ADVANCED DRAINAGE SYSTEMS, INC. Our fiscal year begins onApril 1 and ends onMarch 31 . Unless otherwise noted, references to "year" pertain to our fiscal year. For example, 2020 refers to fiscal 2020, which is the period fromApril 1, 2019 toMarch 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. Inthe 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 ofInfiltrator 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 asInfiltrator 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 ofInfiltrator 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. 44
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Executive Summary Fiscal Year 2020 Results
• Net sales increased 20.9% to
• Net loss of
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
• Free cash flow increased 120.3% to
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 theU.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 inMexico 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
InMarch 2020 , theWorld Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to spread throughoutthe 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. 45
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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 endedMarch 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 ofSocial 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 inthe United States ,Canada ,Mexico andSouth 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; 46
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• 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 ofthe 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, includingCanada ,Mexico andSouth 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 inNorth 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. 47
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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 northernUnited States andCanada . 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 northernUnited States andCanada , 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 westernUnited States ,Mexico ,Central America andSouth 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 inU.S. dollars. We have wholly-owned facilities inCanada ,the Netherlands and joint venture facilities inMexico ,Chile ,Brazil ,Argentina ,Colombia andPeru . The functional currencies in the areas in which we have wholly-owned facilities and joint venture facilities other than theU.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 ofInfiltrator 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
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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 throughoutthe 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 acrossthe 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 inthe United States andCanada . We acquiredInfiltrator Water Technologies onJuly 31, 2019 . We generated net sales to external customers attributable to ourInfiltrator Water Technologies segment of$211.0 million subsequent to the acquisition. International - Our International segment manufactures and markets products in regions outside ofthe United States , with a strategy focused on our owned facilities inCanada and those markets serviced through our joint ventures inMexico andSouth 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 inApril 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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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) 2020 2019 2018
Legacy ADS Adjusted EBITDA
Pipe Adjusted Gross Profit $ 239,531 $ 191,002 $ 186,330
International Adjusted Gross Profit 36,999 37,191 31,725
Allied Products & Other Adjusted Gross Profit 201,206 168,729
155,166
Unallocated corporate and selling expenses (190,353 ) (164,962 )
(162,991 )
Legacy ADS Adjusted EBITDA $ 287,383 $ 231,960 $ 210,230
Legacy Infiltrator Water Technologies
Adjusted EBITDA
Infiltrator Water Technologies Adjusted Gross
Profit 98,245 - -
Unallocated corporate and selling expenses (21,865 ) - -
Legacy Infiltrator Water Technologies
Adjusted EBITDA $ 76,380 $ - $ -
Intersegment eliminations (1,895 ) - -
Consolidated Adjusted EBITDA $ 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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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) 2020 2019 2018 Net sales from external customers by segment Pipe$ 952,603 56.9 %$ 868,805 62.7 %$ 844,875 63.5 % Infiltrator Water Technologies 169,348 10.1 % - - - -
International
