there were no U.S.
dollar denominated loans. The weighted average interest rate as of March 31, 2020 was 5.32% on Chilean
peso denominated loans.
ADS and the South American Joint Venture have entered into shared services arrangements in order to
execute the joint venture services. Occasionally, the South American Joint Venture enters into agreements for
pipe sales with ADS and its other related parties, which were $0.7 million, $1.3 million and $2.1 million in the
fiscal years ended March 31, 2020, 2019 and 2018, respectively. ADS pipe sales to the South American Joint
Venture were $0.9 million, $1.2 million and $0.4 million in the fiscal years ended March 31, 2020, 2019 and
2018, respectively.
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.
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ADS purchased $2.0 million, $0.3 million and $2.0 million of Tigre-ADS USA manufactured products for use
in the production of ADS products during fiscal years 2020, 2019 and 2018, respectively.
13. DEBT
Long-term debt as of the fiscal years ended March 31 consisted of the following:
(Amounts in thousands)
Term Loan Facility
Senior Notes
Revolving Credit Facility
PNC Credit Agreement
Prudential Senior Notes
Equipment financing
Total
Unamortized debt issuance costs
Current maturities
Long-term debt obligations
2020
2019
$ 648,250 $
350,000
100,000
—
—
—
— 134,400
— 100,000
2,427
1,099,742 236,827
(2,293 )
(25,932 )
$ 1,089,368 $ 208,602
(2,419 )
(7,955 )
1,492
Bridge Credit Facility
On July 31, 2019, the Company entered into a credit agreement (the “Base Credit Agreement”) by and among
the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time
party thereto.
The Base Credit Agreement provided for a term loan facility in an initial aggregate principal amount of up to
$1.3 billion (the “Bridge Loan Facility”), a revolving credit facility in an initial aggregate principal amount of
up to $350 million (the “Bridge Revolving Credit Facility”), a letter of credit sub-facility in the initial
aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility (the “Bridge
L/C Facility”) and a swing line sub-facility in the aggregate available amount of up to $50 million, as a
sublimit of the Revolving Credit Facility (together with the Bridge Loan Facility, the Bridge Revolving Credit
Facility and the Bridge L/C Facility, the “Bridge Credit Facility”).
On July 31, 2019, the Company borrowed approximately $1.3 billion under the Bridge Loan Facility and
$145 million under the Bridge Revolving Credit Facility, which amounts were to (i) finance the consideration
paid in connection with the closing of the Acquisition, (ii) repay the total outstanding amount as of the
Closing Date under the Company’s then existing revolving credit facility with PNC, (iii) repay outstanding
amounts of existing indebtedness incurred by Infiltrator Water Technologies under its outstanding credit
facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the
Acquisition and the Bridge Loan Facility. Approximately $300.0 million of outstanding borrowings under the
Base Credit Agreement were repaid on September 10, 2019 with proceeds from the Company’s public
offering of common stock as further described in “Note 19. Net Income Per Share and Stockholders’ Equity”
and approximately $300.0 million of outstanding borrowings under the Bridge Loan Facility were repaid on
September 23, 2019 with proceeds from the Company’s offering of $350.0 million Senior Notes, as defined
and further described below.
As a result of this borrowing, on July 31, 2019, the Company initially capitalized approximately $46.9 million
of deferred financing fees associated with the Bridge Credit Facility. This amount was later reduced by
$14.9 million due to refunds received by ADS. The remaining deferred financing costs were written off due to
loss on early extinguishment of debt resulting from the $300.0 million principal payment primarily from the
Common Stock Offering, $300.0 million principal payment from the issuance of Senior Notes due 2027, and
$700.0 million principal payment from the issuance of the Senior Secured Credit Facility on September 24,
2019. These financings resulted in the Company treating the Bridge Credit Facility as having been
extinguished and replaced with the Common Stock Offering, Senior Notes due 2027 and the syndicated Senior
Secured Credit Facility for accounting purposes under ASC 470-50. The loss on early extinguishment of debt,
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which is included in interest expense in the Company's Consolidated Statements of Operations, primarily
reflects the write-off of unamortized debt issuance costs and discounts.
Repayment of Prudential Senior Notes
On July 29, 2019, the Company repaid in full all of its and its subsidiaries’ indebtedness and other obligations
totaling $104.4 million under that certain Second Amended and Restated Private Shelf Agreement, dated as of
June 22, 2017 (as amended the “Shelf Note Agreement”) of the Company’s Senior Notes (“Prudential Senior
Notes”), by and among the Company, as issuer, the guarantors from time to time a party thereto, PGIM, Inc.,
as a purchaser and the other purchasers from time to time a party thereto. The Company repaid the outstanding
indebtedness under the Shelf Note Agreement using borrowings from the Company’s Second Amended and
Restated Credit Agreement (the “PNC Credit Agreement”) as in effect as of July 29, 2019. Concurrently with
the repayment, the Shelf Noteholders authorized and directed PNC Bank, National Association, in its capacity
as Collateral Agent (as defined in the Shelf Note Agreement) to release the security interests and liens
securing the Shelf Note Agreement and the Shelf Note Agreement was terminated.
As a result of the repayment described above, the Company expensed approximately $4.2 million primarily
consisting of prepayment premium or penalty associated with the debt payoff activity and the write-off of
unamortized deferred financing fees, as the payoff meets the criteria to be accounted for as a debt
extinguishment.
