| Background and Summary of Significant Accounting Policies | 1. BACKGROUND AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Advanced Drainage Systems, Inc. and subsidiaries (collectively
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. Our broad product line includes corrugated high density
polyethylene (or “HDPE”) pipe, polypropylene (or
“PP”) pipe and related water management products.
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, 2016 refers to fiscal 2016, which is
the period from April 1, 2015 to March 31, 2016.
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 prior periods
presented.
On July 25, 2014, we completed the IPO of our common stock,
which resulted in the sale by the Company of 5,289 shares of common
stock. We received total proceeds from the IPO of $79,131 after
excluding underwriter discounts and commissions of $5,501, based
upon the price to the public of $16.00 per share. After deducting
other offering expenses of $6,935, we used the net proceeds of
$72,196 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 (“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 per share. We did not receive any
proceeds from the sale of shares by the selling stockholder.
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.
Principles of Consolidation
Our 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 Consolidated Balance Sheets and the
related equity in earnings from these investments are included in
Equity in net loss of unconsolidated affiliates in our Consolidated
Statements of Operations. All intercompany balances and
transactions have been eliminated in consolidation.
Estimates
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingencies and
liabilities at the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Significant
estimates include, but are not limited to, our allowance for
doubtful accounts, valuation of inventory, useful lives of our
property, plant and equipment and amortizing intangible assets,
determination of the proper accounting for leases, valuation of
equity method investments, goodwill, intangible assets and other
long-lived assets for impairment, accounting for stock-based
compensation and our ESOP, valuation of our Redeemable common stock
and Redeemable convertible preferred stock, determination of
allowances for sales returns, rebates and discounts, determination
of the valuation allowance, if any, on deferred tax assets, and
reserves for uncertain tax positions. Management’s estimates
and assumptions are evaluated on an ongoing basis and are based on
historical experience, current conditions and available
information. Management believes the accounting estimates are
appropriate and reasonably determined; however, due to the inherent
uncertainties in making these estimates, actual results could
differ from those estimates.
Receivables and Allowance for Doubtful Accounts
Receivables include trade receivables, refundable income taxes and
other miscellaneous receivables, net of an allowance for doubtful
accounts. Receivables at March 31, 2016 and 2015 are as
follows:
(Amounts in thousands) 2016 2015
Trade receivables $ 158,664 $ 141,528
Refundable income taxes 19,783 1,895
Other miscellaneous receivables 8,436 10,871
Total Receivables $ 186,883 $ 154,294
Credit is extended to customers based on an evaluation of their
financial condition and collateral is generally not required. The
evaluation of the customer’s financial condition is performed
to reduce the risk of loss. Accounts receivable are evaluated for
collectability based on numerous factors, including the length of
time individual receivables are past due, past transaction history
with customers, their credit worthiness and the economic
environment. This estimate is periodically adjusted when management
becomes aware of a specific customer’s inability to meet its
financial obligations (e.g., bankruptcy filing) or as a result of
changes in historical collection patterns.
Inventories
Inventories are stated at the lower of cost or market value. The
Company’s inventories are maintained on the first-in,
first-out (“FIFO”) method. Costs include the cost of
acquiring materials, including in-bound freight from vendors and
freight incurred for the transportation of raw materials, tooling
or finished goods between the Company’s manufacturing plants
and its distribution centers, direct and indirect labor, factory
overhead and certain corporate overhead costs related to the
production of inventory. The portion of fixed manufacturing
overhead that relates to capacity in excess of our normal capacity
is expensed in the period in which it is incurred and is not
included in inventory.
Market value of inventory is established based on the lower of cost
or estimated net realizable value, with consideration given to
deterioration, obsolescence, and other factors. The Company
periodically evaluates the carrying value of inventories and
adjustments are made whenever necessary to reduce the carrying
value to net realizable value.