International - Pipe 108,624 6.5 % 122,836 8.9 % 119,207 9.0 % International - Allied Products & Other 39,957 2.4 % 37,766 2.7 % 36,715 2.8 %Total International 148,581 8.9 % 160,602 11.6 % 155,922 11.7 % Allied Products & Other 403,273 24.1 % 355,326 25.7 % 329,557 24.8 % Total net sales$ 1,673,805 100.0 %$ 1,384,733 100.0 %$ 1,330,354 100.0 % Gross profit by segment Pipe$ 179,722 56.8 %$ 131,445 40.2 %$ 127,083 42.0 % Infiltrator Water Technologies 82,922 26.2 % - - - - International 30,666 9.7 % 31,232 9.6 % 25,052 8.3 % Allied Products & Other 25,064 7.9 % 164,290 50.2 % 150,346 49.7 % Intersegment Elimination (1,895 ) (0.6 )% - - - - Total gross profit$ 316,479 100.0 %$ 326,967 100.0 %$ 302,481 100.0 % Segment Adjusted Gross Profit Pipe$ 239,531 41.7 %$ 191,002 48.1 %$ 186,330 49.9 % Infiltrator Water Technologies 98,245 17.1 % - - - - International 36,999 6.4 % 37,191 9.4 % 31,725 8.5 % Allied Products & Other 201,206 35.0 % 168,729 42.5 % 155,166 41.6 % Intersegment Elimination (1,895 ) (0.3 )% - - - - Total Adjusted Gross Profit$ 574,086 100.0 %$ 396,922 100.0 %$ 373,221 100.0 % 51
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Fiscal Year Ended
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
2020 2019
Consolidated Statements of Operations data: Net sales$ 1,673,805 100.0 %$ 1,384,733 100.0 % Cost of goods sold 1,188,716 71.0 1,057,766 76.4 Cost of goods sold - ESOP special dividend compensation 168,610 10.1 - - Gross profit 316,479 18.9 326,967 23.6 Selling expenses 117,068 7.0 96,335 7.0 General and administrative expenses 154,270 9.2 89,692 6.5 Selling, general and administrative - ESOP special dividend compensation 78,142 4.7 - - Loss on disposal of assets and costs from exit and disposal activities 5,338 0.3 3,647 0.3 Intangible amortization 57,010 3.4 7,880 0.6 (Loss) income from operations (95,349 ) (5.7 ) 129,413 9.3 Interest expense 82,711 4.9 18,618 1.3 Derivative losses (gains) and other expense (income), net 1,554 0.1 (815 ) (0.1 ) (Loss) income before income taxes (179,614 ) (10.7 ) 111,610 8.1 Income tax expense 14,092 0.8 30,049 2.2 Equity in net (income) loss of unconsolidated affiliates (1,909 ) (0.1 ) 95 - Net (loss) income (191,797 ) (11.5 ) 81,466 5.9 Less: net income attributable to the non- controlling interest 1,377 0.1 3,694 0.3
Net (loss) income attributable to ADS
77,772 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
Net Sales from Net Sales from
Intersegment External External
(Amounts in thousands) Net Sales Net Sales
Customers Net Sales Intersegment Net Sales Customers
Pipe $ 954,633 $ (2,030 ) $ 952,603 $ 868,805 $ - $ 868,805
Infiltrator Water Technologies 211,005 (41,657 ) 169,348 - - -
International
International - Pipe 108,624 - 108,624 122,836 - 122,836
International - Allied Products & Other 39,957 - 39,957 37,766 - 37,766
Total International 148,581 - 148,581 160,602 - 160,602
Allied Products & Other 403,273 - 403,273 355,326 - 355,326
Intersegment Eliminations (43,687 ) 43,687 - - - -
Total Consolidated $ 1,673,805 $ - $ 1,673,805 $ 1,384,733 $ - $ 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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•
$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
7.5%, compared to fiscal 2019. International Pipe salesdecreased 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
Fiscal Year Ended March 31,
2020 2019 $ Variance % Variance
(in thousands)
Pipe $ 179,722 $ 131,445 $ 48,277 36.7 %
International 30,666 31,232 (566 ) (1.8 )%
Allied Products & Other 193,674 164,290 29,384 17.9 %
Organic gross profit 404,062 326,967 77,095 23.6 %
Infiltrator Water Technologies 82,922 - 82,922 -
Cost of goods sold - ESOP special
dividend compensation (168,610 ) - (168,610 ) -
Intersegment eliminations (1,895 ) - (1,895 ) -
Total gross profit $ 316,479 $ 326,967 $ (10,488 ) (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 decreasedmaterial 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 atInfiltrator 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. 53
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Loss on disposal of assets and costs from exit and disposal activities - In the fiscal year endedMarch 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 endedMarch 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 endedMarch 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$0.1 million loss for fiscal 2019. Prior to the acquisition of the noncontrolling interest of Baysaver in fiscal 2019, our proportionate share of income or loss in BaySaver was included in equity in net (income) loss of unconsolidated affiliates.
