UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended December 31, 2014
OR
Commission file number: 001-36557
Advanced Drainage Systems, Inc.
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
4640 Trueman Boulevard, Hilliard, Ohio 43026
(Address of Principal Executive Offices, Including Zip Code)
(614) 658-0050
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
As of January 31, 2015, 53,259,576 shares of common stock were outstanding. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS”. In addition, as of January 31, 2015, 232,977 shares of unvested restricted common stock were outstanding and 25,797,512 shares of ESOP preferred stock, convertible into 19,843,446 shares of common stock, were outstanding. As of January 31, 2015, 73,335,999 shares of common stock were outstanding, inclusive of outstanding shares of unvested restricted common stock and on an as-converted basis with respect to the outstanding shares of ESOP preferred stock.
TABLE OF CONTENTS
ITEM 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2014
Condensed Consolidated Statements of Income for the three and nine months ended December 31, 2013 and 2014
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended December 31, 2013 and 2014
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2013 and 2014
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity for the nine months ended December 31, 2013 and 2014
Notes to Condensed Consolidated Financial Statements
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.
Controls and Procedures
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sale of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
i
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
Current assets:
Cash
Receivables (less allowance for doubtful accounts of $3,977 and $4,116, respectively)
Inventories
Deferred income taxes and other current assets
Total current assets
Property, plant and equipment, net
Other assets:
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations
Accounts payable
Other accrued liabilities
Accrued income taxes
Total current liabilities
Long-term debt obligation
Deferred tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies (see Note 11)
Mezzanine equity:
Redeemable Common Stock; $0.01 par value: 38,320 and 0 issued and outstanding, respectively
Redeemable Convertible Preferred Stock; $0.01 par value: 47,070 authorized: 44,170 issued: 26,129 and 25,797 outstanding, respectively
Deferred compensation – unearned ESOP shares
Total mezzanine equity
Stockholders’ equity:
Common stock; $0.01 par value: 148,271 and 1,000,000 authorized: 109,951 and 153,560 issued: 9,141 and 53,204 outstanding, respectively
Paid-in capital
Common stock in treasury, at cost
Accumulated other comprehensive loss
Retained earnings
Total ADS stockholders’ equity
Noncontrolling interest in subsidiaries
Total stockholders’ equity
Total liabilities, mezzanine equity and stockholders’ equity
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling
General and administrative
Gain on sale of business
Intangible amortization
Income from operations
Other (income) expense:
Interest expense
Other miscellaneous (income) expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Equity in net loss of unconsolidated affiliates
Net (loss) income
Less net income attributable to noncontrolling interest
Net (loss) income attributable to ADS
Change in fair value of Redeemable Convertible Preferred Stock
Dividends to Redeemable Convertible Preferred Stockholders
Dividends paid to unvested restricted stockholders
Net (loss) income available to common stockholders and participating securities
Undistributed income allocated to participating securities
Net (loss) income available to common stockholders
Weighted average common shares outstanding:
Basic
Diluted
Net (loss) income per share:
Cash dividends declared per share
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive loss:
Currency translation, before tax
Other, before tax
Total other comprehensive loss, before tax
Tax attributes of items in other comprehensive (loss) income:
Currency translation
Other
Total tax expense
Comprehensive (loss) income
Less other comprehensive loss attributable to noncontrolling interest, net of tax
Total comprehensive (loss) income attributable to ADS
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Capital expenditures
Proceeds from sale of business
Investment in unconsolidated affiliate
Other investing activities
Net cash used in investing activities
Cash Flows from Financing Activities
Cash dividends paid
Redemption of Redeemable Convertible Preferred Stock
Proceeds from Senior Notes
Proceeds from term loan
Payments on term loan
Payments of notes, mortgages, and other debt
Proceeds from Revolving Credit Facility
Payments on Revolving Credit Facility
Proceeds from initial public offering of common stock, net of underwriter discounts and commissions
Payments for deferred initial public offering costs
Other financing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY
Balance at April 1, 2013
Net income
Other comprehensive loss
Redeemable Convertible Preferred Stock dividends
Common stock dividend ($0.058 per share)
Dividend paid to noncontrolling interest holder
Allocation of ESOP shares to participants for compensation
Exercise of common stock options
Redemption of common shares to exercise stock options
Stock based compensation
Restricted stock awards
Purchase of common stock
Reclassification of common stock to Redeemable Common Stock
Adjustments to Redeemable Convertible Preferred Stock fair value measurement
Adjustments to Redeemable Common Stock fair value measurement
Balance at December 31, 2013
Balance at April 1, 2014
Common stock dividend ($0.042 per share)
Initial Public Offering (IPO)
Reclassification of liability classified stock options upon IPO
ESOP distributions in common stock
Termination of redemption feature upon IPO
Balance at December 31, 2014
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands, except per share data)
Organization
Advanced Drainage Systems, Inc. (collectively with its subsidiaries referred to as “ADS”, the “Company”, “we”, “us” and “our”), incorporated in Delaware, designs, manufactures and markets high performance thermoplastic corrugated pipe and related water management products, primarily in North and South America and Europe.
The Company is managed based primarily on the geographies in which it operates and reports results of operations in two reportable segments. The reportable segments are Domestic and International.
2014 Initial Public Offering (“IPO”)
On July 11, 2014, in anticipation of the IPO, we executed a 4.707-for-one split of our common and our preferred stock. The effect of the stock split on outstanding shares and earnings per share has been retroactively applied to all periods presented.
On July 30, 2014, we completed the IPO of our common stock, which resulted in the sale by the Company of 5,289 shares, bringing the total number of shares issued and outstanding as of July 30, 2014 to 52,881. We received total proceeds from the IPO of $79.1 million after excluding underwriter discounts and commissions of $5.5 million, based upon the price to the public of $16.00 per share. After deducting other offering expenses of approximately $7.0 million, we used the net proceeds of $72.1 million to reduce the outstanding indebtedness under the revolving portion of our credit facility. The common stock is listed on the New York Stock Exchange under the symbol “WMS.”
On August 22, 2014, an additional 600 shares of common stock were sold by certain selling stockholders of the Company as a result of the partial exercise by the underwriters of the over-allotment option granted by the selling stockholders to the underwriters in connection with the IPO. The shares were sold at the public offering price of $16.00 per share. The Company did not receive any proceeds from the sale of such additional shares.
2014 Secondary Public Offering
On December 9, 2014, we completed a Secondary Public Offering of our common stock, which resulted in the sale of 10,000 shares of common stock by a certain selling stockholder of the Company at a public offering price of $21.25. We did not receive any proceeds from the sale of shares by the selling stockholder. A registration statement related to these securities was declared effective by the SEC on December 3, 2014.
On December 15, 2014, an additional 1,500 shares of common stock were sold by a certain selling stockholder of the Company as a result of the full exercise by the underwriters of the over-allotment option granted by the selling stockholder to the underwriters in connection with the Secondary Public Offering. The shares were sold at the public offering price of $21.25 per share. The Company did not receive any proceeds from the sale of such additional shares.
Basis of Presentation
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Condensed Consolidated Balance Sheet as of March 31, 2014 was derived from audited financial statements. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as of December 31, 2014 and the results of operations for the third quarter and nine months ended December 31, 2013 and 2014 and cash flows for the nine months ended December 31, 2013 and
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2014. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto filed in our Registration Statement on Form S-1 (File No. 333-200312), as amended, declared effective by the SEC on December 3, 2014.
Principles of Consolidation
Our condensed consolidated financial statements include the Company, our wholly-owned subsidiaries, our majority-owned subsidiaries and variable interest entities (“VIEs”) of which we are the primary beneficiary. We use the equity method of accounting for equity investments where we exercise significant influence but do not hold a controlling financial interest. Such investments are recorded in Other assets in our Condensed Consolidated Balance Sheets and the related equity earnings from these investments is included in Equity in net loss of unconsolidated affiliates in our Condensed Consolidated Statements of Income. All intercompany balances and transactions have been eliminated in consolidation.
Estimates
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, our allowance for doubtful accounts, useful lives of our property, plant and equipment and amortizing intangible assets, valuation allowance on deferred tax assets, reserves for uncertain tax positions, evaluation of goodwill, intangible assets and other long-lived assets for impairment, accounting for stock based compensation and our ESOP, reserves for general liability, workers’ compensation, and medical insurance, cash discounts and customer rebates and valuation of our Redeemable Common Stock and Redeemable Convertible Preferred Stock. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Management believes the accounting estimates are appropriate and reasonably determined; however, due to the inherent uncertainties in making these estimates, actual results could differ from those estimates.
Acquisitions
In accordance with ASC Topic 805, “Business Combinations” (“ASC 805”), the Company accounts for acquisitions by applying the acquisition method of accounting. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition. The fair values assigned to the assets acquired and liabilities assumed are based on valuations using management’s best estimates and assumptions and are preliminary pending the completion of the valuation analysis of selected assets and liabilities. During the measurement period (which is not to exceed one year from the acquisition date), the Company is required to retrospectively adjust the provisional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The results of operations of the acquired companies since the respective acquisition dates are included in the Company’s unaudited Condensed Consolidated Statements of Operations.
Recent Accounting Pronouncements Not Yet Adopted
In April 2014, the Financial Accounting Standards Board issued authoritative guidance amending existing requirements for reporting discontinued operations. Under the new guidance, discontinued operations reporting will be limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. Public entities will apply the amended guidance prospectively to all disposals occurring within annual periods beginning on or after December 15, 2014, and interim periods within those years. We will adopt this standard effective April 1, 2015. We are currently evaluating the impact of this amendment on our consolidated financial statements.
In May 2014, the Financial Accounting Standards Board issued an accounting standards update which amends the guidance for revenue recognition. This amendment contains principles that will require an entity to recognize revenue to depict the transfer of goods and services to customers at an amount that an entity expects to be entitled to in exchange for goods or services. The amendment sets forth a new revenue recognition model that requires identifying the contract, identifying the performance obligations and recognizing the revenue upon satisfaction of performance obligations. This amendment is effective for annual periods beginning on or after December 15, 2016, and interim periods within those years, with earlier adoption not permitted. We will adopt this standard effective April 1, 2017. We are currently evaluating the impact of this amendment on our consolidated financial statements.
In August 2014, the Financial Accounting Standards Board issued an accounting standards update which provides guidance for management’s assessment of an entity’s ability to continue as a going concern. The new guidance is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of the consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be effective for annual periods
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beginning on or after December 15, 2016, and interim periods within those years, with earlier adoption permitted. We will adopt this standard effective April 1, 2017. We are currently evaluating the impact of this new standard on our consolidated financial statements.