Repayment of PNC Credit Agreement
On the Closing Date, using borrowings of the new Bridge Loan Facility the Company repaid in full all of its
and its subsidiaries indebtedness and other obligations totaling $239.2 million under the PNC Credit
Agreement. Concurrently with the repayment, all security interests and liens held by the Collateral Agent (as
defined in the PNC Credit Agreement) securing the PNC Credit Agreement were terminated and released and
the PNC Credit Agreement was terminated.
As a result of the repayment described above, the Company expensed approximately $2.0 million primarily
consisting of the write-off of unamortized deferred financing fees associated with the debt payoff activity, as
the payoff meets the criteria to be accounted for as a debt extinguishment.
Issuance of Senior Notes due 2027
On September 23, 2019, the Company issued $350.0 million aggregate principal amount of 5.0% senior notes
due 2027 (the “Senior Notes”) pursuant to an Indenture, dated September 23, 2019 (the “Indenture”), among
the Company, the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as Trustee
(the “Trustee”). The Senior Notes are guaranteed by each of the Company’s present and future direct and
indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit
Facility. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified
institutional buyers” pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) or to
persons outside the United States under Regulation S of the Securities Act.
Interest on the Senior Notes will be payable semi-annually in cash in arrears on March 31 and September 30
of each year, commencing on March 31, 2020, at a rate of 5.0% per annum. The Senior Notes will mature
on September 30, 2027. The Company used the majority of the net proceeds from the offering of the Senior
Notes for the repayment of $300.0 million of its outstanding borrowings under the Company’s Bridge Loan
Facility. The deferred financing costs associated with the Senior Notes totaled $2.1 million and are recorded
as a direct reduction from the carrying amount of the related debt.
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Advanced Drainage Systems, Inc.
The Company may redeem the Senior Notes, in whole or in part, at any time on or after September 30, 2022 at
established redemption prices. At any time prior to September 30, 2022, the Company may also redeem up
to 40% of the Senior Notes with net cash proceeds of certain equity offerings at a redemption price equal
to 105.0% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if
any, to, but excluding, the redemption date. In addition, at any time prior to September 30, 2022, the Company
may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount
of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption
date plus an applicable “make-whole” premium.
The Indenture contains customary events of default, including, among other things, payment default, failure to
comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions
related to bankruptcy events. The Indenture also contains customary negative covenants.
New Senior Secured Credit Facility
On September 24, 2019, the Company successfully completed a $700 million syndication of the remaining
balance of the Bridge Credit Facility subsequent to the aforementioned Common Stock Offering and Senior
Notes due 2027 and in connection with the syndication, the Company amended the Base Credit Agreement
(the “Senior Secured Credit Facility”). The Senior Secured Credit Facility reduced the applicable margin
utilized in the determination of the interest rate, as well as other provisions.
The Senior Secured Credit Facility provides for a term loan facility in an initial aggregate principal amount of
$700 million (the “Term Loan Facility”), a revolving credit facility in an initial aggregate principal amount of
up to $350 million (the “Revolving Credit Facility”), a letter of credit sub-facility in the initial aggregate
available amount of up to $50 million, as a sublimit of such Revolving Credit Facility (the “L/C Facility”) and
a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving
Credit Facility (together with the Term Loan Facility, the Revolving Credit Facility and the L/C Facility, the
“Senior Secured Credit Facility”). During fiscal 2020, the Company prepaid $51.8 million of the Term Loan
Facility. Letters of credit outstanding at March 31, 2020 amounts to $8.5 million and reduced the availability
of the Revolving Credit Facility.
In connection with entering into the Senior Secured Credit Facility, the Company capitalized approximately
$0.4 million in deferred financing fees. To the extent not previously paid, all then-outstanding amounts under
the Term Loan Facility are due and payable on the maturity date of the Term Loan Facility, which is seven
years from the Closing Date. Borrowings under the Revolving Credit Facility are available beginning on
September 24, 2019 and, to the extent not previously paid, all then-outstanding amounts under the Revolving
Credit Facility are due and payable on the maturity date of the Revolving Credit Facility, which is five
years from the Closing Date.
At the option of the Company, borrowings under the Term Loan Facility and under the Revolving Credit
Facility (subject to certain limitations) bear interest at either a base rate (as determined pursuant to the Senior
Secured Credit Facility) or at a Eurocurrency Rate, based on LIBOR (as defined in the Senior Secured Credit
Facility), plus the applicable margin as set forth therein from time to time. In the case of the Revolving Credit
Facility, the applicable margin is based on the Company’s consolidated senior secured net leverage ratio (as
defined in the Senior Secured Credit Facility). All borrowings under the Term Loan Facility used to finance
the Merger Consideration as described above initially bear interest at a Eurocurrency Rate applicable to
Eurocurrency Loans (as defined in the Senior Secured Credit Facility) denominated in U.S. Dollars.
The Company is also required to pay a commitment fee that is based upon the undrawn amounts of the
Revolving Credit Facility at a rate per annum based upon a calculated ratio as prescribed within the Senior
Secured Credit Facility. As of March 31, 2020, the rate the Company was committed to paying on the
undrawn portion was equal to 0.2%.
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Advanced Drainage Systems, Inc.