Net income attributable to noncontrolling interest - Income attributable to
noncontrolling interest decreased by
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Fiscal Year Ended
The following table summarizes our operating results as a percentage of net
sales that have been derived from our Consolidated Financial Statements for the
fiscal years ended
2019 2018
Consolidated Statements of Operations data: Net sales$ 1,384,733 100.0 %$ 1,330,354 100.0 % Cost of goods sold 1,057,766 76.4 1,027,873 77.3 Gross profit 326,967 23.6 302,481 22.7 Selling expenses 96,335 7.0 92,764 7.0 General and administrative expenses 89,692 6.5 98,392 7.4 Loss on disposal of assets and costs from exit and disposal activities 3,647 0.3 15,003 1.1 Intangible amortization 7,880 0.6 8,068 0.6 Income from operations 129,413 9.3 88,254 6.6 Interest expense 18,618 1.3 15,262 1.1 Derivative gains and other income, net (815 ) (0.1 ) (3,950 ) (0.3 ) Income before income taxes 111,610 8.1 76,942 5.8 Income tax expense 30,049 2.2 11,411 0.9 Equity in net loss of unconsolidated affiliates 95 - 739 0.1 Net income 81,466 5.9 64,792 4.9 Less: net income attributable to the non- controlling interest 3,694 0.3 2,785 0.2 Net income attributable to ADS$ 77,772 5.6 %$ 62,007 4.7 %
Net sales - Net sales totaled
2019 2018
Net Sales from Net Sales from
External External
(Amounts in thousands) Net Sales Intersegment Net Sales Customers Net Sales Intersegment Net Sales Customers
Pipe $ 868,805 $ - $ 868,805 $ 844,875 $ - $ 844,875
Infiltrator Water Technologies - - - - - -
International
International - Pipe 122,836 - 122,836 119,207 - 119,207
International - Allied Products & Other 37,766 - 37,766 36,715 - 36,715
Total International 160,602 - 160,602 155,922 - 155,922
Allied Products & Other 355,326 - 355,326 329,557 - 329,557
Intersegment Eliminations - - - - - -
Total Consolidated $ 1,384,733 $ - $ 1,384,733 $ 1,330,354 $ - $ 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
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 inproduct
mix, and a $1.1 million increase in international Allied
Products &
Other net sales.
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• 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
Gross profit increased
Fiscal Year Ended March 31,
2019 2018 $ Variance % Variance
(in thousands)
Pipe $ 131,445 $ 127,083 $ 4,362 3.4 %
International 31,232 25,052 6,180 24.7 %
Allied Products & Other 164,290 150,346 13,944 9.3 %
Organic gross profit 326,967 302,481 24,486 8.1 %
Infiltrator Water Technologies - - - -
Intersegment eliminations - - - -
Total gross profit $ 326,967 $ 302,481 $ 24,486 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 endedMarch 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 endedMarch 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 56
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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 endedMarch 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$0.7 million during fiscal 2018. We are no longer invested inTigre-ADS USA and therefore no longer recognizing a proportionate share ofTigre-ADS USA net losses. In addition, net income in the South American Joint Venture decreased to a net loss.
Net income attributable to noncontrolling interest - Income attributable to noncontrolling interest remained relatively flat as a percentage of net sales in fiscal 2019 compared to fiscal 2018.