On June 28, 2013, we entered into an Asset Purchase Agreement (the “NDS Agreement”) to sell substantially all of the assets used in connection with our DrainTech product line to National Diversified Sales, Inc. (“NDS”) in exchange for cash. The NDS Agreement defined the purchase price to consist of a cash payment of $5,877. The net book value for the related assets, consisting of inventory and property and equipment, was $1,029, bringing the net gain recognized to $4,848. The sale transaction closed on June 28, 2013. The Company determined that this sale did not qualify for discontinued operations reporting.
Property, plant and equipment - net as of March 31, 2014 and December 31, 2014 consisted of the following:
Land, buildings and improvements
Machinery and equipment
Total cost
Less accumulated depreciation
Property, plant and equipment – net
The following table sets forth depreciation expense for the three and nine months ended December 31, 2013 and 2014, respectively:
Depreciation expense
Inventories as of March 31, 2014 and December 31, 2014 consisted of the following:
Raw materials
Finished goods
Total inventory
We had no work-in-process inventories as of March 31, 2014 and December 31, 2014.
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The carrying amount of goodwill by reportable segment is as follows:
Balance at March 31, 2014
Intangible Assets
Intangible assets as of March 31, 2014 and December 31, 2014 consisted of the following:
Definite-lived intangible assets
Developed technology
Customer lists
Patents
Contract agreements
Trademarks
Total definite-lived intangible assets
Indefinite-lived intangible assets
Total intangible assets
The following table sets forth amortization expense for the three and nine months ended December 31, 2013 and 2014, respectively:
Amortization expense
The fair value measurements and disclosure principles of ASC 820 - Fair Value Measurements and Disclosures define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements. These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access as of the measurement date.
Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
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When applying fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the periods presented. Our fair value estimates take into consideration the credit risk of both the Company and our counterparties.
When active market quotes are not available for financial assets and liabilities, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves, foreign currency rates and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value. Generally, the fair value of our Level 3 instruments is estimated as the net present value of expected future cash flows based on internal and external inputs.
Recurring Fair Value Measurements
The assets and liabilities carried at fair value as of March 31, 2014 and December 31, 2014 were as follows:
Assets:
Derivative assets – diesel fuel contracts
Total assets at fair value on a recurring basis
Liabilities & Mezzanine Equity:
Derivative liability – interest rate swaps
Contingent consideration for acquisitions
Redeemable Common Stock
Redeemable Convertible Preferred Stock
Total liabilities & mezzanine equity at fair value on a recurring basis
Derivative assets – currency forward contracts
Liabilities:
Derivative liability – diesel fuel contracts
Derivative liability – propylene swaps
Derivative liability – currency forward contracts
Total liabilities at fair value on a recurring basis
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Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2013 and 2014 were as follows:
Balance at beginning of period
Allocation of ESOP shares to participants
Change in fair value related to items recorded in mezzanine equity
Change in estimate of contingent consideration
Termination of redemption feature on redeemable common stock upon IPO
(1) Change in redemption feature of Redeemable Convertible Preferred Stock
(2) Change in redemption feature of Deferred Compensation – unearned ESOP Shares
Balance at end of period
For the nine months ended December 31, 2014 our Redeemable Common Stock transferred out of Level 3, as these securities started actively trading on the NYSE during the second quarter of fiscal 2015. In addition, our Redeemable Convertible Preferred Stock and Deferred Compensation – unearned ESOP were reclassified from a recurring Level 3 fair value measurement to a non-recurring Level 3 fair value measurement as a result of the IPO. See Note 1 for further information on the IPO. There were no further transfers in or out of Levels 1, 2 and 3 for the fiscal year ended March 31, 2014 and the nine months ended December 31, 2014.
Valuation of our Contingent Consideration for Acquisitions
The fair values of the contingent consideration payables were calculated with reference to the estimated future value of the Inserta Tee and Flexstorm businesses, which are based on a discounted cash flow model. The undiscounted value is discounted at the present value using a market discount rate. The categorization of the framework used to price this liability is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
Valuation of our Redeemable Common Stock
The Company has certain shares of common stock outstanding allowing the holder to put its shares to us for cash. This Redeemable Common Stock was historically recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value were recorded in Retained earnings. Historically, the fair value of a share of common stock was determined by management by applying industry-appropriate multiples to EBITDA and performing a discounted cash flow analysis. Under the industry-appropriate multiples approach, to arrive at concluded multiples, we considered differences between the risk and return characteristics of ADS and the guideline companies. Under the discounted cash flow analysis, the cash flows expected to be generated by the Company are discounted to their present value equivalent using a rate of return that reflects the relative risk of an investment in ADS, as well as the time value of money. This return is an overall rate based upon the individual rates of return for invested capital (equity and interest-bearing debt). The return, known as the weighted average cost of capital (“WACC”), is calculated by weighting the required returns on interest-bearing debt and common stock in proportion to their estimated percentages in an expected capital structure. The WACC used was 11% as of March 31, 2014. An increase in the WACC would decrease the fair value of the Redeemable Common Stock. The categorization of the framework used to price this temporary equity is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
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The redemption feature of our Redeemable Common Stock allowing the holder to put its shares to us for cash, as discussed in the previous paragraph, was not in effect upon effectiveness of the IPO on July 25, 2014. As a result, the Redeemable Common Stock was recorded at fair value through the effective date of the IPO and was subsequently reclassified at that fair value to permanent equity. See Note 1 for more information on the IPO.
Nonrecurring Fair Value Measurements
Valuation of our Redeemable Convertible Preferred Stock
The Trustee of the Company’s ESOP has the ability to put the shares of our Redeemable Convertible Preferred Stock to the Company. Our Redeemable Convertible Preferred Stock is recorded at its fair value in the mezzanine equity section of our Condensed Consolidated Balance Sheets and changes in fair value are recorded in Retained earnings. Accordingly, we estimated the fair value of the Redeemable Convertible Preferred Stock through estimating the fair value of the Company’s common stock and applying certain adjustments including for the fair value of the total dividends to be received and assuming conversion of the Redeemable Convertible Preferred Stock to common stock at the stated conversion ratio per our Certificate of Incorporation. The categorization of the framework used to price this temporary equity is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.
Upon the effective date of the IPO, the redemption feature of our Redeemable Convertible Preferred Stock allowing the Trustee of the Company’s ESOP to put shares to us for cash was no longer applicable. However, if our common stock, which our Redeemable Convertible Preferred Stock may convert to, is no longer a “registration-type class of security” (e.g., in the event of a delisting), the option held by the Trustee, which granted it the ability to put the shares of our Redeemable Convertible Preferred Stock to us, would then become applicable. Preferred securities that become redeemable upon a contingent event that is not solely within the control of the Company should be classified outside of permanent equity. As of December 31, 2014, the Company has determined that it is not probable that the redemption feature will become applicable. Since the Redeemable Convertible Preferred Stock is not currently redeemable and it is not probable that the instrument will become redeemable, subsequent adjustment to fair value is not required. As such, the Redeemable Convertible Preferred Stock was recorded to fair value at the effective date of the IPO on July 25, 2014 and will remain in mezzanine equity without further adjustment to carrying value unless it becomes probable that the redemption feature will become applicable. See Note 1 for more information on the 2014 Initial Public Offering and Note 13 for further information on the Redeemable Convertible Preferred Stock.
Valuation of our Goodwill and Indefinite Lived Intangible Assets
Goodwill and indefinite lived intangible assets are tested for impairment annually as of March 31 or whenever events or changes in circumstances indicate the carrying value may be greater than fair value.
The accounting model for VIEs described in ASC 810-10 considers if a company has a controlling financial interest in a VIE. A controlling financial interest will have both (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of a VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could be potentially significant to the VIE. Entities are required to consolidate a VIE when it is determined that they have a controlling financial interest in a VIE and therefore are the primary beneficiary of that VIE. In determining whether we are the primary beneficiary of a VIE, we consider factors such as voting rights, including kick-out rights, whether we have the power to direct the VIE’s significant activities, variable interests held by related parties and other factors. We believe that significant assumptions and judgments were applied consistently.
We participate in joint ventures from time to time for the purpose of expanding upon our growth of manufacturing and selling HDPE corrugated pipe in emerging markets. Our investments in these joint ventures may create a variable interest in a VIE, depending upon the contractual terms of the arrangement. One of our joint ventures, ADS Mexicana, was determined to be a VIE. In April 2013, ADS Worldwide acquired an additional 1% equity interest in its consolidated subsidiary ADS Mexicana stock for $520, increasing the Company’s ownership percentage to 51% from 50%. We invest in this VIE for the purpose of expanding upon our growth of manufacturing and selling ADS licensed HDPE corrugated pipe and related products in the Mexican and Central American markets via the joint venture partner’s local presence and expertise throughout the region. We have executed a Technology, Patents and
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Trademarks Sub-License Agreement and a Distribution Agreement with ADS Mexicana that provides ADS Mexicana with the rights to manufacture and sell ADS licensed products in Mexico and Central America. We are the guarantor of 100% of ADS Mexicana’s credit facility and our maximum potential payment under this guarantee totals $12,000. We have concluded that we hold a variable interest in and are the primary beneficiary of ADS Mexicana based on our power to direct the most significant activities of ADS Mexicana and our obligation to absorb losses and our right to receive benefits that could be significant to ADS Mexicana. As the primary beneficiary, we are required to consolidate the assets and liabilities of ADS Mexicana. The equity owned by our joint venture partner is shown as Noncontrolling interest in subsidiaries in our Condensed Consolidated Balance Sheets and our joint venture partner’s portion of net income is shown as Net income attributable to noncontrolling interest in our Condensed Consolidated Statements of Income.
The table below includes the assets and liabilities of ADS Mexicana that are consolidated as of March 31, 2014 and December 31, 2014. The balances exclude intercompany transactions that are eliminated upon consolidation.
Current assets
Other noncurrent assets
Current liabilities
Noncurrent liabilities
We participate in three unconsolidated joint ventures, Tuberias Tigre — ADS Limitada (“Tigre ADS”), which is 50%-owned by our wholly-owned subsidiary ADS Chile, BaySaver Technologies, LLC (“BaySaver”), which is 55% owned by our wholly-owned subsidiary ADS Ventures, Inc, and Tigre-ADS USA, Inc. (“Tigre-ADS USA”), which is 49% owned by our wholly-owned subsidiary ADS Ventures, Inc.
Tigre ADS
Our investment in this unconsolidated joint venture was formed for the purpose of expanding upon our growth of manufacturing and selling HDPE corrugated pipe in the South American market via the joint venture partner’s local presence and expertise throughout the region. We are the guarantor of 50% of Tigre ADS’ credit facility, and the debt guarantee is shared equally with the joint venture partner. Our maximum potential payment under this guarantee totals $7,000. We are not required to consolidate Tigre ADS under ASC 810-10 as we are not the primary beneficiary, although we do hold a significant variable interest in Tigre ADS through our equity investment and debt guarantee. The results of Tigre ADS are accounted for in the condensed consolidated financial statements using the equity method of accounting. Our share of the loss of this joint venture is reported in the Condensed Consolidated Statements of Income under Equity in net loss of unconsolidated affiliates. Our investment in this joint venture is included in Other assets in the Condensed Consolidated Balance Sheets.