The Company’s obligations under the Senior Secured Credit Facility have been secured by granting a first
priority lien on substantially all of the Company’s assets (subject to certain exceptions and limitations), and
each of StormTech, LLC, Advanced Drainage of Ohio, Inc. and Infiltrator Water Technologies, LLC
(collectively the “Guarantors”) has agreed to guarantee the obligations of the Company under the Senior
Secured Credit Facility and to secure the obligations thereunder by granting a first priority lien in substantially
all of such Guarantor’s assets (subject to certain exceptions and limitations).
Principal Maturities - Maturities of long-term debt (excluding interest and deferred financing costs) as of
March 31, 2020 are summarized below:
(Amounts in thousands)
Principal maturities
14. DERIVATIVE TRANSACTIONS
Fiscal Years Ending March 31,
2022
2023
2021
$ 7,955 $ 7,532 $ 7,000 $ 7,000 $ 107,000 $ 963,255 $ 1,099,742
Thereafter
2024
Total
2025
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. The Company’s interest rate swap was terminated during the year ended March
31, 2020 in conjunction with the new Senior Secured Credit Facility. 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, 2020 and 2019 is presented below:
2020
Assets
Liabilities
(Amounts in thousands)
Diesel fuel option collars and swaps
(Amounts in thousands)
Diesel fuel option collars and swaps
Foreign exchange forward contracts
Interest rate swaps
Receivables Other assets
21 $
$
15 $
Other accrued
liabilities
(2,000 ) $
Other
liabilities
(228 )
2019
Assets
Liabilities
Receivables Other assets
$
127 $
—
566
62 $
—
522
Other accrued
liabilities
Other
liabilities
(82 )
—
—
(201 ) $
(60 )
—
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:
Net Unrealized Mark to Market Losses (Gains)
2019
2018
2020
$
1,029 $
—
2,099
3,128 $
1,712 $
60
574
2,346 $
(2,801 )
—
(443 )
(3,244 )
(Amounts in thousands)
Interest rate swaps
Foreign exchange forward contracts
Diesel fuel option collars
Total net unrealized mark to market losses (gains)
$
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(Amounts in thousands)
Interest rate swaps
Foreign exchange forward contracts
Diesel fuel option collars
Total net realized losses (gains)
15. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
Net Realized Losses (Gains)
2019
2018
2020
$
$
378 $
102
357
837 $
(329 ) $
(163 )
(698 )
(1,190 ) $
—
—
(476 )
(476 )
The Company has historically secured supplies of resin raw material by agreeing to purchase quantities during
a future given period at a fixed price. These purchase contracts typically ranged from 1 to 12 months and
occur in the ordinary course of business. The Company, also, enters into equipment purchase contracts with
manufacturers. The Company does not have any outstanding purchase commitments as of March 31, 2020.
Litigation and Other Proceedings
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.
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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 —
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 $22.70, $19.90, and $20.00 per share of redeemable convertible preferred stock at March 31,
2020, 2019, and 2018, respectively, resulting in an average annual fair value per share of $21.31, $19.95, and
$18.40 per share for the fiscal years ended March 31, 2020, 2019, and 2018, respectively. During the fiscal
years ended March 31, 2020, 2019, and 2018, the Company recognized compensation expense of $20.1
million, $15.3 million, and $11.7 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, 2020, 2019, and 2018, the Company recognized
compensation expense and the trustee retained $0.0 million, $3.3 million and $3.2 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, 2020 and 2019.
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
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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, 2020, 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, 2020, 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 2020, the Board of
Directors approved the 2.5% annual dividend to be paid in cash on March 31, 2020 to stockholders of record
as of March 15, 2020. 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.
During fiscal year ended March 31, 2020, the Board of Directors approved a special cash dividend of $1.00
per share. See “Note 19. Net Income Per Share and Stockholders’ Equity” for additional information. Cash
and stock dividends on allocated Redeemable convertible preferred stock for the fiscal years ended March 31,
2020 and 2019, 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
2020
2019
$
$
$
$
10,840 $
7
10,847 $
359
7
366 $
18,756
0.0195
366 $
1,903
10
1,913
134
10
144
7,392
0.0195
144
In the fiscal years ended March 31, 2020 and 2019, 1.0 million and 0.8 million shares of redeemable
convertible preferred stock, respectively, were allocated to the ESOP participants, including, in addition to the
cash dividends, 0.4 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
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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, 2020, 2019, and 2018 was $0.2 million, $(0.2) million and $1.5 million, respectively,
and is included in General and administrative expenses in the Consolidated Statements of Operations. As of
March 31, 2020 and 2019, the executive termination payment obligation was $2.6 million and $4.3 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, 2020, 2019, and 2018. The Company has defined contribution
postretirement benefit plans covering Infiltrator Water Technologies and Canadian employees. The Company
recognized costs of $0.5 million, $0.4 million and $0.7 million in the fiscal years ended March 31, 2020,
2019, and 2018.
COVID-19 Pandemic Pay – In fiscal 2020, the Company communicated to all hourly employees that each
would be entitled to the equivalent of two weeks, or 80 hours, of pandemic pay regardless of whether they
experienced any interruption of employment. The Company recognized pandemic pay costs in Costs of goods
sold on the Company’s Consolidated Statement of Operations and accrued pandemic pay liability in Other
accrued liabilities on the Company’s Consolidated Balance Sheet of $4.8 million in the fiscal year ended
March 31, 2020.
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.