Liquidity and Capital Resources
Historically we have funded our operations through internally generated cash flow supplemented by debt financings, equity issuance and finance and operating leases. These sources have been sufficient historically to fund our primary liquidity requirements, including working capital, capital expenditures, debt service and dividend payments for our convertible preferred stock and common stock. From time to time, we may explore additional financing methods and other means to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms or at all. The following table presents key liquidity metrics utilized by management. The table includes the Non-GAAP measure, Free cash flow, which is further discussed and defined above. (Amounts in thousands) 2020 2019
Net cash provided by operating activities
(67,677 ) (43,412 )
Free cash flow 238,512 108,266
Total debt (debt and finance lease obligations) 1,162,206 Cash
174,233
Net debt (total debt less cash) 987,973
Leverage ratio 2.7
The following table summarizes our available liquidity as of
(Amounts in thousands) March 31, 2020 Revolver capacity$ 350,000 Less: outstanding borrowings 100,000 Less: letters of credit 8,505
Revolver available liquidity
In addition to the available liquidity above, we have the ability to borrow up
to
As ofMarch 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. 57
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Debt and Equity Financing Transactions
As further described below, during the fiscal year endedMarch 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 ofInfiltrator Water Technologies . OnJuly 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. OnJuly 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 ofInfiltrator Water Technologies , (ii) repay the total outstanding amount under the existing PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred byInfiltrator 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. OnSeptember 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. OnSeptember 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. OnSeptember 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
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As ofMarch 31, 2020 , we had consolidated indebtedness (excluding finance lease obligations) of approximately$1,099.7 million , an increase of$862.9 million compared toMarch 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 ofMarch 31, 2020 , from$260.2 million as ofMarch 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 toMarch 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
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 ofInfiltrator 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
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 ofDuraslot, Inc. The Company also received$13.6 million of proceeds from the sale of corporate-owned life insurance. 59
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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$27.1 million . The table below summarizes the cash flows from the Acquisition, and the related debt and equity transactions. (Amounts in thousands) Sources Uses Bridge Loan Facility$ 1,300,000 $ - Bridge Revolving Credit Facility 145,000 - PNC Credit Agreement draw 104,429 - Prudential Senior Notes payoff - (104,429 ) PNC Credit Agreement payoff - (239,240 ) Acquisition ofInfiltrator Water Technologies , fair value of consideration transferred - (1,146,526 ) Common stock offering, net of offering costs 293,648 - Bridge Loan Facility - payment - (300,000 ) Proceeds from Senior Notes Issuance 350,000 - Bridge Loan Facility - payment - (300,000 ) Term Loan Facility 700,000 - Bridge Loan Facility - payment - (700,000 ) Debt issuance costs - (34,606 ) Cash to Balance Sheet - (68,276 ) Total$ 2,893,077 $ (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
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 endedMarch 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 endedMarch 31, 2018 , our most significant capital expenditures were$8.4 million for increased capacity related to the opening of the manufacturing facility inHarrisonville, MO and$3.7 million related to the implementation of three software solutions to support sales growth and operating effectiveness initiatives. 60
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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 theAdvanced Drainage Systems, Inc. ESOP (the "ESOP" or the "Plan") effectiveApril 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 thanMarch 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 thanMarch 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) 2020 2019 2018
Net (loss) income attributable to ADS
- -
ESOP deferred stock-based compensation 20,126 15,296 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) 2020 2019 2018
Weighted average common shares outstanding 63.8 57.0 55.7 Conversion of redeemable convertible shares 17.1 17.6 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 theSecured Bank Loans, the Senior Notes and the Company's finance lease obligations.
Financing Transactions
PNC Term Loans - OnJune 22, 2017 , we entered into the PNC Credit Agreement, which amends and restates the original agreement dated as ofJune 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 onJune 22, 2018 . The Intercompany Note matures onJune 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 ofMarch 31, 2020 , there were no borrowings under the Intercompany Note. Prudential Senior Notes - OnJune 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. OnJuly 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 ofJuly 29, 2019 . Concurrently with the repayment, the Prudential Shelf Noteholders authorized and directedPNC 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 - OnJuly 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. OnJuly 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 ofInfiltrator Water Technologies by us which occurred onJuly 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 byInfiltrator 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 - OnSeptember 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