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Summarized financial data as of the fiscal year ended March 31, 2014 and December 31, 2014 for the Tigre ADS joint venture is as follows:
Investment in Tigre ADS
Receivable from Tigre ADS
ADS’ Guarantee of Tigre ADS Debt
BaySaver
On July 15, 2013, ADS Ventures, Inc., a wholly-owned subsidiary of the Company, BaySaver Technologies, Inc. (“BTI”) and Mid Atlantic Storm Water Research Center, Inc. entered into an LLC agreement to form a new joint venture, BaySaver. The joint venture was established to design, engineer, manufacture, market and sell water quality filters and separators used in the removal of sediment and pollution from storm water anywhere in the world except New Zealand, Australia and South Africa. The Company contributed $3,500 in cash, $1,285 in inventory, and other intangible assets with no carrying value, in exchange for a 55% equity interest and a 50% voting interest in BaySaver. We are not required to consolidate BaySaver under ASC 810-10 as we are not the primary beneficiary, although we do hold a significant variable interest in BaySaver through our equity investment. The Company accounts for its investment in BaySaver under the equity method of accounting. In connection with this investment, the Company acquired a call option to purchase the remaining 45% interest in BaySaver. Also, in connection with the investment, the Company granted a put option enabling the other equity holders to sell their remaining shares in BaySaver to the Company upon the passage of time or the occurrence of certain events. Our share of the income of this joint venture is reported in the Condensed Consolidated Statements of Income under Equity in net loss of unconsolidated affiliates. Our investment in this joint venture is included in Other assets in the Condensed Consolidated Balance Sheets.
Summarized financial data as of fiscal year ended March 31, 2104 and December 31, 2014 for the BaySaver joint venture is as follows:
Investment in Baysaver
Receivable from Baysaver
Our share of the income of this joint venture is decreased by amortization expense relating to the basis difference between our cost basis in the investment and the basis reflected at the joint venture level. This basis difference is being recorded over the lives of the underlying assets which gave rise to the basis difference, which is 10 years. The unrecorded basis difference as of December 31, 2014 is $1,689.
Tigre-ADS USA
On April 7, 2014, ADS Ventures, Inc., a wholly-owned subsidiary of the Company, and Tigre S.A. – Tubos e Conexoes entered into a stock purchase agreement to form a new joint venture, Tigre-ADS USA Inc. The new joint venture was established to manufacture and sell PVC fittings for waterworks, plumbing, and HVAC applications primarily in the United States and Canadian markets. The Company acquired 49% of the outstanding shares of capital stock of Tigre USA, Inc. for $3,566. The new joint venture represents a continuation of the existing activities of Tigre USA through its Janesville, Wisconsin manufacturing facility. We are not required to consolidate Tigre-ADS USA under ASC 810-10 as we are not the primary beneficiary, although we do hold a significant variable interest in Tigre-ADS USA through our equity investment. The Company accounts for its investment in Tigre-ADS USA under the equity method of accounting. Our share of the loss of this joint venture is reported in the Condensed Consolidated Statements of Income under Equity in net loss of unconsolidated affiliates. Our investment in this joint venture is included in Other assets in the Condensed Consolidated Balance Sheets.
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Summarized financial data as of December 31, 2014 for the Tigre-ADS USA joint venture is as follows:
Investment in Tigre-ADS USA
Receivable from Tigre-ADS USA
Long-term debt as of March 31, 2014 and December 31, 2014 consisted of the following:
a. Bank term loans:
Revolving Credit Facility – ADS
Revolving Credit Facility – ADS Mexicana
Term note
b. Senior Notes payable
c. Mortgage notes payable
d. Industrial revenue bonds
Total
Current maturities
The current ADS Revolving Credit Agreement (the “Revolving Credit Facility”) has been in place with several banks and was refinanced on June 12, 2013. The current bank credit facility expires in June 2018. Additionally, on December 20, 2013, we amended the agreement primarily to make certain amendments in order to permit the payment of a special dividend of $1.59 per share which was financed in full through the Revolving Credit Facility.
The Revolving Credit Facility agreement increased the upper limit of the Revolving Credit Facility to $325,000 for ADS and $12,000 for ADS Mexicana. The Company also entered into a five-year $100,000 term note. Both the Revolving Credit Facility and the term note share the same interest rate structure.
The Revolving Credit Facility interest rate is variable and depends upon the Company’s “pricing ratio” as defined in the agreement. The interest rate is derived from the London InterBank Offered Rate (LIBOR) or alternate base rate (Prime Rate) based upon the Company’s option. The average rate at December 31, 2014 was 3.01%. Any letters of credit outstanding reduce the availability on the revolver. The Company had outstanding letters of credit at December 31, 2014 in the amount of $8,005. The amount available for borrowing for ADS was $178,195, plus $12,000 available under a separate revolving credit facility with our subsidiary, ADS Mexicana, at December 31, 2014.
Per terms of the Revolving Credit Facility, ADS is not required to hedge its interest exposure using interest rate swaps; however, it is currently the objective of ADS to manage its exposure to variable rate debt. On July 18, 2013, ADS executed two Forward Interest Rate Swaps on the 30-Day LIBOR interest rate. One swap was for $50,000 on the Revolving Credit Facility starting on September 3, 2013 at a fixed rate of 0.86% for a period of three years, expiring on September 1, 2016. The second swap executed on July 18, 2013 was for $50,000 on the Revolving Credit Facility starting on September 2, 2014 at a fixed rate of 1.08% for a period of two years, expiring on September 1, 2016.
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In December 2009, ADS signed an agreement with Prudential Investment Management, Inc., for the issuance of senior promissory notes (“Senior Notes”), for an aggregate amount of up to $100,000. We may make requests for purchases of the Senior Notes during the “Issuance Period,” defined as a three-year period beginning with the date of the agreement. The minimum purchase amount of Senior Notes is $10,000. Each Senior Note issued has a maximum term of no more than 10 years from the date of issuance. Interest is payable quarterly and is fixed at 5.6%. The rate is subject to an additional 200 basis point excess leverage fee if calculated leverage exceeds 3 to 1. A principal payment of $25,000 is due in September in each of fiscal years 2017, 2018, and 2019.
In July 2013, ADS issued an additional $25,000 of senior promissory notes (“Senior Notes”) with Prudential Investment Management, Inc. Interest is payable quarterly and is fixed at 4.05%. The rate is subject to an additional 200 basis point excess leverage fee if calculated leverage exceeds 3 to 1. A principal payment of $25,000 is due in September of the fiscal year 2020.
The carrying and fair values of the Company’s Senior Notes were $100,000 and $103,303, respectively, as of December 31, 2014. The fair value of the Senior Notes was determined based on the interest rate and terms of such borrowings to the rates and terms of similar debt available for the period.
One mortgage note payable with a fixed rate of 5.1% (Hilliard, Ohio) requires monthly installments through fiscal year 2015. Land and building with a net book value of approximately $4,914 at December 31, 2014 collateralize the mortgage note.
ADS issued industrial revenue bonds for the construction of four production facilities. The original bond values of $27,300 require periodic principal and interest payments through fiscal year 2019. During fiscal year 2011, two of the four bonds were retired, and during July of fiscal year 2015, one more of the bonds was retired. This leaves a remaining principal of $3,750 at December 31, 2014. The interest rate on the remaining bond is variable and computed on a weekly basis. This bond is not considered auction rate securities. The rate on this bond at December 31, 2014, was 3.84%, including a letter of credit fee of 3.75%. Land and buildings with a net book value of approximately $10,047 at December 31, 2014 collateralize the remaining bond.
The Revolving Credit Facility and the Senior Notes require, among other provisions, that we (1) maintain a minimum fixed charge ratio; (2) maintain a minimum leverage ratio; and (3) establish certain limits on permitted transactions, principally for indebtedness, capital distributions, loans and investments, and acquisitions and dispositions of assets. Capital distributions are limited to $50.0 million in any fiscal year if the pro-forma leverage ratio exceeds 3.0 to 1.
The Company uses interest rate swaps, commodity options in the form of collars and swaps, and foreign currency forward contracts to manage its various exposures to interest rate, commodity price, and exchange rate fluctuations. For interest rate swaps, the difference between the spot rate and applicable base rate is recorded in interest expense. For collars, commodity swaps and forward contracts, contract settlement gains and losses are recorded in the Condensed Consolidated Statements of Income in Cost of goods sold. Gains and (losses) related to the mark-to-market adjustments for changes in fair value of the derivative contracts are recorded in the Condensed Consolidated Statements of Income as Other miscellaneous (income) expense, net. The Company recognized gains and (losses) on mark-to-market adjustments for changes in fair value on derivative contracts of $184 and $(6,054) for the three months ended December 31, 2013 and 2014, respectively, and $(54) and $(6,217) for the nine months ended December 31, 2013 and 2014, respectively.
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A summary of the fair values for the various derivatives at March 31, 2014 and December 31, 2014 is presented below:
Interest rate swaps
Diesel fuel option collars
Propylene swaps
Foreign currency forward contracts
Leases
We lease real estate, transportation, and office equipment under various noncancelable operating lease agreements that expire at various dates through fiscal year 2037.
Total rent expense was $5,667 and $3,577 for the three months ended December 31, 2013 and 2014, respectively, and $17,274 and $13,919 for the nine months ended December 31, 2013 and 2014, respectively.
Purchase Commitments
At December 31, 2014, commitments for the purchase of major property, plant, and equipment totaled approximately $8,560.
We will, from time to time, secure supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts are short term in nature and occur in the ordinary course of business. Under such purchase contracts, we have agreed to purchase 28,000 pounds of resin over the period January 2015 through December 2015 at a committed purchase cost of $19,020.
Litigation
We have been named as a defendant in various litigation matters. Management intends to defend these outstanding claims. We believe we have adequate accrued loss contingencies and that current or threatened litigation matters will not have a material adverse impact on our condensed consolidated results of operations or condensed consolidated financial condition. Management estimates the maximum loss contingency is $420 and $442 at March 31, 2014 and December 31, 2014, respectively.