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, 2020, 2019, and 2018:
(Amounts in thousands)
Component of income before income taxes:
Cost of goods sold
Selling expenses
General and administrative expenses
Total stock-based compensation expense
2020
2019
2018
$
$
897 $
426
10,946
12,269 $
317 $
180
6,035
6,532 $
179
105
6,837
7,121
The following table summarizes stock-based compensation expense by award type for the fiscal years ended
March 31, 2020, 2019, and 2018:
(Amounts in thousands)
Stock-based compensation expense:
Equity-classified stock options
Restricted stock
Performance-based restricted stock units
Non-employee director
Total stock-based compensation expense
2020
2019
2018
2,554
3,807
4,682
1,226
$ 12,269 $
2,550
2,064
869
1,049
6,532 $
4,148
1,741
—
1,232
7,121
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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
2020
$27.44 - $41.85
30.1% - 30.9%
1.4% - 2.3%
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%
6.0
0.9% - 1.3%
6.0
1.1% - 1.2%
5.6 - 6.0
1.1% - 1.5%
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, 2020.
The stock option activity for the fiscal year ended March 31, 2020 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)
82 $
—
(8 )
(3 )
71
37
34
$
14.64
—
13.87
15.74
14.69
13.73
15.74
—
4.3
—
—
—
3.4
2.8
4.0
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2020:
(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
—
8.72
8.72
8.72
54 $
—
(17 )
(3 )
34 $
As of March 31, 2020, there was a total of $0.1 million of unrecognized compensation expense related to
unvested stock option awards under the 2000 plan that will be recognized as an expense as the awards vest
over the remaining weighted average service period of 1.3 years.
During the fiscal year end March 31, 2020, 0.1 million shares vested. No options vested during fiscal years
ended March 31, 2019 and 2018. No options were granted during the fiscal years ended March 31, 2020,
2019, and 2018. The aggregate intrinsic value for options outstanding and currently exercisable as of
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March 31, 2020 was $1.0 million and $0.6 million, respectively. The total intrinsic value of options exercised
during the fiscal years ended March 31, 2020, 2019, and 2018 were $0.2 million, $0.8 million and $0.5
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, 2020.
The stock option activity for the fiscal year ended March 31, 2020 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)
1,120 $
—
(555 )
—
565
542
23
$
16.81
—
14.11
—
19.45
19.25
24.12
—
4.9
—
—
—
4.7
4.6
6.0
The following table summarizes information about the unvested stock option grants as of the fiscal year ended
March 31, 2020:
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Forfeited
Unvested at end of year
Number
of Shares
Weighted
Average Grant
Date Fair Value
7.68
—
7.80
—
7.20
121 $
—
(98 )
—
23 $
As of March 31, 2020, there was a total of $0.1 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 0.9 years.
The aggregate intrinsic value for options outstanding and currently exercisable as of March 31, 2020 was $5.6
million and $5.5 million, respectively. The total fair value of options that vested during the fiscal years ended
March 31, 2020, 2019, and 2018 were $0.8 million, $2.6 million, and $4.7 million, respectively. The total
intrinsic value of options exercised during the fiscal year ended March 31, 2020 was $13.2 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.
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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, 2020.
The information about the unvested restricted stock grants as of March 31, 2020 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
44 $
—
(37 )
(1 )
6 $
24.17
—
24.18
24.20
24.10
The Company expects all restricted stock grants to vest.
At March 31, 2020, there was approximately $0.1 million of unrecognized compensation expense related to
the restricted stock that will be recognized over the weighted average remaining service period of 1.0 years.
During the fiscal years ended March 31, 2020, 2019, and 2018, the total fair value of restricted stock that
vested was $0.9 million, $1.4 million and $2.9 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 1.8 million shares available for awards as of March 31, 2020. 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, 2020 is summarized as follows:
Number
of Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in
years)
457 $
336
(8 )
—
785
212
573
23.19
27.51
25.75
—
25.01
22.04
26.11
8.02
8.9
—
—
—
8.4
7.7
8.7
(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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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, 2020:
(Share amounts in thousands)
Unvested at beginning of year
Granted
Vested
Forfeited
Unvested at end of year
Number
of Shares
Weighted
Average Grant
Date Fair Value
7.19
8.02
7.01
—
7.73
388 $
336
(151 )
—
573 $
As of March 31, 2020, there was a total of $2.9 million of unrecognized compensation expense related to
unvested stock option awards under the 2017 Incentive Plan that will be recognized as an expense as the
awards vest over the remaining weighted average service period of 1.8 years.
The aggregate intrinsic value for options outstanding and exercisable as of March 31, 2020 was $3.5 million
and $1.6 million, respectively. There were 0.1 million options that were exercised during the fiscal year ended
March 31, 2020.
The information about the unvested restricted stock grants as of March 31, 2020 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
172 $
308
(90 )
(2 )
388 $
25.02
31.96
25.63
27.13
30.38
At March 31, 2020, there was approximately $8.2 million of unrecognized compensation expense related to
the restricted stock that will be recognized over the weighted average remaining service period of 2.1 years.
The total fair value of restricted stock that vested during fiscal year ended March 31, 2020 and 2019 was $2.3
million and $2.0 million, respectively. During the fiscal year ended March 31, 2018, 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
25.85
33.27
—
—
31.07
115 $
274
—
—
389 $
At March 31, 2020, there was approximately $9.6 million of unrecognized compensation expense related to
the performance units that will be recognized over the weighted average remaining service period of 1.9 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. During fiscal year 2020, the Company modified the achievement levels
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of the awards due to the Acquisition of Infiltrator Water Technologies. The modification did not result in any
incremental compensation expense. The performance units have a 3-year performance period from April 1,
2019 through March 31, 2022. 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.
