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MarketScreener Homepage  >  Equities  >  Nyse  >  Advanced Drainage Systems Inc    WMS

ADVANCED DRAINAGE SYSTEMS INC (WMS)
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ADVANCED DRAINAGE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/09/2018 | 10:18pm CEST
Unless the context otherwise indicates or requires, as used in this Quarterly
Report on Form 10-Q, 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.

Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted,
references to "year" pertain to our fiscal year. For example, 2018 refers to
fiscal 2018, which is the period from April 1, 2017 to March 31, 2018.

The following discussion and analysis of the financial condition and results of
our operations should be read in conjunction with our Condensed Consolidated
Financial Statements and related footnotes included elsewhere in this Quarterly
Report on Form 10-Q and with the audited Consolidated Financial Statements
included in our Fiscal 2017 Form 10-K, as filed with the Securities and Exchange
Commission (the "SEC") on May 30, 2017. In addition to historical condensed
consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. This discussion contains forward-looking statements
that are based on the beliefs of our management, as well as assumptions made by,
and information currently available to, our management. Our actual results could
differ materially from those discussed in the forward-looking statements. For
more information, see the section below entitled "Forward Looking Statements."

We consolidate all of our joint ventures for purposes of GAAP, except for our South American Joint Venture and our Tigre-ADS USA joint venture.

Overview


We are the leading manufacturer of high performance thermoplastic corrugated
pipe, providing a comprehensive suite of water management products and superior
drainage solutions for use in the underground construction and infrastructure
marketplace. Our innovative products are used across a broad range of end
markets and applications, including non-residential, residential, agriculture
and infrastructure applications. We have established a leading position in many
of these end markets by leveraging our national sales and distribution platform,
our overall product breadth and scale and our manufacturing excellence. In the
United States, our national footprint combined with our strong local presence
and broad product offering make us the leader in an otherwise highly fragmented
sector comprised of many smaller competitors. We believe the markets we serve in
the United States represent approximately $11 billion of annual revenue
opportunity. In addition, we believe the increasing acceptance of thermoplastic
pipe products in international markets represents an attractive growth
opportunity.

Our products are generally lighter, more durable, more cost effective and easier
to install than comparable alternatives made with traditional materials.
Following our entrance into the non-residential construction market with the
introduction of N-12 corrugated polyethylene pipe in the late 1980s, our pipe
products have been displacing products made with traditional materials, such as
reinforced concrete, corrugated steel and polyvinyl chloride ("PVC"), across an
ever expanding range of end markets. This has allowed us to consistently gain
market share and achieve above-market growth throughout economic cycles. We
expect to continue to drive conversion to our products from traditional
materials as contractors, civil design engineers and municipal agencies
increasingly acknowledge the superior physical attributes and compelling value
proposition of our thermoplastic products. In addition, we believe that overall
demand for our products will benefit as the regulatory environment continues to
evolve.

Our broad product line includes HDPE pipe, PP pipe and related water management
products. Building on our core drainage businesses, we have aggressively pursued
attractive ancillary product categories such as storm and septic chambers, PVC
drainage structures, fittings and filters, and water quality filters and
separators. We refer to these ancillary product categories as Allied Products.
Given the scope of our overall sales and distribution platform, we have been
able to drive growth within our Allied Products and believe there are
significant growth opportunities going forward.

On August 1, 2017, we acquired DURASLOT, Inc., a manufacturer of linear surface drains for $2.3 million.


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Restructuring Activities


In fiscal 2018, we initiated restructuring activities designed to improve our
cost structure, including closing three underutilized manufacturing facilities,
reducing headcount and eliminating nonessential costs. The following table
summarizes the restructuring activity included in Loss on disposal of assets and
costs from exit and disposal activities recorded during the three and nine
months ended December 31, 2017 and 2016:



                                        Three Months Ended           Nine Months Ended
                                           December 31,                 December 31,
                                         2017           2016          2017           2016
                                                        (in thousands)
    Accelerated depreciation         $          -       $   -     $      3,561       $   -
    Plant severance                         1,021           -            1,848           -
    Headcount reduction                         -           -            2,577           -
    Other restructuring activities             56           -               56           -

Total restructuring activities $ 1,077 $ - $ 8,042 $ -

The following table summarizes the line items of the Condensed Consolidated Statements of Operations where the expenses above would have been recorded to absent of a restructuring program:



                                          Three Months Ended           Nine Months Ended
                                             December 31,                 December 31,
                                           2017           2016          2017           2016
                                                          (in thousands)
 Cost of goods sold                    $      1,077       $   -     $      6,023       $   -
 Selling expenses                                 -           -            1,390           -
 General and administrative expenses              -           -              629           -

Total restructuring activities $ 1,077 $ - $ 8,042 $ -

The restructuring costs above represent one-time expenses and are not indicative of expected costs or cost savings in future periods.




As of December 31, 2017, we have a $2.8 million severance liability related to
the restructuring activities, which is recorded in Other accrued liabilities and
Other liabilities in the Condensed Consolidated Balance Sheet.