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The following table presents the changes in balances of each component of Accumulated other comprehensive loss (“AOCL”) for the periods ending December 31:
Other comprehensive loss before reclassifications
Amounts reclassified from AOCL
Income tax expense
The Trustee of the Company’s ESOP has the ability to put shares of our Redeemable Convertible Preferred Stock to the Company. The redeemable convertible preferred stock has a required cumulative 2.5% dividend and is convertible to common stock at a rate of one share for every 0.7692 share of common stock. We guarantee the value of the redeemable convertible preferred stock at $0.78 per share. The put option requirements of the Internal Revenue Code apply in the event that the Company’s common stock is not a registration type class of security or its trading has been restricted. Therefore, the holders of convertible preferred stock have a put right to require us to repurchase such shares in the event that our common stock is not listed for trading or otherwise quoted on the NYSE, AMEX, NASDAQ, or any other market more senior than the OTC Bulletin Board.
Given that the event may trigger redemption of the convertible preferred stock (the listing or quotation on a market more senior than the OTCBB) is not solely within our control, this results in the classification of our convertible preferred stock recorded in the mezzanine section of our Condensed Consolidated Balance Sheets as of December 31, 2014.
In accordance with ASC 480-10-S99, as of December 31, 2014, we did not adjust the carrying value of the convertible preferred stock to its redemption value or recognize any changes in fair value as we did not consider it probable that the convertible preferred stock would become redeemable.
Deferred Compensation — Unearned ESOP Shares
The fair value of Redeemable Convertible Preferred Stock held by the ESOP trust, but not yet earned by the ESOP participants or used for dividends, is reported as Deferred compensation — unearned ESOP shares within the mezzanine equity section of our Condensed Consolidated Balance Sheets.
Compensation expense and related dividends paid with ESOP shares are recognized based upon the average annual fair value of the shares allocated. The shares allocated are for services rendered throughout the period and, therefore, a simple average is used to calculate average annual fair value. Deferred compensation – unearned ESOP shares are relieved at the fair value, with any difference between the average fair value and the fair value shares when allocated
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being added to Additional paid in capital. The fair value of the shares allocated was $11.75 and $12.50 per share of Redeemable Convertible Preferred Stock at December 31, 2013 and 2014, respectively, resulting in an average fair value per share of $11.20 and $12.34 for the nine months ended December 31, 2013 and 2014, respectively. We recognized compensation expense of $2,317 and $2,690 for the three months ended December 31, 2013 and 2014, respectively, and $7,343 and $8,064 for the nine months ended December 31, 2013 and 2014, respectively, related to allocation of ESOP shares to participants for compensation.
Stock Options
Our 2000 stock option plan (“2000 Plan”) provides for the issuance of incentive common stock options and nonstatutory common stock options to management based upon the discretion of the Board of Directors. The plan generally provides for grants with the exercise price equal to fair value on the date of grant, which vest in three equal annual amounts beginning in year five and expire after 10 years from issuance.
In August 2013, a new stock option plan (“2013 Plan”) was approved by the Board of Directors and, as amended, provides for the issuance of up to 500 nonstatutory common stock options to management subject to the Board’s discretion. The plan generally provides for grants with the exercise price equal to fair value on the date of grant. The grants vest in five equal annual amounts beginning in year one and expire after 10 years from issuance. Options issued to the Chief Executive Officer vest equally over four years and expire after 10 years from issuance. In May 2014, the Board of Directors approved the increase of shares available for granting under the 2013 plan to 1,412 shares.
For both stock option plans, management determines the fair value of the options based on the Black-Scholes option pricing model. This methodology requires significant inputs including the fair value of our common stock, which is determined with the assistance of an independent appraisal performed by a reputable valuation firm. We recognized total stock-based compensation expense under both plans of $1,256 and $1,178 for the three months ended December 31, 2013 and 2014, respectively, and $1,502 and $3,596 for the nine months ended December 31, 2013 and 2014, respectively, which was included with General and administrative expenses in our Condensed Consolidated Statements of Income. As of December 31, 2013 and 2014, there was a total of $8,103 and $4,133, respectively, of unrecognized compensation expense related to unvested stock option awards that will be recognized as an expense as the awards vest over the remaining service period. We had approximately 1,097 and 1,412 shares available for granting under the 2000 and 2013 plans, respectively, as of December 31, 2014.
We estimate the fair value of stock options granted after April 1, 2006, using a Black-Scholes option-pricing model, with assumptions as follows:
Expected stock price volatility
Risk-free interest rate
Weighted-average expected option life (years)
Dividend yield
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2000 Plan
The stock option transactions as of the nine months ended December 31 are summarized as follows:
Outstanding at beginning of period
Issued
Exercised
Forfeited
Outstanding at end of period
Exercisable and vested at end of period
Unvested at end of period
Vested and expected to vest at end of period
As a result of the 2014 Initial Public Offering (See Note 1), all unvested stock options from prior issuances immediately vested. A new grant of 78 shares was issued in August 2014 at a fair market value of $15.74 per share. Vesting on this issuance will be recognized as expense as the awards vest over the remaining service period.
The following table summarizes information about the nonvested stock option grants as of the nine months ended December 31, 2014:
Unvested at beginning of period
Granted
Vested
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2013 Plan
The stock option transactions as of the nine months ended December 31, 2014 for the 2013 Stock Option Plan are summarized as follows:
Issued – equity classified
Issued – liability classified
Forfeited – equity classified
Fair value of options granted during the period
The following table summarizes information about the nonvested stock option grants as of December 31, 2014:
Restricted Stock
On September 16, 2008, the Board of Directors adopted the restricted stock plan for which restricted stock awards may be granted to certain key employees. The restricted stock will vest ratably over a five-year period from the original restricted stock grant date with the risk of forfeiture being stipulated only by the employees’ continuous employment by ADS. A portion of the grants vested immediately. Under the restricted stock plan, the vested shares granted are considered issued and outstanding. Employees with restricted stock have the right to dividends on the shares awarded (vested and unvested) in addition to voting rights on nonforfeited shares. The Company recognized compensation expense of $(40) and $78 for the three months ended December 31, 2013 and 2014, respectively, and $1,138 and $1,626 for the nine months ended December 31, 2013 and 2014, respectively, relating to the issuance of these shares; of this amount, $385 and $0 relates to the restricted shares that vested immediately during the nine months ended December 31, 2013 and 2014, respectively. We had approximately 333 shares available for granting under this plan as of December 31, 2014.
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The following table summarizes information about the unvested restricted stock grants as of December 31, 2014:
We expect most, if not all, restricted stock grants to vest.
As of December 31, 2014, there was approximately $1,723 of unrecognized compensation expense related to the restricted stock that will be recognized over the remaining service period.
Non-Employee Director Compensation Plan
On June 18, 2014, the Company amended its then-existing Stockholders’ Agreement to authorize shares of stock to be granted to non-employee members of its Board of Directors. The number of shares authorized amounted to 282. The shares typically vest one year from the date of issuance. Under this stock plan, the vested shares granted are considered issued and outstanding. Non-employee directors with this stock have the right to dividends on the shares awarded (vested and unvested) in addition to voting rights. On September 6, 2014, a total of 48 shares were granted to seven directors at a fair market value of $18.88 per share. These shares will vest on February 27, 2015. The Company recognized compensation expense of $0 and $286 for the three months ended December 31, 2013 and 2014, respectively, and $0 and $736 for the nine months ended December 31, 2013 and 2014, respectively, relating to the issuance of these shares. We had approximately 234 shares available for granting under this plan as of December 31, 2014.
The following table summarizes information about the unvested Non-Employee Director Compensation stock grants as of December 31, 2014:
We expect all the stock grants to vest.
As of December 31, 2014, there was approximately $164 of unrecognized compensation expense related to the restricted stock that will be recognized over the remaining service period.
The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other one-time charges, as well as discrete events, such as provision to return adjustments. For the nine months ended December 31, 2013 and 2014, the Company utilized an effective tax rate of 61.7% and 36.6%, respectively, to calculate its
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provision for income taxes. These rates are higher than the federal statutory rate of 35% due principally to state and local taxes, partially offset by foreign income taxed at lower rates. The effective tax rate for the first nine months of fiscal 2014 was primarily driven by the expected special dividend payment to participants in the ESOP Plan, which increased the effective tax rate by 19%. In accordance with ASC 740-270, “Income Taxes – Interim Reporting,” the Company’s expected annual effective tax rate for fiscal year 2015 based on all known variables is 36.6%.
Basic net income per share is calculated by dividing the Net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share is computed by dividing the Net income attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period.
Holders of unvested restricted stock have nonforfeitable rights to dividends when declared on common stock, and holders of Redeemable Convertible Preferred Stock participate in dividends on an as-converted basis when declared on common stock. As a result, unvested restricted stock and Redeemable Convertible Preferred Stock meet the definition of participating securities, which requires us to apply the two-class method to compute both basic and diluted net income per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders.
The dilutive effect of stock options and unvested restricted stock is based on the more dilutive of the treasury stock method or the diluted two-class method. In computing diluted net income per share, income available to common shareholders used in the basic net income per share calculation (numerator) is adjusted, subject to sequencing rules, for certain adjustments that would result from the assumed issuance of potential common shares. Diluted net income per share assumes the Redeemable Convertible Preferred Stock would be cash settled through the effective date of the IPO on July 25, 2014, as we have the choice of settling in cash or shares and we have demonstrated past practice and intent of cash settlement. Therefore these shares are excluded from the calculation through the effective date of the IPO. After the effective date of the IPO, Management’s intent is to share settle; therefore, these shares are included in the calculation from July 26, 2014 through December 31, 2014, if dilutive. For purposes of the calculation of diluted net income per share, stock options and unvested restricted stock are considered to be potential common stock and are only included in the calculations when their effect is dilutive.
The Company’s Redeemable Common Stock is included in the weighted-average number of common shares outstanding for calculating basic and diluted net income per share.
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The following table presents information necessary to calculate net income per share for the three and nine months ended December 31, 2013 and 2014, as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive:
NET (LOSS) INCOME PER SHARE - BASIC:
Adjustment for:
Net (loss) income available to common stockholders – Basic
Weighted average number of common shares outstanding – Basic
Net (loss) income per common share – Basic
NET (LOSS) INCOME PER SHARE - DILUTED:
Net (loss) income available to common stockholders – Diluted
Assumed conversion of preferred stock
Assumed exercise of stock options
Weighted average number of common shares outstanding – Diluted
Net (loss) income per common share – Diluted
Potentially dilutive securities excluded as anti-dilutive
We operate our business in two distinct operating and reportable segments based on the markets we serve: “Domestic” and “International”. The Chief Operating Decision Maker (“CODM”) evaluates segment reporting based on net sales and Segment EBITDA and Segment Adjusted EBITDA (a non-GAAP measure). We calculate Segment EBITDA as net income or loss before interest, income taxes, depreciation and amortization. We calculate Segment Adjusted EBITDA as Segment EBITDA before non-cash stock-based compensation expense, non-cash charges and certain other expenses.