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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 isSeptember 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 isSeptember 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 ofStormTech, LLC ,Advanced Drainage of Ohio, Inc. andInfiltrator 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 endingMarch 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 anyLoan 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 endingMarch 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 - OnSeptember 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 outsidethe United States under Regulation S of the Securities Act. Interest on the Senior Notes will be payable semi-annually in cash in arrears onMarch 31 andSeptember 30 of each year, commencing onMarch 31, 2020 , at a rate of 5.000% per annum. The Senior Notes will mature on September 63
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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
The Company may redeem the Senior Notes, in whole or in part, at any time on or afterSeptember 30, 2022 at established redemption prices. At any time prior toSeptember 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 toSeptember 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 endingMarch 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 anyLoan 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 endingMarch 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
Contractual Obligations as of
Payments Due by Period
Less than More than
(Amounts in thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years
Contractual obligations:
Long-term debt (1) $ 1,099,742 $ 7,955 $ 14,532 $ 114,000 $ 963,255
Interest payments (2) 301,675 45,931 91,000 88,128 76,616
Operating leases 28,951 8,511 9,556 4,809 6,075
Finance leases 73,965 23,492 32,660 13,091 4,722
Total $ 1,504,333 $ 85,889 $ 147,748 $ 220,028 $ 1,050,668 (1) The Secured Bank Loans mature in
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(2) Based on applicable rates and pricing margins as of
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 ofMarch 31, 2020 . The maximum borrowing permitted under the South American Joint Venture's credit facility is$22 million . As ofMarch 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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Policy Judgments and Estimates Effect if Actual Results Differ from Assumptions
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Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Goodwill- Goodwill is Determining the fair value We performed our annual
reviewed annually for of a reporting unit is impairment test for
impairment as of March 31 judgmental in nature and goodwill as of March 31,
or whenever events or involves the use of 2020. We performed the test
changes in circumstances significant estimates and for all reporting units
indicate the carrying value assumptions. with goodwill, which
may not be recoverable. The •Reporting units - As a include our Domestic pipe
fair value of goodwill is result of the Acquisition reporting unit, the
determined by considering of Infiltrator Water International reporting
both the income and market Technologies, we revised units, the Infiltrator
approach. our reportable segments and Water Technologies
allocated the goodwill reporting unit, and the
balance of $92.5 million various Allied Product
recorded on the former reporting units.
Domestic reportable segment
to our revised reporting Based on our analysis, the
units based on the relative estimated fair value of
fair value. Our Pipe each reporting unit
reporting unit was exceeded its carrying
allocated approximately value. Based on our
$57.7 million of goodwill analysis, the estimated
from our former Domestic fair value of each
reporting unit. No other reporting unit exceeded its
reporting unit was carrying value. However,
allocated more than $10 the estimated fair value
million of goodwill. exceeded the carrying value
•These estimates and by less than 20% for two of
assumptions include revenue our reporting units,
growth rates and EBITDA Infiltrator Water
used to calculate projected Technologies and Canada,
future cash flows, which had goodwill balances
risk-adjusted discount of $495.8 million and $9.9
rates, future economic and million, respectively, at
market conditions, and March 31, 2020. We utilized
determination of a discount rate of 14%, in
appropriate market determining the discounted
comparables. cash flows in our fair
• The fair value estimates value analysis and a
are based on assumptions long-term growth rate of
management believes to be 3.0% and 2.0%,
reasonable, but are respectively. If our
inherently uncertain. 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,
along with the decline in
our stock price and other
market conditions, could
result in an indication of
impairment of goodwill in
fiscal 2021.
Definite-lived intangible Determining the fair value We did not record any
assets-Definite-lived of the definite-lived and impairment charges for
intangible assets are indefinite-lived intangible definite-lived intangible
tested for recoverability assets is judgmental in assets in fiscal 2020,
whenever events or changes nature and involves the use 2019, or 2018. Due to the
in circumstances indicate of significant estimates expected retirement of the
that carrying amounts of and assumptions. Future "Hancor" trademark in
the asset group may not be events and unanticipated fiscal 2021, we accelerated
recoverable. Asset groups changes to assumptions the amortization of our
are established primarily could require a provision "Hancor" trademark
by determining the lowest for impairment in a future recording additional
level of cash flows period. amortization expense of
available. If the estimated $4.4 million .
undiscounted future cash
flows are less than the We performed our annual
carrying amounts of such impairment test for
assets, an impairment loss indefinite-lived intangible
is recognized to the extent assets as of March 31,
the fair value of the asset 2020. We determined for our
less any costs of indefinite-lived intangible
disposition is less than assets that the fair value
the carrying amount of the of the assets exceeded its
asset. carrying value.
Indefinite-lived intangible Accordingly, we did not
assets-Indefinite-lived incur any impairment
intangible assets are charges for
tested for impairment indefinite-lived intangible
annually as of March 31 or assets in fiscal 2020, 2019
whenever events or changes or 2018. Future events and
in circumstances indicate unanticipated changes to
the carrying value may be assumptions could require a
greater than fair value. provision for impairment in
Determining the fair value a future period.