Federal Income Tax Reform


The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The
Tax Act includes numerous provisions that will affect us, including a reduction
of corporate tax rates from 35% to 21%, business-related exclusions, deductions
and credits and the repatriation of our undistributed foreign earnings and
profits.

We are currently in the process of evaluating the impacts of the Tax Act on our
deferred income tax attributes and tax on undistributed foreign earnings. As
such, we recorded provisional amounts for the revaluing of deferred tax
attributes resulting in a tax benefit of $14.7 million and an estimated tax
obligation on our undistributed foreign earnings resulting in a tax expense of
$0.9 million. We will continue to evaluate the impact of the Tax Act. In order
to complete this assessment, we need full year activity to be able to
appropriately revalue our deferred tax attributes. Also, additional time is
needed to fully evaluate the earnings and profit and corresponding measurement
periods for our tax on undistributed foreign earnings.

We are evaluating the impacts of the Tax Act on our ongoing future provisional
income tax effective tax rate. We currently estimate the provisional effective
tax rate will be in the range of 30% to 32% which is a decrease of 8% to 10%
from our previous historical expectation.

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Results of Operations

Three Months Ended December 31, 2017 Compared With Three Months Ended December 31, 2016

The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the three months ended December 31, 2017 and 2016. We believe this presentation is useful to investors in comparing historical results.



                                                                Three Months Ended December 31,
                                                                 2017                     2016
Consolidated Statements of Operations data:
Net sales                                                             100.0 %                  100.0 %
Cost of goods sold                                                     75.7                     76.4
Gross profit                                                           24.3                     23.6
Selling                                                                 7.1                      7.2
General and administrative                                              7.4                      7.7

Loss on disposal of assets and costs from exit and

  disposal activities                                                   0.6                      0.7
Intangible amortization                                                 0.6                      0.7
Income from operations                                                  8.5                      7.2
Interest expense                                                        1.0                      1.4
Derivative gains and other income, net                                 (0.3 )                   (0.3 )
Income before income taxes                                              7.8                      6.0
Income tax (benefit) expense                                           (2.3 )                    2.0
Equity in net (income) loss of unconsolidated affiliates               (0.2 )                    0.5
Net income                                                             10.4                      3.5
Less: net income attributable to noncontrolling interest                0.3                      0.4
Net income attributable to ADS                                         10.0 %                    3.1 %




Net sales - Net sales were $320.8 million in the three months ended December 31,
2017, increasing $26.1 million, or 8.9%, over the comparable period in fiscal
2017.



                                           Three Months Ended December
                                                       31,
                                              2017             2016         $ Variance      % Variance
                                                 (In thousands)
Domestic
Pipe                                       $  196,402$  182,061$     14,341             7.9 %
Allied Products                                80,470           72,251            8,219            11.4 %
Total domestic                                276,872          254,312           22,560             8.9 %
International
Pipe                                           33,166           32,550              616             1.9 %
Allied Products                                10,794            7,854            2,940            37.4 %
Total international                            43,960           40,404            3,556             8.8 %
Total net sales                            $  320,832$  294,716$     26,116             8.9 %


Domestic net sales increased $22.6 million, or 8.9%, in the three months ended
December 31, 2017, over the comparable period in the previous fiscal year. Our
domestic pipe sales increased by $14.3 million, or 7.9%, which was primarily
attributable to price increases and changes in product mix of $11.9 million and
pipe volume increase of $1.7 million. Allied Product sales increased
$8.2 million, or 11.4%.

International net sales increased $3.6 million, or 8.8%, in the three months
ended December 31, 2017 over the comparable period in the previous fiscal year.
The increase was primarily attributable to the increased Allied Product sales of
$2.9 million.

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Cost of goods sold and Gross profit - Cost of goods sold increased by $17.7 million, or 7.8%, and gross profit increased by $8.4 million, or 12.1%, in the three months ended December 31, 2017 over the comparable period in the previous fiscal year.



                        Three Months Ended December 31,
                          2017                  2016            $ Variance       % Variance
                                (In thousands)
Gross Profit
Domestic             $        69,880$        60,526$      9,354             15.5 %
International                  7,946                 8,915             (969 )          (10.9 %)
Total gross profit   $        77,826$        69,441$      8,385             12.1 %




The increase in domestic gross profit of $9.3 million, or 15.5%, was due to the
gross profit impact of the net sales increase discussed above partially offset
by a $2.5 million increase in material costs. The remainder of the variance is
comprised of distribution and other expenses.

International gross profit decreased $1.0 million, or 10.9%, in the three months
ended December 31, 2017 compared to the same period in fiscal 2017, due to a
$2.7 million increase in labor and overhead costs partially offset by the gross
profit impact of the 8.8% increase in net sales discussed above.

Selling expenses - As a percentage of net sales, selling expenses were relatively flat at 7.1% in the three months ended December 31, 2017 as compared to 7.2% in the prior year.


General and administrative expenses - General and administrative expenses for
the three months ended December 31, 2017 increased $1.1 million from the prior
year period. The increase was primarily due to an increase in stock-based
compensation expense of $4.7 million and a $1.8 million legal settlement. These
increases were partially offset by a decrease in restatement related costs of
$5.5 million. On April 1, 2017, all stock options were amended and became equity
classified. In the three months ended December 31, 2016, all stock options were
liability-classified resulting in adjustments to fair value each period.