Domestic - Our Domestic segment manufactures and markets products throughout the United States. We maintain and serve these markets through strong product distribution relationships with many of the largest national and independent waterworks distributors, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the U.S. We also sell through a broad variety of buying groups and co-ops
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in the United States. Products include Singlewall pipe, N-12 HDPE pipe sold into the Storm sewer and Infrastructure markets, N-12 High Performance PP pipe sold into the Storm sewer and sanitary sewer markets, and our broad line of Allied Products including Stormtech, Nyloplast, Arc Septic Chambers, Inserta Tee, Baysaver filters and water quality structures, Fittings, and FleXstorm. Our Domestic segment sales are diversified across all regions of the country.
International - Our International segment manufactures and markets products in regions outside of the United States, with a growth strategy focused on our owned facilities in Canada and through our joint-ventures, with best-in-class local partners in Mexico, Central America and South America. Our joint venture strategy provides us with local and regional access to new markets such as Brazil, Chile, Argentina, Peru and Colombia. We have been serving the Canadian market through Hancor of Canada since 2003. Our Mexican joint venture through ADS Mexicana primarily serves the Mexican markets, while our joint venture through Tigre ADS is our primary channel to serve the South American markets. Our product line includes Singlewall pipe, N-12 HDPE pipe, and N-12 High Performance PP pipe. The Canadian market also sells our broad line of Allied Products, while sales in Latin America are currently concentrated in fittings and Nyloplast.
The following table sets forth reportable segment information with respect to the amount of net sales contributed by each class of similar products of our consolidated gross profit for the three and nine months ended December 31, 2013 and 2014, respectively:
Domestic
Pipe
Allied Products
Total Domestic
International
Total International
Total net sales
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The following sets forth certain additional financial information attributable to our reportable segments for the three and nine months ended December 31, 2013, and 2014, respectively:
Segment Adjusted EBITDA
Interest expense, net
Depreciation and amortization
Equity in net income (loss) of unconsolidated affiliates
The following sets forth certain additional financial information attributable to our reporting segments as of March 31, 2014 and December 31, 2014, respectively
Investment in unconsolidated affiliates
Total identifiable assets
Eliminations
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Reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net (Loss) Income
Reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net (Loss) Income:
Depreciation and amortization (a)
Segment EBITDA
Derivative fair value adjustments
Foreign currency transaction losses (gains)
Unconsolidated affiliates interest and tax
Management fee to minority interest holder JV
Share-based compensation
ESOP deferred compensation
Transaction costs (b)
Reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net Income
Reconciliation of Segment EBITDA and Segment Adjusted EBITDA to Net Income:
Net income attributable to ADS
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ASC 855, “Subsequent Events” (“ASC 855”), establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 requires the Company to evaluate events that occur after the balance sheet date through the date the Company’s financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. The Company has evaluated subsequent events through the date these financial statements were issued.
On January 30, 2015, Hancor of Canada, a wholly-owned subsidiary of the Company, acquired all issued and outstanding shares of Ideal Drain Tile Limited and Wave Plastics Inc., the sole partners of Ideal Pipe of Canada. Ideal Pipe designs, manufactures and markets high performance thermoplastic corrugated pipe and related water management products used across a broad range of Canadian end markets and applications, including non-residential, residential, agriculture, and infrastructure applications. The acquisition further strengthens our positions in Canada by increasing our size and scale in the market, as well as enhancing our manufacturing, marketing and distribution capabilities. The purchase price of Ideal Pipe of Canada was $56,800 Canadian dollars, financed through our existing line of credit facility. We acquired certain assets and liabilities including accounts receivable, inventory, property plant and equipment, intangible and other assets and accrued liabilities. The Company will account for this acquisition in accordance with ASC 805. Pro forma results and other expanded disclosures prescribed by ASC 805 have not been presented as the Company has not begun the process of completing the preliminary purchase accounting.
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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, 2015 refers to fiscal 2015, which is the period from April 1, 2014 to March 31, 2015.
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 report and with our audited consolidated financial statements included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission (the “SEC”) on July 28, 2014. 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, our BaySaver 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 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 North America, our national footprint combined with our strong local presence and broad product offering makes 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 $12.0 billion of annual revenue opportunity. In addition, we believe the increasing acceptance of thermoplastic pipe products in international markets represents an attractive growth opportunity.
Our products are generally lighter, more durable, more cost effective and easier to install than comparable alternatives made with traditional materials. Following our entrance into the non-residential construction market with the introduction of N-12 corrugated polyethylene pipe in the late 1980s, our pipe has been displacing traditional materials, such as reinforced concrete, corrugated steel and PVC, across an ever expanding range of end markets. This has allowed us to consistently gain share and achieve above market growth throughout economic cycles. We expect to continue to drive conversion to our products from traditional products 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 corrugated high density polyethylene (or HDPE) pipe, polypropylene (or 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.
Recent Developments
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Results of Operations
Three Months Ended December 31, 2014 Compared With Three Months Ended December 31, 2013
The following tables summarize certain financial information relating to our operating results that have been derived from our condensed consolidated financial statements for the three months ended December 31, 2014 and 2013. Also included is certain information relating to the operating results as a percentage of net sales. We believe this presentation is useful to investors in comparing historical results.
Net Sales
Gross Profit
Selling expenses
General and administrative expenses
Less net income attributable to the non-controlling interests
Net loss attributable to ADS
Other financial data:
Adjusted EBITDA (a)
System-Wide Net Sales (a)
Adjusted Earnings Per Fully Converted Share – Basic (a)
Total Consolidated Net Sales
Net sales for the third quarter ended December 31, 2014 totaled $278.2 million, increasing $16.7 million, or 6.4%, over the comparable prior year period.
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Domestic net sales increased $11.8 million, or 5.2%, for the third quarter ended December 31, 2014, as compared to the prior year period. The increase in domestic sales was due to continued strong sales growth in the non-residential (up 10.4%) and residential (up 8.8%) markets; offsetting a 1.2% and 4.9% decline in infrastructure and agricultural sales, respectively. The sales growth was broken down between our pipe and Allied Products, which increased $7.9 million and $3.9 million, respectively, for the three months ended December 31, 2014. Domestic pipe sales increased $7.9 million, or 4.6%, due to continued growth in our N-12 and N-12 HP product lines offsetting lower agricultural singlewall sales. Pipe selling prices increased 4.4% as compared to the prior year. Allied Product sales increased $3.9 million, or 7.1%, led by our Nyloplast, StormTech, Inserta Tee and FleXstorm product lines. Excluding $1.8 million of Allied Product lines sold in third quarter fiscal 2014, Allied Product sales increased $5.7 million, or 10.7%, for the three months ended December 31, 2014 as compared to prior year sales of continuing products.
International net sales for the third quarter ended December 31, 2014 increased $4.9 million, or 14.1%, over the comparable fiscal year 2014 period. The growth was primarily due to increased sales in Canada and Mexico. Strong sales in the Canadian agricultural markets as well as continued acceptance and sales growth of Allied Products across all end markets led to the increase in third quarter net sales, offsetting the negative currency impact of the weakening Canadian dollar. Improved public spending and continued positive sales momentum in the electrical conduit market were the main factors in increased third quarter net sales in Mexico versus the comparable prior year period.
System-Wide Net Sales for the third quarter ended December 31, 2014 were $299.7 million, an increase of $21.7 million, or 7.8%, over System-Wide Net Sales of $278.0 million for the third quarter of fiscal 2014. Net sales at our South American Joint Venture operation were up slightly compared to the prior year period. Net sales growth from our domestic joint ventures (Tigre-ADS USA and Baysaver) provided a combined increase of $4.5 million in net sales for the unconsolidated joint ventures for the three months ended December 31 2014, as compared to the prior year period. Our Tigre-ADS USA Joint Venture was formed in the first quarter of fiscal year 2015 and our Baysaver Joint Venture was formed in the second quarter of fiscal year 2014.
Gross profit for the third quarter ended December 31, 2014 increased $0.4 million, or 0.7%, over the comparable period for fiscal year 2014.
Domestic gross profit increased $1.0 million, or 2.3%, to $43.6 million for the three months ended December 31, 2014 as compared to $42.6 million during the prior year. The increase was primarily due to sales growth in our higher margin Allied Product lines, which increased gross margin by $2.9 million, partially offset by a decrease in the pipe product gross margin of $1.9 million for the three months ended December 31, 2014 as compared to the prior year. Raw material prices increased 13.6% as compared to the prior year period due to virgin and non-virgin resin prices spiking higher in the third quarter of fiscal 2015. Freight costs totaled 9.1% of domestic net sales for the three months ended December 31, 2014, compared to 10.3% for the prior year period helped by diesel fuel prices moving lower late in the quarter.
International gross profit decreased $0.6 million, or 8.5%, for the third quarter of fiscal year 2015 over the comparable fiscal year 2014 period despite the strong sales growth in the quarter due to margin pressures. Gross margins were negatively impacted by the continued devaluation of the Canadian dollar versus the U.S. dollar and its impact on overall Canadian market selling prices in the third quarter. Raw material prices (which are primarily purchased in U.S. dollars for all International operations) also moved sharply higher, further contributing to the declining gross profit for the three months ended December 31, 2014.
Gross margin as a percentage of net sales totaled 18.0% for the third quarter ended December 31, 2014 as compared to 19.0% for the comparable third quarter fiscal 2014.
Selling expenses consist of field selling, customer service and commission expenditures for personnel engaged in sales and sales support functions. Field selling and customer service expenditures primarily consists of personnel costs (salaries, benefits, and variable sales commissions), travel and entertainment expenses, marketing, promotion, and advertising expenses, as well as bad debt provisions.
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Selling expenses for the three months ended December 31, 2014 increased $2.7 million, or 16.2%, over the comparable fiscal year 2014 period. The increase was primarily the result of increases in variable selling expenses due to higher sales volume and investments in additional sales coverage and growth initiatives. As a percentage of Net sales, selling expenses increased to 6.9% for the third quarter of fiscal 2015 as compared to 6.3% in the prior year.
General and administrative expenses consists of personnel costs (salaries, benefits, and other personnel-related expenses, including stock based compensation), recruitment and relocation expenses, accounting and legal fees, business travel expenses, rent and utilities for the administrative offices, director fees, investor relations, membership fees, office supplies, insurance and other miscellaneous expenses.
General and administrative expenses for the three months ended December 31, 2014 increased $0.7 million, or 3.9%, over the comparable fiscal year 2014 period. The increase was primarily the result of increases in non-cash compensation of $0.3 million and higher professional fees of $0.8 million, offset by lower corporate overhead expenses of $0.4 million.
The $0.8 million increase in professional fees was due to services of $0.3 million in connection with the Secondary Public Offering and additional audit, professional and consulting fees of $0.5 million associated with being a public company.