Property, Plant and Equipment and Depreciation
Method
Property, plant and equipment are recorded at cost less accumulated
depreciation, with the exception of assets acquired through
acquisitions, which are initially recorded at fair value. Equipment
acquired under capital lease is recorded at the lower of fair
market value or the present value of the future minimum lease
payments. Depreciation is computed for financial reporting purposes
using the straight-line method over the estimated useful lives of
the related assets or the lease term, if shorter, as follows:
Years
Buildings 40 — 45
Machinery and equipment 3 — 18
Leasehold improvements
Shorter of useful
Costs of additions and major improvements are capitalized, whereas
maintenance and repairs that do not improve or extend the life of
the asset are charged to expense as incurred. When assets are
retired or disposed, the cost and related accumulated depreciation
are removed from the asset accounts and any resulting gain or loss
is reflected in Loss (gain) on disposal of assets or businesses in
our Consolidated Statements of Operations. Construction in progress
is also recorded at cost and includes capitalized interest,
capitalized payroll costs and related costs such as taxes and other
fringe benefits. Interest capitalized was $411, $518, and $611
during the fiscal years ended March 31, 2016, 2015, and 2014,
respectively.
Goodwill
The Company records acquisitions resulting in the consolidation of
an enterprise using the acquisition method of accounting. Under
this method, we record the assets acquired, including intangible
assets that can be identified, and liabilities assumed based on
their estimated fair values at the date of acquisition. The
purchase price in excess of the fair value of the identifiable
assets acquired and liabilities assumed is recorded as
goodwill.
Goodwill is reviewed annually for impairment as of March 31 or
whenever events or changes in circumstances indicate the carrying
value may be greater than fair value. The goodwill impairment
analysis is comprised of two steps. The first step requires the
comparison of the fair value of the applicable reporting unit to
its respective carrying value. If the fair value of the reporting
unit exceeds the carrying value of the net assets assigned to that
unit, goodwill is not considered impaired and the Company is not
required to perform further testing. If the carrying value of the
net assets assigned to the reporting unit exceeds the fair value of
the reporting unit, then the Company must perform the second step
of the impairment test in order to determine the implied fair value
of the reporting unit’s goodwill. If the carrying value of a
reporting unit’s goodwill exceeds its implied fair value,
then we would record an impairment loss equal to the difference.
With respect to this testing, a reporting unit is a component of
the Company for which discrete financial information is available
and regularly reviewed by management. Implied fair value of
goodwill is determined by considering both the income and market
approach. Determining the fair value of a reporting unit is
judgmental in nature and involves the use of significant estimates
and assumptions. These estimates and assumptions include revenue
growth rates and operating margins used to calculate projected
future cash flows, risk-adjusted discount rates, future economic
and market conditions, and determination of appropriate market
comparables. The fair value estimates are based on assumptions
management believes to be reasonable, but are inherently
uncertain.
The Company did not incur any impairment charges for Goodwill in
the fiscal years ended March 31, 2016, 2015, or 2014.
Intangible Assets
Intangible Assets — Definite-Lived
Definite-lived intangible assets are amortized using the
straight-line method over their estimated useful lives, and are
tested for recoverability whenever events or changes in
circumstances indicate that carrying amounts of the asset group may
not be recoverable. Asset groups are established primarily by
determining the lowest level of cash flows available. If the
estimated undiscounted future cash flows are less than the carrying
amounts of such assets, an impairment loss is recognized to the
extent the fair value of the asset less any costs of disposition is
less than the carrying amount of the asset. Determining the fair
value of these assets is judgmental in nature and involves the use
of significant estimates and assumptions.
Intangible Assets — Indefinite-Lived
Indefinite-lived intangible assets are tested for impairment
annually as of March 31 or whenever events or changes in
circumstances indicate the carrying value may be greater than fair
value. Determining the fair value of these assets is judgmental in
nature and involves the use of significant estimates and
assumptions. The Company bases its fair value estimates on
assumptions it believes to be reasonable, but that are inherently
uncertain. To estimate the fair value of these indefinite-lived
intangible assets, the Company uses an income approach, which
utilizes a market derived rate of return to discount anticipated
performance. An impairment loss is recognized when the estimated
fair value of the intangible asset is less than the carrying
value.