Loss on disposal of assets and costs from exit and disposal activities - In the
three months ended December 31, 2017, we recorded $1.9 million related to
restructuring activities. In addition, we recorded a loss on other disposals and
partial disposals of property, plant and equipment of approximately $0.8
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.


Interest expense - Interest expense decreased $1.1 million in the three months
ended December 31, 2017 compared to the same period in fiscal 2017, primarily
due to a $1.1 million unrealized gain on the interest rate swap executed on June
28, 2017.

Derivative gains and other income, net - Derivative gains and other income, net
increased by $0.2 million for the three months ended December 31, 2017 compared
to the same period in fiscal 2017. During the three months ended December 31,
2017, we recognized a net $0.5 million gain on derivative contracts compared to
a $0.3 million loss for the three months ended December 31, 2016. The increase
in gain on derivative contracts was offset by changes in foreign currency
exchange rates.

Income tax (benefit) expense - For the three months ended December 31, 2017 and
2016, we had effective tax rates of (29.4)% and 33.8%, respectively. The
decrease in the effective tax rate was primarily due to impact of the Tax Act,
return to provision adjustments and the uncertain tax position lapse. See "Note
10. 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 two unconsolidated joint ventures in which we

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have significant influence, but not control, over operations. The Equity in
(income) net loss of unconsolidated affiliates increased to a $0.8 million
income for the three months ended December 31, 2017 from a $1.5 million loss for
the three months ended December 31, 2016. The increase is primarily the result
of the $1.9 million gain recognized as a result of the contribution of
outstanding receivables we made to the South American Joint Venture in the three
months ended December 31, 2107. See "Note 6. Related Party Transactions" for
additional information.

Net income attributable to noncontrolling interest - Net income attributable to
noncontrolling interest decreased from net income of $1.2 million for the three
months ended December 31, 2016 to net income of $1.1 million for the three
months ended December 31, 2017.

Nine Months Ended December 31, 2017 Compared With Nine Months Ended December 31, 2016

The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the nine months ended December 31, 2017 and 2016. We believe this presentation is useful to investors in comparing historical results.


                                                               Nine Months 

Ended December 31,

                                                                2017                    2016
Consolidated Statements of Operations data:
Net sales                                                            100.0 %                 100.0 %
Cost of goods sold                                                    76.5                    74.7
Gross profit                                                          23.5                    25.3
Selling                                                                6.5                     6.8
General and administrative                                             6.9                     7.7

Loss on disposal of assets and costs from exit and

  disposal activities                                                  1.0                     0.3
Intangible amortization                                                0.6                     0.6
Income from operations                                                 8.6                     9.9
Interest expense                                                       1.2                     1.3
Derivative gains and other income, net                                (0.4 )                  (0.5 )
Income before income taxes                                             7.9                     9.1
Income tax (benefit) expense                                           1.5                     3.5
Equity in net (income) loss of unconsolidated affiliates               0.0                     0.2
Net income                                                             6.4                     5.3
Less: net income attributable to noncontrolling interest               0.2                     0.3
Net income attributable to ADS                                         6.3 %                   5.0 %


Net sales - Net sales were $1,080.2 million in the nine months ended December
31, 2017, increasing $67.1 million, or 6.6%, over the comparable period in
fiscal 2017.

                         Nine Months Ended December 31,
                             2017                 2016          $ Variance      % Variance
                                 (In thousands)
 Domestic
 Pipe                  $        676,079$    627,397$     48,682             7.8 %
 Allied Products                272,174            251,451           20,723             8.2 %
 Total domestic                 948,253            878,848           69,405             7.9 %
 International
 Pipe                           101,139            105,832           (4,693 )          (4.4 %)
 Allied Products                 30,848             28,397            2,451             8.6 %
 Total international            131,987            134,229           (2,242 )          (1.7 %)
 Total net sales       $      1,080,240$  1,013,077$     67,163             6.6 %


Domestic net sales increased $69.4 million, or 7.9%, in the nine months ended
December 31, 2017, over the comparable period in the previous fiscal year. Our
domestic pipe sales increased by $48.7 million, or 7.8%, which

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was primarily the result of pipe volume increase of $36.0 million and price increases and changes in product mix of $12.1 million. Allied Product sales increased $20.7 million, or 8.2%.


International net sales decreased $2.2 million, or 1.7%, in the nine months
ended December 31, 2017 over the comparable period in the previous fiscal year.
The decrease was primarily attributable to price decreases and changes in
product mix of $5.5 million, partially offset by an increase in Allied Products
sales of $2.5 million.

Cost of goods sold and Gross profit - Cost of goods sold increased by
$69.4 million, or 9.1%, and gross profit decreased by $2.2 million, or 0.9%, in
the nine months ended December 31, 2017 over the comparable period in the
previous fiscal year.