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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Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Revenue Recognition- We We estimate and allocate If our historical
generate revenue by selling variable consideration, experience differs from
pipe and related water such as right of return, future experience, our
management products credits or incentives, estimates of variable
primarily to distributors, based on numerous factors, consideration could differ.
retailers, buying groups including the customer
and co-operative buying agreements and past
groups. Products are transaction history.
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 Shares of convertible As the value of the shares
Plan ("ESOP")- When shares preferred stock are valued increase or decrease, it
of convertible preferred based on an annual could result in a
stock are allocated to the valuation for the ESOP by significant increase or
ESOP stock accounts of ESOP an independent third-party decrease in compensation
participants, we reduce the appraisal firm as required expense.
amount of deferred by the Plan.
compensation reflected in
Deferred compensation
- unearned ESOP shares in
mezzanine equity.
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Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Stock-Based Compensation The fair value of each All current stock-based
Plan-Equity-classified stock option granted is awards qualify for equity
awards are measured based estimated using the classification. Changes in
on the grant-date estimated Black-Scholes option the assumptions utilized to
fair value of each award, pricing model. Determining determine the fair value
net of estimated the fair value of stock could cause fluctuations in
forfeitures, at each options under the the stock-based
relevant reporting date for Black-Scholes compensation expense for
accounting purposes. option-pricing model future grants.
Compensation expense is requires judgment, common
recognized on a stock volatility, expected Performance-Based
straight-line basis over term of the awards, Restricted Stock Units
the employee's requisite dividend yield and the
service period, which is risk-free interest rate. As the Company forecasts
generally the vesting The assumptions used in the performance metrics to
period of the grant. calculating the fair value target over the vesting
of stock options represent term, changes in forecast
our best estimates, based could cause fluctuations in
on management's judgment the stock-based
and subjective future compensation expense.
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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Effect if Actual Results
Policy Judgments and Estimates Differ from Assumptions
Business Combinations - Fair values allocated to These significant
Acquisitions, such as the assets acquired and assumptions are forward
acquisition of Infiltrator liabilities assumed in looking and could be
Water Technologies, are business combinations affected by future economic
accounted for in accordance require management to make and market conditions.
with ASC 805, Business significant judgments, Customer Relationships - In
Combinations. We recognize estimates, and assumptions, addition to revenue growth
separately from goodwill especially with respect to rates, EBITDA and discount
the assets acquired and the intangible assets. rate, a key input for
liabilities assumed, at Management makes estimates customer relationships is
their acquisition date fair of fair values based upon the customer attrition
values and goodwill is assumptions it believes to rate. A higher than
defined as the excess of be reasonable. These expected customer attrition
consideration transferred estimates are based upon rate could result in an
over the net of the historical experience, impairment charge.
acquisition date fair information obtained from
values of the assets the management of the Developed Technology - In
acquired and the acquired company, addition to revenue growth
liabilities assumed. comparable transactions, rates, discount rate,
and market and industry royalty rate and an
During the measurement considerations and these obsolescence factor, the
period, which may take up estimates are inherently timing of obsolescence of
to one year from the uncertain. The estimated the acquired technology
acquisition date, fair values related to could result in a shorter
adjustments due to changes intangible assets primarily useful life than originally
in the estimated fair value consist of customer determined and an
of assets acquired and relationships, patents and acceleration of
liabilities assumed may be developed technology, and amortization expense.
recorded as adjustments to tradenames and trademarks.
the consideration Estimates in the discounted Tradenames and Trademarks -
transferred and related cash flow models include, The most significant driver
allocations. Upon the but are not limited to, is revenue growth rates,
conclusion of the certain assumptions that discount rate and royalty
measurement period or the form the basis of the rate. If revenue growth final determination of the forecasted results (e.g. rates are lower than values of assets acquired revenue growth rates, expected, it could result and liabilities assumed, discount rate, royalty, in an impairment charge. whichever comes first, any customer attrition rates such adjustments are and EBITDA). charged to the consolidated statements of operations.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see "Note 1. Background and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data."
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