Intangibles amortization
Intangibles amortization for the three months ended December 31, 2014 decreased $0.5 million, or 17.4%, over the comparable fiscal year 2014 period. The $0.5 million decrease was due to lower amortization of intangibles from prior period acquisitions.
Interest expense for the three months ended December 31, 2014 increased $0.2 million, or 4.2%, over the comparable fiscal year 2014 period. The increase in the current year third quarter was due to a higher average interest rate on our outstanding indebtedness and a higher average long term debt balance. Our Long Term Debt was reduced by over $59.2 million in the third quarter of fiscal 2015
Other miscellaneous expenses, net
Miscellaneous expense increased $5.6 million over the comparable prior year period. The increase in the net expense was primarily due to unfavorable mark-to-market adjustments of $6.2 million for changes in fair value on derivative contracts (diesel fuel hedges and raw material derivatives) and $0.3 million of other miscellaneous expense, partially offset by $0.9 million of income related to unrealized currency gains in our International operations.
For the three months ended December 31, 2013 and 2014, the Company recorded an income tax provision of $17.5 million and an income tax benefit of $1.2 million, respectively. The effective tax rate for the third quarter of fiscal 2014 was primarily driven by the expected special dividend payment to participants in the Company’s ESOP, which increased the effective tax rate by 19%. The effective tax rate for the third quarter of fiscal 2015 was primarily driven by lower income before income taxes in our Domestic operation and $1.9 million of discrete items related to favorable provision to return adjustments realized in the filing of federal and state tax returns.
Net loss attributed to ADS and Net loss per share
Third quarter net loss attributable to ADS for fiscal year 2015 of approximately $0.4 million improved from the preceding fiscal year’s net loss attributable to ADS for the quarter of $10.3 million, as influenced by the factors noted above. Net loss per share for the third quarter fiscal year 2015 totaled $0.01 per basic and diluted share, as compared to a net loss of $0.32 per basic and diluted share recorded in the comparable prior year period.
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Adjusted EBITDA
Total adjusted EBITDA
As a percentage of net sales
Adjusted EBITDA for the third quarter of fiscal year 2015 decreased by $1.8 million, or 6.0%, over the comparable fiscal year 2014 period.
Domestic adjusted EBITDA totaled $25.4 million for the three months ended December 31, 2014, compared to $26.4 million for the prior year third quarter. International adjusted EBITDA totaled $2.3 million for the third quarter of fiscal 2015, compared to $3.1 million for the prior year period.
Adjusted EBITDA as a percentage of net sales totaled 10.0% for the three months ended December 31, 2014, compared to 11.3% for the prior year third quarter.
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Nine Months Ended December 31, 2014 Compared With Nine Months Ended December 31, 2013
The following tables summarize certain financial information relating to our operating results that have been derived from our condensed consolidated financial statements for the nine months ended December 31, 2014 and 2013. Also included is certain information relating to the operating results as a percentage of net sales. We believe this presentation is useful to investors in comparing historical results.
Income before income taxes
Adjusted Earnings Per Fully Converted Share (a)
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Net sales totaled $971.2 million for the nine months ended December 31, 2014, increasing $83.4 million, or 9.4%, over the comparable period for fiscal year 2014.
Domestic net sales increased $71.3 million, or 9.2%, for the nine months ended December 31, 2014, as compared to prior year period. The increase in domestic sales was due to continued strong sales growth in the non-residential (up 14.4%), infrastructure (up 15.5%), and residential (up 8.6%) markets; offsetting a 5.4% decline in Agricultural sales due to less drainage work in fiscal 2015. The sales growth was broken down between our pipe and Allied Products, which increased $53.9 million and $17.4 million, respectively, for the nine months ended December 31, 2014. Domestic pipe sales increased $53.9 million, or 9.2%, due to continued growth in our N-12 and N-12 HP product lines offsetting lower Agricultural singlewall sales. Allied Product sales increased $17.4 million, or 9.0%, due to strong sales volume sold primarily into the non-residential, residential and infrastructure markets. Excluding $6.9 million in sales of Allied Product lines sold in fiscal 2014, Allied Product sales increased $24.3 million, or 13.0%, for the nine months ended December 31, 2014 as compared to prior year sales of continuing products. Pipe selling prices increased 5.3% as compared to the prior year. After the nine months ended December 31, 2014, domestic sales were broken down as follows: Non-Residential - 51.8%, Residential – 19.1%, Agriculture – 18.5%, and Infrastructure – 10.6%.
International net sales increased $12.1 million, or 11.1%, for the nine months ended December 31, 2014 over the comparable fiscal year 2014 period. The growth was primarily due to increased sales in Canada and Mexico. Strong sales in the Canadian agricultural markets as well as continued acceptance and sales growth of Allied Products across all end markets led to the increase in third quarter net sales. Improved public spending and continued positive sales momentum in the electrical conduit market were the main factors in the increased nine month net sales in Mexico versus the comparable prior year period.
System-Wide Net Sales were $1,036.4 million for the first nine months of fiscal year 2015, an increase of $96.8 million, or 10.3%, over System-Wide Net Sales of $939.7 million for the first nine months of fiscal year 2014. Net sales at our South American Joint Venture operation were negatively impacted by continued softness in the mining markets and an overall construction slowdown due to reduced public spending. Net sales from our domestic joint ventures (Tigre-ADS USA and Baysaver) provided a combined increase of $15.9 million in net sales for unconsolidated joint ventures for the nine months ended December 31, 2014 as compared to the prior year. Our Tigre-ADS USA Joint Venture was formed in the first quarter of fiscal year 2015 and our Baysaver Joint Venture was formed in the second quarter of fiscal year 2014.
Gross profit for the nine months ended December 31, 2014 increased $15.6 million, or 8.3%, over the comparable prior year period.
Domestic gross profit increased $17.5 million, or 10.6%, to $182.9 million for the nine months ended December 31, 2014 as compared to $165.4 million during the prior year. The increase was primarily due to sales growth in our N-12 and N-12 HP pipe product lines and higher margin Allied Product lines, which increased gross margin by $4.9 million and $12.6 million, respectively, for the nine months ended December 31, 2014 as compared to the prior year. Raw material prices increased 10.8% due to higher virgin and non-virgin resin prices for the first nine months of fiscal 2015 as compared to the prior year period. Freight costs totaled 9.2% of domestic net sales for the nine months ended December 31, 2014, compared to 9.7% for the prior year period.
International gross profit decreased $1.9 million, or 8.0%, for the first nine months of fiscal year 2015 over the comparable fiscal year 2014 period. International pipe gross profit decreased $1.4 million, or 8.2%, primarily due to the impact of continued devaluation of the Canadian dollar versus the U.S. dollar and its impact on overall Canadian market selling prices, especially in the second and third quarters. Raw material prices (which are primarily purchased in U.S. dollars for all International operations) moved higher, and higher freight costs compared to the prior year period also contributed to the declining pipe gross profit for the nine months ended December 31, 2014.
Gross margin as a percentage of net sales totaled 21.1% for the nine months ended December 31, 2014 as compared to 21.3% for the prior year.
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Selling expenses for the nine months ended December 31, 2014 increased $5.9 million, or 11.2%, over the comparable fiscal year 2014 period. The increase was primarily the result of increases in variable selling expenses due to higher sales volume and investments in additional sales coverage and growth initiatives. As a percentage of Net sales, selling expenses increased to 6.0% for the first nine months of fiscal 2015 as compared to 5.9% in the prior year.
General and administrative expenses for the nine months ended December 31, 2014 increased $4.6 million, or 8.4%, over the comparable fiscal year 2014 period. The increase was primarily the result of increases in non-cash stock based compensation of $3.3 million and higher professional fees of $1.7 million, partially offset by reduced corporate overhead expenses of $0.4 million.
The $3.3 million increase in non-cash stock based compensation was due to a $2.2 million increase in non-cash compensation related to our stock option plans, primarily the 2013 stock option plan that was implemented late in the second quarter of fiscal 2014, $0.4 million of accelerated non-cash compensation related to immediate vesting of certain restricted stock shares as a result of the initial public offering, and $0.7 million of non-cash compensation expense related to the non-employee director compensation stock plan created in the second quarter of fiscal 2015.
The $1.7 million increase in professional fees was due to audit services of $0.8 million in connection with the IPO, $0.3 million in professional fees due to the Secondary Public Offering, and additional professional and consulting fees of $0.6 million associated with being a public company.
Gain on sale of business for the nine months ended December 31, 2014 was zero compared to $4.8 million over the comparable prior year period. The Company sold its Draintech product line during the first quarter of fiscal year 2014.
Intangibles amortization for the nine months ended December 31, 2014 decreased $0.9 million, or 11.0%, over the comparable prior year period. The $0.9 million decrease was due to less amortization of intangibles from prior period acquisitions.
Interest expense for the nine months ended December 31, 2014 increased $1.1 million, or 9.7%, over the comparable prior year period. The increase was due to a higher average interest rate on our outstanding indebtedness and a higher average outstanding balance in addition to a 2% surcharge on our shelf notes paid during the first quarter of fiscal 2015 due to our leverage ratio of Adjusted EBITDA to Funded Debt exceeding 3 times at June 30, 2014. The surcharge increased interest expense by $0.5 million. We repaid a portion of our outstanding indebtedness with the $72.1 million of net proceeds from our IPO, which closed on July 30, 2014. This repayment reduced our leverage ratio below 3 times at September 30, 2014 and eliminated the surcharge on the shelf notes for the second and third quarter of fiscal 2015. The leverage ratio dropped to 2.28 times at December 31, 2014, primarily due to $59.2 million of Long Term Debt reduction in the third quarter of fiscal 2015.
Miscellaneous expense increased $4.8 million over the comparable prior year period. The increase in the net expense was primarily due to unfavorable mark-to-market adjustments of $6.2 million for changes in fair value on derivative contracts (diesel fuel hedges and raw material derivatives), partially offset by $0.9 million of income related to unrealized currency gains in our International operations and $0.5 million of other miscellaneous income.
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For the nine months ended December 31, 2013 and 2014, the Company recorded income tax provisions of $40.8 million and $22.5 million, respectively, which represents an effective tax rate of 61.7% and 36.6%, respectively. The effective tax rate for the first nine months of fiscal 2014 was primarily driven by the expected special dividend payment to participants in the Company’s ESOP, which increased the effective tax rate by 19%. The effective tax rate for the first nine months of the fiscal 2015 is lower than the prior year period primarily due to the shift in the projections of the proportion of income earned and higher income before income taxes reducing the impact of Schedule M items in our tax calculations.