In addition to the performance units based on ADS performance, the Company issued performance units based
on the achievements of other performance targets. During fiscal year 2020, the Company granted 0.1 million
units with a grant date fair value of $2.9 million, subject to achieving predetermined synergies of the now
consolidated legacy ADS business and Infiltrator Water Technologies. The Company further
granted 0.1 million units with a grant date fair value of $2.7 million, subject to performance conditions of the
Infiltrator Water Technologies reportable segment. For the performance units based on the Infiltrator Water
Technologies reportable segment, 75% of the award is based upon the achievement of certain levels of
Infiltrator Water Technologies Adjusted EBITDA for the performance period and 25% is based upon the
achievement of certain levels of Infiltrator Water Technologies Free cash flow for the performance
period. These two performance unit grants have a 3-year performance period from August 1, 2019 through
March 31, 2022.
During the fiscal year ended March 31, 2020 and 2019, the weighted average grant date fair value of
performance units granted was $33.27 and $25.84, respectively. During the fiscal year ended March 31, 2020
and 2019, the total fair value of performance units that vested was $0.0 million and $0.1 million. During the
fiscal year ended March 31, 2018, 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
2020
$ (186,209 ) $
6,595
$ (179,614 ) $
2019
103,559 $
8,051
111,610 $
2018
72,109
4,833
76,942
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
2020
2019
2018
$
10,867 $
4,655
1,546
17,068
11,575 $
3,998
2,050
17,623
17,107
3,541
2,242
22,890
210
(1,228 )
(1,958 )
(2,976 )
14,092 $
11,745
1,795
(1,114 )
12,426
30,049 $
(11,236 )
(55 )
(188 )
(11,479 )
11,411
$
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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, ESOP dividends
and special dividend(a)
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
Equity-based compensation
Return to provision - federal and state
Qualified production activity deduction
Executive compensation
Net operating losses
Credits and incentives
Other
Effective rate
2020
2019
2018
21.0 %
21.0 %
31.5 %
(30.3 )
0.6
3.2
(0.3 )
5.4
0.7
(1.7 )
1.2
—
1.1
0.3
—
(0.8 )
1.9
0.7
(1.9 )
(7.9 )%
4.6
(1.3 )
—
(0.4 )
(0.2 )
—
1.1
—
(1.0 )
0.2
26.9 %
3.6
0.3
(19.4 )
0.5
(5.0 )
(2.5 )
0.1
—
(0.5 )
0.1
14.8 %
(a) This includes the special dividend paid in the first quarter of fiscal 2020 that resulted in $246.8 million in additional stock-based
compensation. Of the total stock-based compensation expense and dividends paid, approximately $242.9 million related to non-
deductible stock appreciation and deductible dividends. This decreased the effective tax rate by 28.4%. See “Note 19. Net Income
Per Share and Stockholders’ Equity” for additional information.
As discussed in “Note 4. Acquisitions”, the Company acquired Infiltrator Water Technologies on July 31,
2019. During the year ended March 31, 2020, as part of the purchase price, approximately $132.4 million was
attributed to deferred tax liabilities. Of the $132.4 million, $82.3 million related to the step up of GAAP basis
for fair market valuations, while the remaining $50.1 million were acquired deferred tax liabilities. Of the
total $82.3 million, $80.2 million was attributed to intangibles. The Company also acquired a federal net
operating loss of $24.0 million.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed
into law. The CARES Act provides that net operating losses arising in a tax year beginning in 2018, 2019, or
2020 can be carried back five years. As a result, the Company has recognized an income tax benefit of $3.4
million related to the federal net operating loss from the acquisition of Infiltrator Water Technologies. The
Company continues to evaluate the new law, and we do not expect either the U.S. or non-U.S. corporate
income tax provisions of the CARES Act to have a material impact on our income tax (benefit) provision.
As of March 31, 2020, the Company has approximately $26.5 million of undistributed earnings that are
intended to be reinvested indefinitely with the exception of cash dividends paid by our ADS Mexicana joint
venture and the distribution paid by our Canadian subsidiary during the fiscal year. 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 undistributed earnings.
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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:
Receivable and other allowances
Inventory
Stock-based compensation
Worker’s compensation
Net operating loss and credit carryforwards
Operating lease liabilities
Other
Total deferred tax assets
Less: valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Intangible assets
Property, plant and equipment
Operating lease assets
Goodwill
Other
Total deferred tax liabilities
Net deferred tax liability
2020
2019
$
$
1,122 $
2,065
2,770
2,317
2,059
6,160
5,562
22,055
(941 )
21,114
121,276
63,649
6,147
4,527
600
196,199
175,085 $
1,546
3,217
3,186
2,063
152
-
4,673
14,837
(269 )
14,568
2,512
52,218
-
4,078
1,385
60,193
45,625
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
2020
2019
$
531 $
175,616
338
45,963
As a result of the acquisition of Infiltrator Water Technologies, the Company acquired state net operating
losses (“NOLs”) and state credit carryforward attributes. The Company has recorded deferred tax assets
related to state NOLs of $0.9 million as of March 31, 2020, with carryforward periods ranging from 5 to 20
years. Any losses not utilized within a specific state’s carryforward period will expire. A valuation allowance
has been recorded against $0.1 million of these deferred tax assets as of March 31, 2020 for state NOLs that
the Company does not expect to realize within their respective carryforward periods. Tax benefits associated
with state tax credits will also expire if not utilized and amounted to $0.8 million at March 31, 2020. A
valuation allowance in the amount of $0.5 million has been established related to state credits the Company
does not expect to utilize.