The Company did not incur any impairment charges for Intangible
assets in the fiscal years ended March 31, 2016, 2015 or
2014.
Other Assets
Other assets include investments in unconsolidated affiliates
accounted for under the equity method, cash surrender value of
officer life insurance on key senior management executives,
capitalized software development costs, deposits, deferred
financing costs, Central parts, and other miscellaneous assets. The
Company capitalizes development costs for internal use software.
Capitalization of software development costs begins in the
application development stage and ends when the asset is placed
into service. The Company amortizes such costs using the
straight-line method over estimated useful lives of 2 to 10 years,
which is included in General and administrative expense, Selling
expense or Cost of goods sold within our Consolidated Statements of
Operations depending on the nature of the asset and its intended
use. Amortization expense related to deferred financing costs is
included in Interest expense within our Consolidated Statements of
Operations. Central parts represent spare production equipment
items which are used to replace worn or broken production equipment
parts and help reduce the risk of prolonged equipment outages. The
cost of Central parts is amortized on a straight line basis over
estimated useful lives of 8 to 30 years.
The Company evaluates its investments in unconsolidated affiliates
for impairment whenever events or changes in circumstances indicate
that the carrying amount might not be recoverable, and recognizes
an impairment loss when a decline in value below carrying value is
determined to be other-than-temporary. Under these circumstances,
we would adjust the investment down to its estimated fair value,
which then becomes its new carrying value. For the fiscal year
ended March 31, 2016, the Company recorded an impairment
charge of $4,000 related to its investment in the South American
Joint Venture. See Note 10. Investment in Unconsolidated
Affiliates.
Other assets as of the fiscal years ended March 31 consisted
of the following:
(Amounts in thousands) 2016 2015
Investments in unconsolidated affiliates $ 13,188 $ 25,038
Cash surrender value of officer life insurance 10,739 9,953
Capitalized software development costs, net 7,264 7,276
Deposits 4,553 4,947
Deferred financing costs 3,131 4,543
Central parts 1,040 2,108
Other 8,472 7,302
Total other assets $ 48,387 $ 61,167
The following table sets forth amortization expense related to
Other assets in each of the fiscal years ending March 31:
(Amounts in thousands) 2016 2015 2014
Capitalized software development costs $ 3,872 $ 3,550 $ 3,270
Deferred financing costs 1,412 1,410 1,591
Central parts 362 55 43
Other 1,898 1,977 1,986
Leases
Leases are reviewed for capital or operating classification at
their inception. The Company uses the lower of the rate implicit in
the lease or its incremental borrowing rate in the assessment of
lease classification and assumes the initial lease term includes
cancellable and renewal periods that are reasonably assured. For
leases classified as capital leases at lease inception, we record a
capital lease asset and lease financing obligation equal to the
lesser of the present value of the minimum lease payments or the
fair market value of the leased asset. The capital lease asset is
recorded in Property, plant and equipment, net and amortized to its
expected residual value at the end of the lease term using the
straight-line method, and the lease financing obligation is
amortized using the interest method over the lease term with the
rental payments being allocated to principal and interest. For
leases classified as operating leases, we record rent expense over
the lease term using the straight-line method.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries with a functional
currency other than the U.S. dollar are translated into U.S.
dollars at the current rate of exchange on the last day of the
reporting period. Revenues and expenses are translated at a monthly
average exchange rate and equity transactions are translated using
either the actual exchange rate on the day of the transaction or a
monthly average historical exchange rate. For the fiscal years
ended March 31, 2016, 2015 and 2014, the Company’s
Accumulated other comprehensive loss (“AOCL”) consisted
entirely of foreign currency translation gains and losses.