Equity in net loss of unconsolidated affiliates represent our proportionate share of net loss attributed to the three unconsolidated joint ventures in which we have significant influence, but not control, over operations. Equity net loss for the nine months ended December 31, 2014 increased $0.4 million to a net loss of $1.1 million over the comparable prior year period. The increase was primarily due to the $1.4 million equity loss from our South American Joint Venture operations which increased $0.4 million compared to the prior year period. Continued softness in the mining markets and an overall construction slowdown due to reduced public spending contributed to the increased loss. Offsetting this increase was equity income from our domestic joint ventures of $0.3 million, which increased slightly over the comparable prior year period.
Income attributed to non-controlling interests
Non controlling interests represent income attributed to the noncontrolling interest holders in joint venture operations that are consolidated in our financial statements. Income attributed to non-controlling interests increased $0.3 million for the nine months ended December 31, 2014 to income of $1.7 million compared to $1.4 million for the comparable prior year period.
Net income attributed to ADS and Net income per share
Year- to-date net income attributable to ADS of approximately $36.3 million increased from the preceding fiscal year’s net income attributable to ADS of $23.3 million, as influenced by the factors noted above. Net income per share for the first nine months of fiscal year 2015 totaled $0.44 basic and $0.43 diluted share, respectively, as compared to $0.28 and $0.27 per basic and diluted share, respectively, recorded in the comparable prior year period. The income per share for the nine months ended December 31, 2014 is impacted by changes in fair value appreciation on convertible preferred stock classified in mezzanine equity which reduced income available to common shareholders by $11.1 million, or $0.22 per share for common shareholders.
Adjusted EBITDA for the first nine months of fiscal year 2015 increased by $6.8 million, or 5.2%, over the comparable fiscal year 2014 period. Excluding the impact of the one-time $4.8 million gain from the sale of the Draintech business during the first quarter of fiscal 2014, adjusted EBITDA increased $11.6 million, or 9.2%, for the nine months ended December 31, 2014 as compared to the prior year ($137.3 million compared to an adjusted $125.7 million for the prior year).
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Domestic adjusted EBITDA totaled $127.3 million for the nine months ended December 31, 2014, compared to $118.2 million in the prior year (which included the impact of the one-time $4.8 million gain on the sale of the Draintech business). International adjusted EBITDA totaled $10.0 million for the first nine months of fiscal 2015 compared to $12.3 million in the prior period.
Adjusted EBITDA as a percentage of net sales totaled 14.1% for the nine months ended December 31, 2014, compared to 14.7% for the prior year. Excluding the impact of the one-time gain on adjusted EBITDA in the first quarter of fiscal 2014, adjusted EBITDA as a percentage of net sales would have been 14.2%.
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, System-Wide Net Sales, Adjusted Earnings Per Fully Converted Share, Adjusted Net Income and Weighted Average Fully Converted Common Shares Outstanding. 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 is a non-GAAP financial measure that comprises net income attributable to ADS before interest, income taxes, depreciation and amortization, stock-based compensation, non-cash charges and certain other expenses. Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Adjusted EBITDA is a key metric used by management and our board of directors to assess our financial performance and evaluate the effectiveness of our business strategies. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.
The following table presents a reconciliation of Adjusted EBITDA to Net (Loss) Income attributable to ADS, the most comparable GAAP measure, for each of the periods indicated:
EBITDA
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The following table presents a reconciliation of Segment Adjusted EBITDA to Net (Loss) Income attributable to ADS, the most comparable GAAP measure, for each of the periods indicated:
Reconciliation of Segment EBITDA and Adjusted Segment EBITDA to Net (Loss) Income
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Reconciliation of Segment EBITDA and Adjusted Segment EBITDA to Net Income
System-Wide Net Sales. System-Wide Net Sales is a non-GAAP measure which equals the sum of the net sales of our Domestic and International segments plus all net sales from our unconsolidated joint ventures (our South American Joint Venture, our BaySaver Joint Venture and our Tigre-ADS USA Joint Venture). We use this metric to measure the overall performance of our business across all of our geographies and markets we serve.
Our South American Joint Venture is managed as an integral part of our International segment and our BaySaver and Tigre-ADS USA Joint Ventures are managed as an integral part of our Domestic segment. However, they are not consolidated under GAAP. System-Wide Net Sales is prepared as if our South American Joint Venture, our BaySaver Joint Venture, and our Tigre-ADS USA Joint Venture were accounted for as consolidated subsidiaries for management and segment reporting purposes.
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The reconciliation of our System-Wide Net Sales to net sales is as follows:
Reconciliation of System-Wide Net Sales to Net Sales
Net sales associated with our unconsolidated affiliates:
South American Joint Venture (a)
BaySaver Joint Venture (b)
Tigre-ADS USA Joint Venture (c)
System-Wide Net Sales
Adjusted Earnings per Fully Converted Share, Adjusted Net Income, and Weighted Average Fully Converted Common Shares Outstanding. 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 and Weighted average common shares outstanding – Basic, the most comparable GAAP measures.
To effect this adjustment, we have (1) removed the adjustment for the change in fair value of Redeemable Convertible Preferred Stock classified as mezzanine equity from the numerator of the Net income per share - Basic computation, (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, and (4) added back 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.
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 included in this report because it is a key metric used by management and our board of directors to assess our financial performance. 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.
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The following table presents a reconciliation of Adjusted Earnings Per Fully Converted Share (Non-GAAP), Adjusted Net Income (Non-GAAP), and the Weighted Average Fully Converted Common Shares Outstanding (Non-GAAP) to our Net Income attributable to ADS, Net income per share and corresponding Weighted average common shares outstanding amounts, the most comparable GAAP measures, for each of the periods indicated.
Net (loss) income available to common shareholders
Weighted Average Common Shares Outstanding – Basic
Net (loss) income per share - Basic
Adjustments to net (loss) income available to common shareholders:
Total adjustments to net income available to common shareholders
Adjustments to net (loss) income attributable to ADS:
Fair value of ESOP Compensation related to Redeemable Convertible Preferred Stock
Adjusted net (loss) income – (Non-GAAP)
Adjustments to Weighted Average Common Shares Outstanding – Basic:
Unvested restricted shares
Redeemable Convertible Preferred shares
Total Weighted Average Fully Converted Common Shares Outstanding (Non-GAAP)
Adjusted (Loss) Earnings Per Fully Converted Share (Non-GAAP)
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 operation primarily through internally generated cash flow, debt financings and equity issuances. 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, 2014, we had $10.6 million in cash that was held by our foreign subsidiaries. Our intent is to reinvest our earnings in foreign subsidiaries. In the event that foreign earnings are repatriated, these amounts will be subject to income tax liabilities in the appropriate tax jurisdiction. No restrictions exist on our liquidity that is impacted by the significance of cash held by foreign subsidiaries.
Working Capital and Cash Flows
During the nine months ended December 31, 2014, our net increase in cash funds amounted to $6.8 million, compared to a net increase of $4.0 million for the nine months ended December 31, 2013. During the nine months ended December 31, 2014, our source of funds was primarily driven by higher operating earnings, net proceeds of $72.1 million from our IPO of common stock and non-cash charges (depreciation, amortization, ESOP and stock
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based compensation expense and mark-to-market adjustments for changes in fair value of derivative contracts). For the same period ending December 31, 2014, our use of cash was primarily driven by increased accounts receivable balances (up $16.2 million), spending for capital expenditures ($21.5 million), investments in joint ventures ($7.6 million) and repayment of $115.6 million of Long Term Debt. During the nine months ended December 31, 2013, our primary source of cash was also provided by operating earnings, borrowings on the Revolving Credit Facility and a new Private Shelf Note. For the nine months ended December 31, 2013, our use of cash was primarily due to increases in accounts receivable and for capital expenditures ($27.1 million) and repayment of $43.7 million of Long Term Debt.
As of December 31, 2014, we had $201.0 million in liquidity, including $10.8 million of cash and cash equivalents and $190.2 million in borrowings available under our Revolving Credit Facility, described below. We believe that our cash on hand, together with the availability of borrowings under our Revolving Credit Facility and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled interest payments on our indebtedness and dividend payment requirement for our convertible preferred stock for at least the next twelve months.
As of December 31, 2014, we had total consolidated indebtedness of approximately $338.4 million, down $115.6 million compared to March 31, 2014. We repaid a portion of our outstanding indebtedness with the $72.1 million of net proceeds from our initial public offering, which closed on July 30, 2014.
The following table sets forth the major sources and uses of cash for each of the periods presented:
Statement of Cash Flows data:
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Working Capital
Net working capital increased to $277.9 million as of December 31, 2014, from $263.9 million as of March 31, 2014, primarily due to the growth in accounts receivable of $16.2 million resulting from sales increases and a $21.8 million decrease in accounts payable, accrued expenses and other current liabilities. This change was partially offset by a decrease of $27.4 million in inventory.
Operating Cash Flows
During the nine months ended December 31, 2014, cash provided from operating activities was $85.4 million as compared with cash provided by operating activities of $88.1 million for the nine months ended December 31, 2013. Cash flow from operating activities during the nine months ended December 31, 2014 was impacted by moderately higher net income and share-based compensation compared to the prior period, offsetting an increase in the use of cash related to changes in accounts receivable and accounts payable. Cash flow from operating activities for the nine months ended December 31, 2013 was driven by higher revenues and favorable changes in working capital as well as a reduction of $4.8 million realized from the sale of assets for the Draintech product line.
Investing Cash Flows
During the nine months ended December 31, 2014, cash used for investing activities was $31.9 million, primarily due to $21.5 million for capital expenditures in support of operations, a $3.6 million investment in a domestic joint venture operation created in the first quarter fiscal 2015, and a $4.0 million investment in our international joint venture operation to support growth initiatives. During the nine months ended December 31, 2013, cash used for investing activities was $30.1 million, primarily due to capital expenditures in support of operations, net of $5.9 million in proceeds received from the sale of the Draintech product line.
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Financing Cash Flows
During the nine months ended December 31, 2014, cash used from financing activities was $46.2 million, primarily due to utilizing our operating cash flow and $79.1 million of proceeds from the IPO to pay down debt of $115.6 million as well as payments for $2.3 million in dividends and $6.5 million for fees related to the IPO. During the nine months ended December 31, 2013, cash used in financing activities was $54.0 million, primarily due to utilizing our operating cash flow to pay down debt of $43.7 million as well as payments for $4.6 million in dividends and $3.9 million for redemption of redeemable convertible preferred stock.
Capital Expenditures
Capital expenditures totaled $21.5 million, and $27.1 million for the nine months ended December 31, 2014 and 2013, respectively. Our capital expenditures for the nine months ended December 31, 2014 were used primarily to support facility expansions, equipment replacements, and our recycled resin initiatives.
We currently anticipate that we will make capital expenditures of approximately $35.0 million in fiscal year 2015. Such capital expenditures are expected to be financed using funds generated by operations. As of December 31, 2014, there were no material contractual obligations or commitments related to these planned capital expenditures.