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Deferred tax assets related to foreign NOLs were $0.3 million as of March 31, 2020 with carryforward periods
ranging from 20 years to indefinite carryforward periods. Any losses not utilized within a specific
carryforward period will expire. A valuation allowance has been recorded against $0.1 million of these
deferred tax assets as of March 31, 2020 for foreign NOLs that the Company does not expect to realize within
their respective carryforward periods.
Accounting for Uncertain Tax Positions
As of March 31, 2020, The Company had unrecognized tax benefit of $3.3 million, which if resolved
favorably, would reduce income tax expense by $3.3 million. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits for the years ended March 31, 2020, 2019, and 2018 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
2020
2019
2018
5,681 $
—
(1,398 )
1,907
(124 )
(2,589 )
(134 )
3,343 $
7,593 $
164
(198 )
136
(200 )
(1,595 )
(219 )
5,681 $
6,196
81
—
5,108
—
(3,940 )
148
7,593
$
$
The short-term portion of the unrecognized tax benefit of $1.5 million at March 31, 2020 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 $0.8 million and $1.5 million at March 31, 2020 and 2019,
respectively.
The Company believes that over the next twelve months, it is reasonably possible that up to $1.5 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, 2017 through March 31, 2020. 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, 2016 through March 31, 2020. The foreign
income tax returns are open to audit under the statute of limitations for the years ended March 31, 2016
through March 31, 2020.
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.
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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, 2020, if dilutive. For purposes of the
calculation of diluted net income per share, stock options and unvested restricted stock are considered to be
potential common stock and are only included in the calculations when their effect is dilutive.
The Company’s redeemable common stock is included in the weighted-average number of common shares
outstanding for calculating basic and diluted net income per share.
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Advanced Drainage Systems, Inc.
The following table presents information necessary to calculate net income per share for the fiscal years ended
March 31, 2020, 2019, and 2018, 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 (loss) income attributable to ADS
Adjustment for:
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 (loss) 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 (loss) income per common share —
Diluted
Potentially dilutive securities excluded as anti-
dilutive
2020
2019
2017
$ (193,174 ) $
77,772 $
62,007
(11,206 )
(2,047 )
(1,858 )
(338 )
(69 )
(49 )
(204,718 )
75,656
60,100
—
(5,474 )
(4,514 )
(204,718 )
70,182
55,586
63,820
57,025
55,696
$
(3.21 ) $
1.23 $
1.00
(204,718 )
70,182
55,586
63,820
—
—
57,025
39
547
55,696
—
638
63,820
57,611
56,334
$
(3.21 ) $
1.22 $
0.99
14,449
5,966
6,167
Common Stock Offering – On September 10, 2019, the Company issued and sold an aggregate
of 10,350,000 shares of common stock, $0.01 par value per share, which included the full exercise of the
underwriters’ option to purchase additional shares, at a price of $29.75 per share, before underwriting
discounts and commissions. The common stock was sold pursuant to the Company’s shelf registration
statement and related prospectus supplement. The Company received proceeds of $293.6 million from the
issuance after deducting underwriting discounts and commissions and offering expenses. The Company used
the net proceeds for the repayment of a portion of the outstanding borrowings under the Senior Secured Credit
Facility.
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Advanced Drainage Systems, Inc.
Stockholders’ Equity - The Company did not repurchase any shares of common stock during fiscal years 2020
and 2019. In February 2017, the Company’s Board of Directors authorized the Company to repurchase up to
$50 million of ADS common stock in accordance with applicable securities laws. As of March 31, 2020,
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.
Special Dividend and the Employees Stock Ownership Plan (“ESOP”) - During fiscal year ended March 31,
2020, the Board of Directors approved a special cash dividend of $1.00 per share and quarterly dividends of
$0.09 per share. The special and quarterly dividend were paid to all stockholders on June 14, 2019 to
stockholders of record at the close of business on June 3, 2019. The total dividend payment was $81.6 million.
The dividends received by the unallocated redeemable convertible preferred stock held in the ESOP trust was
used to pay $12.0 million of the ESOP loan back to the Company resulting in approximately 11.6 million
shares of the Company’s redeemable convertible preferred stock being allocated to ESOP participants. The
Company recognized $246.8 million in stock-based compensation expense based on the fair value on the date
the Board of Directors approved the special dividend. The Board of Director’s approval committed the ESOP
to use those proceeds to pay down the ESOP loan. The special dividend compensation expense was
recognized in Cost of goods sold - ESOP special dividend compensation and Selling, general and
administrative expenses - ESOP special dividend compensation on the Company’s Consolidated Statement of
Operations. The Company’s ESOP is further described in “Note 16. Employee Benefit Plans”.