                        Nine Months Ended December 31,
                          2017                  2016            $ Variance       % Variance
                                (In thousands)
Gross Profit
Domestic             $       233,914$       227,988$      5,926              2.6 %
International                 20,452                28,571           (8,119 )          (28.4 %)
Total gross profit   $       254,366$       256,559$     (2,193 )           (0.9 %)


The increase in domestic gross profit of $5.9 million, or 2.6%, was due to the
gross profit impact of the net sales increase discussed above offset by a $10.3
million increase in material costs, a $3.5 million increase in labor and
overhead costs, and a $5.2 million increase in distribution expenses.

International gross profit decreased $8.1 million, or 28.4%, in the nine months
ended December 31, 2017 compared to the same period in fiscal 2017, largely due
to a $3.2 million increase in labor and overhead costs and the gross profit
impact of the 1.7% decrease in net sales discussed above.

Selling expenses - As a percentage of net sales, selling expenses were 6.5% in
the nine months ended December 31, 2017 as compared to 6.8% in the prior year.
The change is primarily due to an increase of $1.7 million in compensation
expense partially offset by a benefit in bad debt expense in fiscal 2018
resulting from the collection of approximately $0.6 million from a Canadian
customer that had previously been reserved.

General and administrative expenses - General and administrative expenses for
the nine months ended December 31, 2017 decreased $4.1 million from the prior
year period. The decrease was primarily due to a decrease in restatement related
costs of $17.9 million. This decrease was partially offset by a $6.7 million
increase in professional and legal fees, an increase in stock-based compensation
expense of $2.1 million, and a $1.8 million legal settlement. The decrease was
also partially offset by an increase of $1.1 million of transaction costs in
connection with our debt refinancing and potential asset acquisitions and
dispositions and an increase of $1.4 million related to compensation and
executive retirement expense. On April 1, 2017, all stock options were amended
and became equity classified. In the nine months ended December 31, 2016, all
stock options were liability-classified resulting in adjustments to fair value
each period.

Loss on disposal of assets and costs from exit and disposal activities - In the
nine months ended December 31, 2017, we recorded $10.5 million of expense
related to restructuring activities, including closing three underutilized
manufacturing facilities. In addition, we recorded a loss on other disposals and
partial disposals of property, plant and equipment of approximately $2.4
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.

Interest expense - Interest expense remained relatively flat as a percentage of net sales.


Derivative gains and other income, net - Derivative gains and other income, net
decreased by $1.1 million for the nine months ended December 31, 2017 compared
to the same period in 2016. During the nine months ended December 31, 2017, the
Company recognized a net $0.9 million gain on derivative contracts compared to a
$2.7

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million gain for the nine months ended December 31, 2016. The decrease in gain on derivative contracts is primarily due to a significant amount of the Company's propylene swaps maturing in fiscal 2017. The decrease in gain on derivative contracts was partially offset by changes in foreign currency exchange rates.


Income tax (benefit) expense - For the nine months ended December 31, 2017 and
2016, we had effective tax rates of 18.6% and 38.7%, respectively. The decrease
in the effective tax rate was primarily due to impact of the Tax Act, return to
provision adjustments and the uncertain tax position lapse. See "Note 10. 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 two unconsolidated joint ventures in which we have
significant influence, but not control, over operations. The Equity in net
(income) loss of unconsolidated affiliates increased to a $0.5 million income
for the nine months ended December 31, 2017 from a $2.4 million loss for the
nine months ended December 31, 2016. The increase is primarily the result of the
$1.9 million gain recognized as a result of the contribution of outstanding
receivables we made to the South American Joint Venture in the nine months ended
December 31, 2107. See "Note 6. Related Party Transactions" for additional
information. In addition the increase is attributable to insurance recovery
related to a fire that occurred in fiscal 2017 in one of the plants of the South
American Joint Venture.

Net income attributable to noncontrolling interest - Net income attributable to
noncontrolling interest decreased from net income of $2.9 million for the nine
months ended December 31, 2016 to net income of $1.9 million for the nine months
ended December 31, 2017. The change is primarily attributable to fluctuations in
the profitability of ADS Mexicana.

Non-GAAP Financial Measures


In addition to financial results reported in accordance with GAAP, we have
provided the following non-GAAP financial measures: Adjusted EBITDA, Adjusted
Earnings Per Fully Converted Share and Free Cash Flow. These non-GAAP financial
measures are used in addition to and in conjunction with results presented in
accordance with GAAP. However, these measures are not intended to be a
substitute for those reported in accordance with GAAP. These measures may be
different from non-GAAP financial measures used by other companies, even when
similar terms are used to identify such measures.

Adjusted EBITDA - Adjusted EBITDA, a non-GAAP financial measure, has been
presented in this Quarterly Report on Form 10-Q as a supplemental measure of
financial performance that is not required by, or presented in accordance with,
GAAP. We calculate adjusted EBITDA as net income before interest, income taxes,
depreciation and amortization, stock-based compensation expense, non-cash
charges and certain other expenses.

Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is
a key metric used by management and our Board of Directors to assess our
financial performance. Adjusted EBITDA is frequently used by analysts, investors
and other interested parties to evaluate companies in our industry. In addition
to covenant compliance and executive performance evaluations, we use adjusted
EBITDA to supplement GAAP measures of performance to evaluate the effectiveness
of our business strategies, to make budgeting decisions and to compare our
performance against that of other peer companies using similar measures.

Adjusted EBITDA is not a GAAP measure of our financial performance and should
not be considered as an alternative to net income as a measure of financial
performance or cash flows from operations or any other performance measure
derived in accordance with GAAP, and it should not be construed as an inference
that our future results will be unaffected by unusual or non-recurring items.
Adjusted EBITDA contains certain other limitations, including the failure to
reflect our cash expenditures, cash requirements for working capital needs and
cash costs to replace assets being depreciated and amortized. In evaluating
adjusted EBITDA, you should be aware that in the future we will incur expenses
that are the same as or similar to some of the adjustments in this presentation,
such as stock-based compensation expense, derivative fair value adjustments, and
foreign currency transaction losses. Our presentation of adjusted EBITDA should
not be construed to imply that our future results will be unaffected by any such
adjustments. Management compensates for these limitations by relying on our GAAP

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results in addition to using adjusted EBITDA supplementally. Our measure of adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

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



                                              Three Months Ended           Nine Months Ended
                                                 December 31,                December 31,
                                              2017          2016          2017          2016
                                                              (In thousands)
Net income                                 $   33,215$  10,258$  69,648$  53,960
Depreciation and amortization                  17,852        18,029        55,793        54,065
Interest expense                                3,086         4,221        12,620        13,551
Income tax (benefit) expense                   (7,371 )       5,986        15,812        35,528
EBITDA                                         46,782        38,494       153,873       157,104
Derivative fair value adjustments                (145 )      (2,237 )        (735 )     (11,297 )
Foreign currency transaction gains               (430 )        (601 )      (2,878 )      (1,678 )
Loss on disposal of assets and costs
from exit
  and disposal activities                       1,924         2,138        10,468         3,077
Unconsolidated affiliates interest, tax,
depreciation
  and amortization(1)                             637           469         2,060         2,049
Contingent consideration remeasurement              1           (15 )          33            42
Stock-based compensation expense
(benefit)                                       1,640        (3,413 )       5,140         2,699
ESOP deferred stock-based compensation          2,737         2,323         7,946         7,428
Executive retirement expense (benefit)             73          (170 )         982           (12 )
Transaction costs(2)                               92             -         1,149             -
Legal settlement(3)                             1,800             -         1,800             -
Restatement-related costs(4)                      888         6,406         3,390        21,391
Adjusted EBITDA                            $   55,999$  43,394$ 183,228$ 180,803

(1) Includes our proportional share of interest, income taxes, depreciation and

amortization related to our South American Joint Venture and our Tigre-ADS

     USA joint venture, which are accounted for under the equity method of
     accounting.


(2)  Represents expenses recorded related to legal, accounting and other
     professional fees incurred in connection with our debt refinancing and
     potential asset acquisitions and dispositions.

(3) Represents settlement agreement to resolve the Hayes matter, as further

     discussed in "Note 9. Commitments and Contingencies" to the Condensed
     Consolidated Financial Statements.


(4)  Represents expenses recorded related to legal, accounting and other

professional fees incurred in connection with the restatement of our prior

period financial statements in fiscal 2017. Fiscal 2018 expenses relate to

the ongoing SEC Enforcement Division's investigation and related shareholder

litigation.



Adjusted Earnings Per Fully Converted Share - Adjusted Earnings per Fully
Converted Share - Adjusted Earnings per Fully Converted Share, Adjusted Net
Income and Weighted Average Fully Converted Common Shares Outstanding, which are
non-GAAP measures, are supplemental measures of financial performance that are
not required by, or presented in accordance with GAAP. We calculate Adjusted
earnings per fully converted share (Non-GAAP), Adjusted Net Income (Non-GAAP),
and Weighted average fully converted common shares outstanding (Non-GAAP), by
adjusting our Net income per share - Basic, Net income available to common
stockholders - Basic and Weighted average common shares outstanding - Basic, the
most comparable GAAP measures. To effect this adjustment with respect to Net
income available to common stockholders - Basic, we have (1) removed the
adjustment for the change in fair value of redeemable convertible preferred
stock classified as mezzanine equity, (2) added back the dividends to redeemable
convertible preferred stockholders and dividends paid to unvested restricted
stockholders, (3) made corresponding adjustments to the amount allocated to
participating securities under the two-class earnings per share computation
method, (4) added back ESOP deferred compensation attributable to the shares of
redeemable convertible preferred stock allocated to employee ESOP accounts
during the

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applicable period, which is a non-cash charge to our earnings and not deductible for income tax purposes, (5) added back the accretion of redeemable noncontrolling interest in subsidiaries.


We have also made adjustments to the Weighted average common shares outstanding
- Basic to assume (1) share conversion of the redeemable convertible preferred
stock to outstanding shares of common stock and (2) add shares of outstanding
unvested restricted stock.