Net Sales
The Company sells pipe products and related water management
products. ADS ships products to customers predominantly by internal
fleet and to a lesser extent by third-party carriers. The Company
does not provide any additional revenue generating services after
product delivery.
Sales, net of sales tax and allowances for returns, rebates and
discounts are recognized from product sales when persuasive
evidence of an arrangement exists, delivery has occurred, the price
to the buyer is fixed or determinable and collectability is
reasonably assured. ADS does not ship an order until a customer
purchase order or sales order has been received that includes the
pricing and quantity of the products in the order, which
establishes both persuasive evidence of an arrangement and that the
price is fixed or determinable. Title to the products and risk of
loss generally passes to the customer upon delivery. ADS performs
credit check procedures on all new customers, establishes credit
limits accordingly, and monitors the creditworthiness of existing
customers, which is the basis for concluding that collectability is
reasonably assured.
Shipping Costs
Shipping costs are incurred to physically move our raw materials,
tooling and products between manufacturing and distribution
facilities and from our production or distribution facilities to
our customers. Shipping costs for the fiscal years ended
March 31, 2016, 2015 and 2014 were $120,487, $120,993, and
$111,862, respectively, and are included in Cost of goods sold. In
certain instances, we bill shipping costs to our customers.
Shipping costs billed to customers were $7,026, $9,282, and $8,864
during 2016, 2015 and 2014, respectively, and are included in Net
sales.
Stock-Based Compensation
ADS has several programs for stock-based payments to employees and
directors. Equity-classified awards are measured based on the
grant-date estimated fair value of each award, net of estimated
forfeitures, and liability-classified awards are re-measured at
fair value, net of estimated forfeitures, at each reporting date.
Compensation expense is recognized over the employee’s
requisite service period, which is generally the vesting period of
the grant. The fair value of each stock option granted is estimated
using the Black-Scholes option pricing model. Compensation expense
is recorded for new awards and existing awards that are modified,
repurchased, or forfeited. For details of our stock-based
compensation award programs, see Note 18. Stock-Based
Compensation.
Advertising
We expense advertising costs as incurred. Advertising costs are
recorded in Selling expenses in the Consolidated Statements of
Operations. The total advertising costs were $3,150, $2,477, and
$2,335 for the fiscal years ended March 31, 2016, 2015 and
2014, respectively.
Self-Insurance
The Company is self-insured for short term disability and medical
coverage it provides for substantially all eligible employees. The
Company is self-insured for medical claims up to the individual and
aggregate stop-loss coverage limits. Management accrues for claims
incurred but not reported based on our estimate of future claims
related to events that occurred prior to our fiscal year end if we
have not met the aggregate stop-loss coverage limit. Amounts
contributed totaled $37,509, $32,002, and $29,484 for the fiscal
years ended March 31, 2016, 2015 and 2014, respectively, of
which employees contributed $4,511, $4,067, and $4,032,
respectively.
ADS is also self-insured for various other general insurance
programs to the extent of the applicable deductible limits on the
Company’s insurance coverage. These programs include
primarily automobile, general liability and employment practices
coverage with deductibles ranging from $250 to $500 per occurrence
or claim incurred. Amounts expensed during the period, including an
estimate for claims incurred but not reported at year end, were
$2,133, $569, and $447, for the years ended March 31, 2016,
2015 and 2014, respectively.
ADS is also self-insured for workers’ compensation insurance
with stop-loss coverage for claims that exceed $250 per incident up
to the respective state statutory limits. Amounts expensed,
including an estimate for claims incurred but not reported, were
$3,873, $1,369, and $1,395 for the fiscal years ended
March 31, 2016, 2015 and 2014, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized and
represent the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. They are measured
using the enacted tax rates expected to apply to taxable income in
the years in which the related temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The deferred income tax
provision represents the change during the reporting period in the
deferred tax assets and deferred tax liabilities. Penalties and
interest recorded on income taxes payable are recorded as part of
Income tax expense.