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)
Lease liability - Operating leases
Self-insurance accruals
Other
Total accrued liabilities
2020
2019
$
$
33,215 $
14,479
7,757
12,486
33,179
101,116 $
18,108
12,313
—
11,697
19,783
61,901
(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
Following the Acquisition of Infiltrator Water Technologies, the Company revised its reportable segments to
reflect how the Chief Operating Decision Maker (“CODM”) currently reviews financial information and
makes operational decisions. After the Acquisition, ADS operates its business in three distinct reportable
segments: “Pipe”, “International” and “Infiltrator Water Technologies.” “Allied Products & Other” represents
the Company’s Allied Products and all other business segments. “Pipe” and “Allied Products & Other” were
previously included as Domestic. With the change in reportable segments, the CODM is now evaluating
segment reporting based on Net Sales and Segment Adjusted Gross Profit. The Company calculated Segment
Adjusted Gross Profit as net sales less costs of goods sold, depreciation and amortization, stock-based
compensation, non-cash charges and certain other expenses. A measure of assets is not applicable, as segment
assets are not regularly reviewed by the CODM for evaluating performance or allocating resources. The prior
period segment results and related disclosures have been recast to conform to the current year presentation.
Pipe – The Pipe segment manufactures and markets high performance thermoplastic corrugated pipe
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, buying groups and
co-ops, major national retailers as well as an extensive network of hundreds of small to medium-sized
distributors across the U.S.
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Advanced Drainage Systems, Inc.
Products include single wall pipe, N-12 HDPE pipe sold into the Storm sewer, Infrastructure and Agriculture
markets, High Performance polypropylene pipe sold into the Storm sewer, Infrastructure and sanitary sewer
markets. Products are designed primarily for storm water management in the construction and infrastructure
marketplace across a broad range of end markets and applications, including non-residential, residential,
agriculture and infrastructure. Products are manufactured using HDPE and polypropylene plastic material.
Infiltrator Water Technologies – Infiltrator Water Technologies is a leading national provider of plastic
leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications.
Infiltrator Water Technologies products are used in on-site septic wastewater treatment systems in the United
States and Canada.
International – The International segment manufactures and markets pipe and allied products in certain
regions outside of the United States, including Company owned facilities in Canada, subsidiaries that
distribute to Europe and the Middle East, exports and through the Company’s joint ventures with local
partners in Mexico and South America. The Company’s 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 lines include
single wall pipe, N-12 HDPE pipe, high performance PP pipe and certain geographies also sell our broad line
of Allied Products & Other.
Allied Products & Other – Allied Products & Other manufactures and markets products throughout the
United States. Products include StormTech, Nyloplast, ARC Septic Chambers, Inserta Tee, BaySaver filters
and water quality structures, Fittings, and FleXstorm. 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.
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Advanced Drainage Systems, Inc.
The following table sets forth reportable segment information with respect to the amount of Net sales
contributed by each class of similar products for the fiscal years ended March 31:
2020
(Amounts in thousands)
Pipe
Infiltrator Water Technologies
International
International - Pipe
International - Allied Products & Other
Total International
Allied Products & Other
Intersegment Eliminations
Total Consolidated
(Amounts in thousands)
Pipe
Infiltrator Water Technologies
International
International - Pipe
International - Allied Products & Other
Total International
Allied Products & Other
Intersegment Eliminations
Total Consolidated
(Amounts in thousands)
Pipe
Infiltrator Water Technologies
International
International - Pipe
International - Allied Products & Other
Total International
Allied Products & Other
Intersegment Eliminations
Total Consolidated
Net Sales
$ 954,633 $
211,005
Intersegment
Net Sales
Net Sales from
External
Customers
(2,030 ) $
(41,657 )
952,603
169,348
108,624
39,957
148,581
403,273
(43,687 )
$ 1,673,805 $
—
—
—
—
43,687
108,624
39,957
148,581
403,273
—
— $ 1,673,805
2019
Intersegment
Net Sales
Net Sales from
External
Customers
Net Sales
$ 868,805 $
—
122,836
37,766
160,602
355,326
—
$ 1,384,733 $
2018
Net Sales
$ 844,875 $
—
— $
—
868,805
—
122,836
—
37,766
—
160,602
—
355,326
—
—
—
— $ 1,384,733
— $
—
844,875
—
119,207
—
36,715
—
155,922
—
329,557
—
—
—
— $ 1,330,354
Intersegment
Net Sales
Net Sales from
External
Customers
119,207
36,715
155,922
329,557
—
$ 1,330,354 $
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Advanced Drainage Systems, Inc.
The following sets forth certain financial information attributable to the reportable segments for the fiscal
years ended March 31:
(Amounts in thousands)
Segment adjusted gross profit
Pipe
Infiltrator Water Technologies
International
Allied Products & Other
Intersegment Elimination
Total
Depreciation and amortization
Pipe
Infiltrator Water Technologies
International
Allied Products & Other(a)
Total
Capital expenditures
Pipe
Infiltrator Water Technologies
International
Allied Products & Other(a)
Total
2020
2019
2018
239,531 $
98,245
36,999
201,206
(1,895 )
574,086 $
191,002 $
—
37,191
168,729
—
396,922 $
186,330
—
31,725
155,166
—
373,221
46,611 $
7,159
6,013
65,157
124,940 $
33,629 $
24,917
2,623
6,508
67,677 $
49,419 $
—
5,938
16,543
71,900 $
34,878 $
—
3,765
4,769
43,412 $
51,236
—
6,431
17,336
75,003
32,393
—
2,147
7,169
41,709
$
$
$
$
$
$
(a) Includes depreciation and amortization and capital expenditures not allocated to a reportable segment.