Adjusted Earnings Per Fully Converted Share (Non-GAAP) is a key metric used by
management and our Board of Directors to assess our financial performance on a
per share basis assuming all shares held by the ESOP and all shares of
redeemable common stock are converted to common stock. This information is
useful to investors as the preferred shares held by the ESOP are required to be
distributed to our employees over time, which is done in the form of common
stock after the conversion of the preferred shares. As such, this measure is
included in this report because it provides the investors with information to
understand the impact on the financial statements once all preferred shares are
converted and distributed. Adjusted Earnings Per Fully Converted Share
(Non-GAAP) is not necessarily comparable to other similarly titled captions of
other companies due to different methods of calculation.

The following table presents a reconciliation of Adjusted Earnings Per Fully
Converted Share (Non-GAAP), Adjusted Net Income (Non-GAAP) and Weighted Average
Fully Converted Common Shares Outstanding (Non-GAAP) to Net income (loss) per
share - Basic, Net income (loss) available to common stockholders - Basic and
Weighted average common shares outstanding - Basic, the most comparable GAAP
measures, respectively, for each of the periods indicated.

                                              Three Months Ended            Nine Months Ended
                                                 December 31,                  December 31,
                                              2017           2016           2017          2016
                                                   (in thousands, except per share data)
Net income available to common
stockholders
  - Basic                                  $   28,871$   7,712$   60,660$  44,520
Adjustments to Net income available to
common
  stockholders - Basic:
Accretion of Redeemable noncontrolling
interest
  in subsidiaries                                   -            399              -         1,141
Dividends to Redeemable convertible
preferred
  stockholders                                    456            407          1,415         1,247
Dividends paid to unvested restricted
  stockholders                                     12             32             47            86
Undistributed income allocated to
participating
  securities                                    2,766            503          5,588         4,066
Net income attributable to ADS                 32,105          9,053         67,710        51,060
Fair value of ESOP compensation related
to

redeemable convertible preferred stock 2,737 2,325

   7,946         7,428
Adjusted Net Income (Non-GAAP)             $   34,842$  11,378$   75,656$  58,488
Weighted average common shares
outstanding
  - Basic                                      55,917         54,557         55,497        54,354
Adjustments to Weighted average common
shares
  outstanding - Basic:
Unvested restricted shares                        270             55            270            63

Redeemable convertible preferred shares 18,219 18,774

  18,386        18,913
Weighted Average Common Shares
Outstanding
  - Fully Converted (Non-GAAP)                 74,406         73,386         74,153        73,330
Net income per share - Basic               $     0.52$    0.14$     1.09$    0.82
Adjusted Earnings per Fully Converted
Share
  (Non-GAAP)                               $     0.47$    0.16$     1.02$    0.80


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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 Quarterly Report on
Form 10-Q 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.



                                                     Nine Months Ended
                                                       December 31,
                                                    2017          2016
                                                      (in thousands)
            Cash flow from operating activities   $ 138,909$ 116,631
            Capital expenditures                    (35,124 )     (36,504 )
            Free Cash Flow                        $ 103,785$  80,127

Liquidity and Capital Resources


Our primary liquidity requirements are working capital, capital expenditures,
debt service, and dividend payments for our convertible preferred stock and
common stock. We have historically funded, and expect to continue to fund, our
operations primarily through internally generated cash flow, debt financings,
equity issuance and capital and operating leases. From time to time, we may
explore additional financing methods and other means to raise capital. There can
be no assurance that any additional financing will be available to us on
acceptable terms or at all.

As of December 31, 2017, we had $14.9 million in cash that was held by our
foreign subsidiaries. Prior to the Tax Act, our intent was to indefinitely
reinvest our earnings in foreign subsidiaries with the exception of cash
dividends paid by our ADS Mexicana joint venture. Prior to the Tax Act, in the
event that foreign earnings were repatriated, these amounts will be subject to
income tax liabilities in the appropriate tax jurisdictions. As a result of the
Tax Act, we are evaluating our strategy with our foreign cash.

Working Capital and Cash Flows


As of December 31, 2017, we had $457.1 million in liquidity, including
$18.4 million of cash, $375.7 million in borrowings available under our
Revolving Credit Facility net of $13.0 million of outstanding letters of credit,
and $50.0 million under the Senior Notes, described below. We believe that our
cash on hand, together with the availability of borrowings under our Revolving
Credit Facility and other financing arrangements and cash generated from
operations, will be sufficient to meet our working capital requirements,
anticipated capital expenditures, scheduled interest payments on our
indebtedness and the dividend payment requirement for our convertible preferred
stock for at least the next twelve months.

Working Capital - Working capital increased to $217.8 million as of December 31,
2017, from $184.8 million as of March 31, 2017. The increase in working capital
is primarily due to decreases in accounts payable and other accrued liabilities
of $38.1 million attributable to the seasonality of operations and a $12.0
million increase in cash. The increase in working capital is also due to a
decrease of $11.0 million of the current debt obligations maturities related to
the refinancing of the Secured Bank Term Loans and Senior Notes Payable, as
discussed in "Note 7. Debt," and a decrease of $11.9 million due to the
modification of the liability-classified stock-based awards, as discussed in
"Note 11. Stock-Based Compensation." These increases to working capital were
partially offset by a decrease of $43.4 million in inventory due to seasonality
of sales.