Financing Transactions
Senior Loan Facilities
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 Senior Loan Facilities consisting of (i) the Revolving Credit Facility providing for revolving loans and letters of credit of up to a maximum aggregate principal amount of $325.0 million and (ii) the Term Loan Facility providing for the Term Loans in an aggregate original principal amount of $100.0 million. The Senior Loan Facilities also permit us to add additional commitments to the Revolving Credit Facility or the Term Loan Facility not to exceed $50 million in the aggregate. The proceeds of the Revolving Credit Facility are primarily used to provide for our ongoing working capital and capital expenditure needs, to finance acquisitions and distributions, and for our other general corporate purposes. The proceeds of the Term Loan Facility were primarily used for our general corporate purposes. The interest rates on the Senior Loan Facilities are determined by certain base rates or LIBOR rates, plus an applicable margin. The obligations under the Senior Loan Facilities are guaranteed by certain of our subsidiaries and secured by substantially all of our personal property assets. On December 20, 2013, we amended the Revolving Credit Facility to, among other things, make certain amendments in order to permit the payment of a cash dividend. For further information about the Senior Loan Facilities, see “Description of Certain Indebtedness – Senior Loan Facilities” disclosed in our Registration Statement on Form S-1 (File No. 333-200312), as amended, declared effective by the SEC on December 3, 2014. As of December 31, 2014, the outstanding principal drawn on the Revolving Credit Facility was $138.8 million, with $178.2 million available to be drawn. As of December 31, 2014, the outstanding principal balance of the Term Loan was $93.1 million.
We used the net proceeds of $72.1 million from the initial public offering, which closed on July 30, 2014, to repay a portion of our outstanding indebtedness under the Revolving Credit Facility.
Mexicana Revolving Credit Facility
On September 24, 2010, our joint venture 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 million. The proceeds of the revolving credit facility are primarily used to cover working capital needs. The interest rates of the revolving credit facilities are determined by certain base rates or LIBOR rates, plus an applicable margin. The obligations under the revolving credit facility are guaranteed by us and certain of our subsidiaries and secured by substantially all of our assets. For further information about the Senior Loan Facilities, see “Description of Certain Indebtedness – Senior Loan Facilities” disclosed in our Registration Statement on Form S-1 (File No. 333-200312), as amended, declared effective by the SEC on December 3, 2014. As of December 31, 2014, there was no outstanding principal drawn on the revolving credit facility and the entire $12.0 million was available to be drawn.
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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 $100.0 million. Pursuant to the private shelf agreement, on September 27, 2010, we issued $75.0 million in aggregate principal amount of the 5.60% Senior Series A Notes due September 24, 2018 to repurchase outstanding shares of common stock from certain of our stockholders and to repurchase outstanding shares of convertible preferred stock from the ESOP. On July 24, 2013, we issued $25.0 million in aggregate principal amount of the 4.05% Senior Series B Notes due September 24, 2019 for our general corporate purposes. The Senior Notes are guaranteed by certain of our subsidiaries and secured by substantially all of our assets. On December 20, 2013, we amended the private shelf agreement to, among other things, make certain amendments in order to permit the payment of a cash dividend. For further information about the Senior Notes, see “Description of Certain Indebtedness – Senior Notes” disclosed in our Registration Statement on Form S-1 (File No. 333-200312), as amended, declared effective by the SEC on December 3, 2014. We have no further amount available for issuance of senior notes under the private shelf agreement. At December 31, 2014 the outstanding principal balance on these notes was $100.0 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 include a Leverage Ratio and a Fixed Charge Ratio. For any relevant period of determination, the Leverage Ratio is calculated by dividing Total Consolidated Indebtedness (funded debt plus guarantees) by Consolidated EBITDA. The current upper limit is 4.0 times. The Fixed Charge Ratio is calculated by dividing the sum of Consolidated EBITDA minus Capital Expenditures minus cash Income Taxes paid, by the sum of Fixed Charges. Fixed Charges include cash Interest expense, scheduled principal payments on Indebtedness, and ESOP Capital Distributions in excess of $10.0 million in a given fiscal year. The current minimum ratio is 1.25 times. For further information, see “Description of Certain Indebtedness” disclosed in our Registration Statement on Form S-1 (File No. 333-200312), as amended, declared effective by the SEC on December 3, 2014. We were in compliance with our debt covenants as of December 31, 2014.
Contractual Obligation as of December 31, 2014
Contractual obligations:
Long-term debt (1)
Interest payments (2)
Operating leases
Contractual purchase obligations (3)
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 8 of our Notes to Condensed Consolidated Financial Statements. As of December 31, 2014, our South American Joint Venture had approximately $12.2 million of outstanding debt. 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.
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Critical Accounting Policies and Estimates
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 Registration Statement on Form S-1 (File No. 333-200312), as amended, declared effective by the SEC on December 3, 2014.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements. Some of the forward-looking statements can be identified by the use of terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects and growth strategies and the industries in which we operate and including, 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 and liquidity, and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our consolidated results of operations, financial condition and liquidity, and industry development are consistent with the forward-looking statements contained in this report, 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 the risks and uncertainties discussed in this report under the headings “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:
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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.
We are subject to various market risks, primarily related to changes in interest rates, raw material supply prices, and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions.
Interest Rate Risk
We are subject to interest rate risk associated with our debt. Changes in interest rates impact the fair value of our fixed-rate debt, but there is no impact to earnings and cash flow. Alternatively, changes in interest rates do not affect the fair value of our variable-rate debt, but they do affect future earnings and cash flow. The Revolving Credit Facility, the Term Loan Facility, and our industrial development revenue bond, or IDRB, notes bear variable interest rates. The Revolving Credit Facility and Term Loan Facility bear interest either at LIBOR or the Prime Rate, at our option, plus applicable pricing margins. The IDRB notes bear interest at weekly commercial paper rates, plus applicable pricing margins. A 1% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $1.4 million based on our borrowings as of December 31, 2014. Assuming the Revolving Credit Facility is fully drawn, each 1% increase or decrease in the applicable interest rate would change our interest expense by approximately $3.0 million per year. To mitigate the impact of interest rate volatility, we had two interest rate swaps in effect as of December 31, 2014. The first swap is a $50.0 million notional value, non-amortizing swap at a LIBOR rate of 0.86% which expires in September, 2016. A second $50.0 million notional value swap took effect on September 1, 2014 and expires on September 1, 2016. The rate is at a fixed LIBOR of 1.08%.
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Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk consist principally of accounts receivable. We provide our products to customers based on an evaluation of the customers’ financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer’s financial condition. We monitor the exposure for credit losses and maintain allowances for anticipated losses. Concentrations of credit risk with respect to our accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion among many different geographies.
Raw Material and Commodity Price Risk
Our primary raw materials used in the production of our products are polyethylene and polypropylene resins. As these resins are hydrocarbon-based materials, changes in the price of feedstocks, such as crude oil and natural gas, as well as changes in the market supply and demand may cause the cost of these resins to fluctuate significantly. Raw materials account for the majority of our cost of goods sold. Given the significance of these costs and the inherent volatility in supplier pricing, our ability to reflect these changes in the cost of resins in our product selling prices in an efficient manner, passing the increase on to our customers, contributes to the management of our overall supply price risk and the potential impact on our results of operations.
We manage supply risk with financial and physical hedge contracts for the HDPE and PP resins used in the manufacture of our Pipe and Allied Products, as well as for the diesel fuel used by our in-house fleet of delivery trucks. Our physical hedge contracts for HDPE resins are typically at a fixed price and volume over time. We use to a limited extent financial derivatives for PP resin in the form of fixed price swaps based on propylene monomer. For diesel fuel, we have utilized option contracts in the form of collars with put and call options.
We have supply contracts that typically include supply periods of greater than one year. Except for physical-hedged resin contracts, we generally do not enter into long-term purchase orders for the delivery of raw materials. Our orders with suppliers are flexible and do not normally contain minimum purchase volumes or fixed prices. Accordingly, our suppliers may change their selling prices or other relevant terms on a monthly basis, exposing us to pricing risk. Our use of pricing and forecasting tools, centralized procurement, additional sources of supply and incorporation of vertical integration for recycled material have increased our focus on efficiency and resulted in lower overall supply costs. If the price of HDPE and PP virgin resin increased or decreased by 5%, it would result in a material change to our cost of goods sold.
Inflation
Our cost of goods sold is subject to inflationary pressures and price fluctuations of the raw materials we use, primarily high density polyethylene and polypropylene resins. Historically, we have generally been able over time to recover the effects of inflation and price fluctuations through sales price increases and production efficiencies related to technological enhancements and improvements. However, we cannot reasonably estimate our ability to successfully recover any price increases.
Financial Instruments
We have operations in countries outside of the United States, all of which use the respective local foreign currency as their functional currency. Each of these operations may enter into contractual arrangements with customers or vendors that are denominated in currencies other than its respective functional currency. Consequently, our results of operations may be affected by exposure to changes in foreign currency exchange rates and economic conditions in the regions in which we sell or distribute our products. Exposure to variability in foreign currency exchange rates from these transactions is managed, to the extent possible, by natural hedges which result from purchases and sales occurring in the same foreign currency within a similar period of time, thereby offsetting each other to varying degrees.
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In addition, to the transaction-related gains and losses that are reflected within the results of operations, we are subject to foreign currency translation risk, as the financial statements for our foreign subsidiaries are measured and recorded in the respective subsidiary’s functional currency and translated into U.S. dollars for consolidated financial reporting purposes. The resulting translation adjustments are recorded net of tax impact in the Condensed Consolidated Statement of Comprehensive Income.
Evaluation of Disclosure Controls and Procedures
Our management, under the direction and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the three months ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
From time to time we are involved in legal proceedings incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business. In connection with ASC 450, Contingencies, we have not accrued for material loss contingencies relating to any legal proceedings because we believe that, although unfavorable outcomes in proceedings may be possible, they are not considered by our management to be probable and reasonably estimable. We believe that the outcome of any such pending matters, either individually or in the aggregate, will not have a material impact on our business or financial condition.
We discussed in the Company’s Registration Statement on Form S-1 (File No. 333-200312), as amended (the “Registration Statement”), and our other filings with the SEC various risks that may materially affect our business. There have been no material changes to the risk factors disclosed in our Registration Statement. The materialization of any risks and uncertainties identified in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” contained in this report, together with those previously disclosed in the Registration Statement and our other filings with the SEC or those that are presently unforeseen, could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-looking Statements” contained in this report.
Not applicable.
None.
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The exhibits listed in the Exhibit Index are incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 9, 2015
/s/ Joseph A. Chlapaty
/s/ Mark B. Sturgeon
EXHIBIT INDEX
ExhibitNumber
Exhibit Description