The amortization expense of Infiltrator Water Technologies intangible assets acquired is included in
Allied Products & Other.
Reconciliation of Gross Profit to Segment Adjusted Gross profit
(Amounts in thousands)
Reconciliation of Segment Adjusted Gross Profit:
2020
2019
2018
Total Gross Profit
Depreciation and amortization
ESOP and stock-based compensation expense
ESOP special dividend compensation
COVID-19 Related Expenses (a)
Inventory step up related to
Infiltrator Water Technologies acquisition
Total Segment Adjusted Gross Profit
$
316,479 $
62,225
14,319
168,610
4,573
326,967 $
59,164
10,791
—
—
302,481
62,113
8,627
—
—
7,880
574,086 $
—
396,922 $
—
373,221
$
(a) Represents the Company’s pandemic pay expense included in Gross profit in connection with the
Company’s response to the COVID-19 pandemic, see “Note 16. Employee Benefit Plans” for additional
information.
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Advanced Drainage Systems, Inc.
Geographic Sales and Assets Information
Net sales are attributed to the geographic location based on the location of the customer. The table below
represents the Net sales and long-lived asset information by geographic location for each of the fiscal years
ended March 31:
(Amounts in thousands)
Net Sales
North America
Other
Total
(Amounts in thousands)
Long-Lived Assets (a)
North America
Other
Total
2020
2019
2018
$ 1,655,219 $ 1,366,470 $ 1,313,917
16,437
$ 1,673,805 $ 1,384,733 $ 1,330,354
18,263
18,586
2020
2019
$
$
488,125 $
9,250
497,375 $
401,276
10,467
411,743
(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:
2020
2019
2018
Interest
Income taxes
$
41,290 $
8,710
15,679 $
29,841
17,890
24,510
(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
Lease obligation retired upon disposition of
leased assets
Contribution of net accounts receivable to
the South American Joint Venture
Payable recorded for business acquisition
2020
2019
2018
$
359 $
134 $
134
1,588
13,109
1,255
8,609
1,258
11,566
799
578
636
—
—
—
—
2,785
300
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Advanced Drainage Systems, Inc.
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth certain historical unaudited consolidated condensed quarterly financial
information for each of the quarters during the years ended March 31, 2020 and 2019. 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 2020
For the Three Months Ended
(in thousands, except per share amounts)
Net sales
Gross profit
Net income (loss)
Net income (loss) attributable to ADS
Net (loss) income per share
Basic (1)
Diluted (1)
(in thousands, except per share amounts)
Net sales
Gross profit
Net income
Net income attributable to ADS
Net income per share
Basic (1)
Diluted (1)
March
31, 2020
December
31, 2019
September
30, 2019
June 30,
2019
$ 370,768 $ 393,424 $ 495,905 $ 413,708
(62,158 )
108,755 123,358 146,524
8,462 (227,451 )
7,589 (226,356 )
23,659
23,288
3,533
2,305
$
$
0.01 $
0.01 $
0.28 $
0.28 $
0.10 $
0.10 $
(4.06 )
(4.06 )
Fiscal 2019
For the Three Months Ended
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
72,399
16,550
15,812
59,504
1,893
1,010
$
$
0.01 $
0.01 $
0.25 $
0.25 $
0.45 $
0.45 $
0.51
0.51
(1) The earnings per share calculations for each quarter are based upon the applicable weighted average shares
outstanding for each period and may not necessarily be equal to the full year share amount.
24. SUBSEQUENT EVENTS
Dividends on Common Stock - During the first quarter of fiscal 2021, the Company declared a quarterly cash
dividend of $0.09 per share of common stock. The dividend is payable on June 15, 2020 to stockholders of
record at the close of business on June 1, 2020.
* * * * * *
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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, 2020,
2019 and 2018 (in thousands):
Allowance for Doubtful Accounts:
Year ended March 31,
2020
2019
2018
Balance at
beginning
of period
$ 7,653 $
6,826
10,431
Charged
to
costs and
expenses (1)
Charged
to
other
accounts (2)
Deductions
(3)
Balance at
end of
period
(24 ) $
1,154
503
(234 ) $ (2,360 ) $ 5,035
7,653
(262 )
6,826
(3,717 )
(65 )
(391 )
(1) Amount for the year ended March 31, 2020 includes $0.4 million due to the Acquisition.
(2) Amounts represent the impact of foreign currency translation.
(3) 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-61
About Advanced
Drainage Systems, Inc.
Advanced Drainage Systems is a leading provider of innovative water management solutions in
the stormwater and on-site septic wastewater industries, providing superior drainage solutions
for use in the construction and agriculture marketplace. For over 50 years, the Company has been
manufacturing a variety of innovative and environmentally friendly alternatives to traditional
materials. Its innovative products are used across a broad range of end markets and applications,
including non-residential, residential, infrastructure and agriculture applications. The Company has
established a leading position in many of these end markets by leveraging its national sales and
distribution platform, overall product breadth and scale and manufacturing excellence. Founded
in 1966, the Company operates a global network of 64 manufacturing plants and 32 distribution
centers. To learn more about ADS, please visit the Company’s website at www.ads-pipe.com.
ADS Annual Report 2020 / 13
Advanced Drainage System, Inc.
4640 Trueman Blvd.
Hilliard, OH 43026
www.ads-pipe.com
14
/ ADS Annual Report 2020