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Operating Cash Flows - Cash flows from operating activities for the nine months
ended December 31, 2017 was $138.9 million as compared with cash from operating
activities of $116.6 million for the nine months ended December 31, 2016. Cash
flows from operating activities during the nine months ended December 31, 2017
was primarily impacted by changes in working capital and specifically the
decrease in inventory for planned sales.

Investing Cash Flows - During the nine months ended December 31, 2017 and 2016,
cash used for investing activities was $31.7 million and $41.4 million,
respectively. The decrease in cash used for investing activities was primarily
due to proceeds received from the sale of corporate-owned life insurance and
decreases in capital expenditures and purchases of property, plant and equipment
through financing. Our capital expenditures for the nine months ended December
31, 2017 were used primarily to support facility expansions, equipment
replacements, various recycled resin initiatives, and technology.

Financing Cash Flows - During the nine months ended December 31, 2017, cash used
for financing activities was $94.5 million due to repayments on our Revolving
Credit Facility, Term Loan and Senior Notes, $7.9 million of repurchases of our
common stock under the stock repurchase program, offset by our borrowings on our
Senior Notes and Revolving Credit Facility associated with the debt refinancing.
The repayments and borrowings associated with the debt refinancing are more
fully discussed in "Note 7. Debt." During the nine months ended December 31,
2016, cash used in financing activities was $69.1 million, due to payments on
our Senior Notes, Term Loan and capital lease obligations, partially offset by
decreased repayments on our Revolving Credit facility to support our typical
seasonal demand increase following the winter months.

Capital Expenditures


Capital expenditures totaled $35.1 million and $36.5 million for the nine months
ended December 31, 2017 and 2016, respectively. Our capital expenditures for the
nine months ended December 31, 2017 were used primarily to support facility
expansions, equipment replacements, our recycled resin initiatives and
technology. For the nine months ended December 31, 2017, our most significant
capital expenditures were $8.3 million for increased capacity related to the
opening of the manufacturing facility in Harrisonville, MO and $3.3 million
related to the implementation of three software solutions.

We currently anticipate that we will make capital expenditures of approximately
$50 million to $55 million in fiscal year 2018. Such capital expenditures are
expected to be financed using funds generated by operations. As of December 31,
2017, there were no material contractual obligations or commitments related to
these planned capital expenditures.

Financing Transactions


Secured Bank Term Loans - On September 24, 2010, we entered into a credit
agreement with PNC Bank, National Association, or PNC, as administrative agent,
and lender parties thereto. The credit agreement, as amended and restated on
June 12, 2013 and subsequently further amended, provides for our Bank Term Loans
consisting of (i) the Revolving Credit Facility providing for revolving loans
and letters of credit of up to a maximum aggregate principal amount of
$325 million, (ii) the Term Loan Facility providing for the Term Loans in an
aggregate original principal amount of $100 million, and (iii) the ADS Mexicana
Revolving Credit Facility, described below, which is more fully described in our
Fiscal 2017 Form 10-K. On June 22, 2017, we entered into a Second Amended and
Restated Credit Agreement with PNC, which amends and restates the agreement
dated as of June 12, 2013, to provide us a $550 million Revolving Credit
Facility, which is more fully described in "Note 7. Debt" to the Condensed
Consolidated Financial Statements.

As of December 31, 2017, the outstanding principal drawn on the Revolving Credit
Facility was $161.3 million, with $375.7 million available to be drawn on the
U.S. facility, net of $13.0 million of outstanding letters of credit.

ADS Mexicana Revolving Credit Facility - On September 24, 2010, ADS Mexicana
entered into a credit agreement with PNC, as administrative agent, and lender
parties thereto. The credit agreement, as amended and restated on June 12, 2013
and subsequently further amended, provides for revolving loans and letters of
credit of up to a maximum aggregate principal amount of $12.0 million. As of
December 31, 2017, ADS Mexican had no outstanding principal drawn on the
Revolving Credit Facility with $12.0 million available to be drawn.

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ADS Mexicana Scotia Bank Revolving Credit Facility - On December 11, 2017, the $5.0 millionScotia Bank revolving credit facility matured. At December 11, 2017, there were no borrowings under the Scotia Bank revolving credit facility.


Senior Notes - On December 11, 2009, we entered into a private shelf agreement
with Prudential Investment Management Inc., or Prudential, which agreement, as
amended and restated on September 24, 2010 and subsequently further amended,
provides for the issuance by us of senior secured promissory notes to Prudential
or its affiliates from time to time in the aggregate principal amount up to
$100 million, which is more fully described in our Fiscal 2017 Form 10-K. On
June 22, 2017, we entered into the Second Amended and Restated Private Shelf
Agreement with Prudential, which amends and restates the agreement dated as of
September 24, 2010, to provide for the issuance of secured senior notes to
Prudential or its affiliates from time to time in the aggregate principal amount
of up to $175 million, which is more fully described in "Note 7. Debt" to the
Condensed Consolidated Financial Statements. We have $50 million available for
issuance of senior notes under the private shelf agreement. At December 31,
2017, the outstanding principal balance on these notes was $125 million.

Covenant Compliance


Our outstanding debt agreements and instruments contain various restrictive
covenants including, but not limited to, limitations on additional indebtedness
and capital distributions, including dividend payments. The two primary debt
covenants of the amended ADS Revolving Credit Facility and Senior Notes include
a Leverage Ratio and an Interest Coverage Ratio maintenance covenant. For any
relevant period of determination, the Leverage Ratio is calculated by dividing
Total Consolidated Indebtedness (funded debt plus guarantees) by Consolidated
EBITDA, as defined by the credit facility. The current upper limit is 4.0 times
(or 4.25 as of the date of any acquisitions permitted under the amended
agreement for which the aggregate consideration is $100.0 million or greater).
The Interest Coverage Ratio is calculated by dividing the sum of Consolidated
EBITDA by consolidated interest expense. The current minimum ratio is 3.0 times.

The primary debt covenant of the ADS Mexicana Revolving Credit Facility is a
Leverage Ratio maintenance covenant. For any relevant period of determination,
the Leverage Ratio is calculated by dividing Total Consolidated Indebtedness
(funded debt plus guarantees) by Consolidated EBITDA, as defined by the credit
facility. The current upper limit is 4.0 times.

For further information, see "Note 7. Debt" to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q and "Note 12. Debt" to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of our Fiscal 2017 Form 10-K. We were in compliance with our debt covenants as of December 31, 2017.

Off-Balance Sheet Arrangements


Excluding the guarantees of 50% and 49% of certain debt of our unconsolidated
South American Joint Venture and Tigre-ADS USA, respectively, as further
discussed in "Note 6. Related Party Transactions" to the Condensed Consolidated
Financial Statements, we do not have any other off-balance sheet arrangement. As
of December 31, 2017, our South American Joint Venture and Tigre-ADS USA had
approximately $14.2 million and $9.0 million, respectively, of outstanding debt
subject to our guarantees. We do not believe that these guarantees will have a
current or future effect on our financial condition, results of operations,
liquidity, or capital resources.

Critical Accounting Policies and Estimates


With the exception of the accounting pronouncements adopted during fiscal 2018
discussed in "Note 1. Background and Summary of Significant Accounting
Policies," there have been no changes in critical accounting policies from those
disclosed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Fiscal 2017 Form 10-K.


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Forward-Looking Statements


This Quarterly Report on Form 10-Q ("Form 10-Q") includes forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Some of the forward-looking statements can be identified by the use of
terms such as "believes," "expects," "may," "will," "would," "should," "could,"
"seeks," "predict," "potential," "continue," "intends," "plans," "projects,"
"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 Form 10-Q 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 you 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 Quarterly Report on Form 10-Q.
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 Form 10-Q, 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 Form 10-Q
(including under the headings "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"), 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:

• fluctuations in the price and availability of resins and other raw

materials and our ability to pass any increased costs of raw materials

on to our customers in a timely manner;

• volatility in general business and economic conditions in the markets in

          which we operate, including without limitation, factors relating to
          availability of credit, interest rates, fluctuations in capital and
          business and consumer confidence;

• cyclicality and seasonality of the non-residential and residential

construction markets and infrastructure spending;

• the risks of increasing competition in our existing and future markets,

          including competition from both manufacturers of high performance
          thermoplastic corrugated pipe and manufacturers of products using
          alternative materials;


     •    our ability to continue to convert current demand for concrete, steel
          and polyvinyl chloride ("PVC") pipe products into demand for our high
          performance thermoplastic corrugated pipe and Allied Products;


  • the effect of weather or seasonality;


  • the loss of any of our significant customers;


  • the risks of doing business internationally;

• the risks of conducting a portion of our operations through joint ventures;


  • our ability to expand into new geographic or product markets;

• our ability to achieve the acquisition component of our growth strategy;


  • the risk associated with manufacturing processes;


  • our ability to manage our assets;


  • the risks associated with our product warranties;

• our ability to manage our supply purchasing and customer credit policies;



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  • the risks associated with our self-insured programs;

• our ability to control labor costs and to attract, train and retain

          highly-qualified employees and key personnel;


  • our ability to protect our intellectual property rights;


     •    changes in laws and regulations, including environmental laws and
          regulations;


  • our ability to project product mix;


  • the risks associated with our current levels of indebtedness;

• fluctuations in our effective tax rate, including from the recently

enacted Tax Cuts and Jobs Act;

• changes to our operating results, cash flows and financial condition

attributable to the recently enacted Tax Cuts and Jobs Act;

• our ability to meet future capital requirements and fund our liquidity needs;

• 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; and

• additional uncertainties related to accounting issues generally.



All forward-looking statements are made only as of the date of this report and
we do not undertake any obligation, other than as may be required by law, to
update or revise any forward-looking statements to reflect future events or
developments. Comparisons of results for current and any prior periods are not
intended to express any future trends, or indications of future performance,
unless expressed as such, and should only be viewed as historical data.

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