The Company determines whether an uncertain tax position of the
Company is more likely than not to be sustained upon examination,
including resolution of any related appeals or litigation process,
based upon the technical merits of the position. For tax positions
meeting the more likely than not threshold, the tax amount
recognized in the financial statements is the largest amount of tax
benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the relevant taxing authority.
Fair Values
The fair value framework requires the categorization of assets and
liabilities into three levels based upon assumptions (inputs) used
to price the assets or liabilities. Level 1 provides the most
reliable measure of fair value, whereas Level 3 generally
requires significant management judgment. The three levels are
defined as follows:
Level 1 — Unadjusted quoted prices in active
markets for identical assets and liabilities.
Level 2 — Observable inputs other than those
included in Level 1. For example, quoted prices for similar
assets or liabilities in active markets or quoted prices for
identical assets or liabilities in inactive markets.
Level 3 — Unobservable inputs reflecting
management’s own assumptions about the inputs used in pricing
the asset or liability.
Our policy for determining when transfers between levels have
occurred is to use the actual date of the event or change in
circumstances that caused the transfer.
The carrying amounts of current financial assets and liabilities
approximate fair value because of the immediate or short-term
maturity of these items, or in the case of derivative instruments,
because they are recorded at fair value. The carrying and fair
value of the Company’s Senior Notes (discussed in
Note 12. Debt) were $100,000 and $101,175, respectively, as of
March 31, 2016 and $100,000 and $103,590, respectively, at
March 31, 2015. The fair value of the Senior Notes was
determined based on a comparison of the interest rate and terms of
such borrowings to the rates and terms of similar debt available
for the period. Management believes the carrying amount on the
remaining long-term debt, including the Bank Term Loans, is not
materially different from its fair value as the interest rates and
terms of the borrowings are similar to currently available
borrowings. The categorization of the framework used to evaluate
this debt is considered Level 2. See also Note 8. Fair Value
Measurement to these financial statements.
Concentrations of Risk
We have a large, active customer base of approximately twenty
thousand customers with two customers each representing more than
10% of annual net sales. Such customers accounted for 21.1%, 20.3%,
and 20.5% of fiscal year 2016, 2015 and 2014 net sales,
respectively. Our customer base is diversified across the range of
end markets that we serve.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of Receivables.
The Company provides its products to customers based on an
evaluation of the customers’ financial condition, generally
without requiring collateral. Exposure to losses on Receivables is
principally dependent on each customer’s financial condition.
The Company performs ongoing credit evaluations of its customers.
The Company monitors the exposure for credit losses and maintains
allowances for anticipated losses. Concentrations of credit risk
with respect to Receivables are limited due to the large number of
customers comprising the Company’s customer base and their
dispersion across many different geographies. One customer
accounted for approximately 14% of our Receivables at
March 31, 2016.
Derivatives
We recognize derivative instruments as either assets or liabilities
and measure those instruments at fair value. We use interest rate
swaps, commodity options in the form of collars and swaps, and
foreign currency forward contracts to manage our various exposures
to interest rate, commodity price, and exchange rate fluctuations.
These instruments do not qualify for hedge accounting treatment and
therefore, gains and losses from contract settlements and changes
in fair value of the derivative instruments are recognized in
Derivative losses (gains) and other expense (income), net in the
Consolidated Statements of Operations. Our policy is to present all
derivative balances on a gross basis.
The Company also has forward purchase agreements in place with
certain resin suppliers for virgin polyethylene resin. The
agreements specify a fixed amount of virgin resin material to be
purchased at a fixed price for a given period of time in quantities
the Company will use in the normal course of business, and
therefore, are not subject to the guidance provided in ASC 810-15.
The cost of such resin is recognized in Cost of goods sold in the
Consolidated Statements of Operations.
Recent Accounting Pronouncements
Revenue Recognition
Consolidation
Debt Issuance Costs
Measurement of Inventory
Deferred Tax Assets and Liabilities
Leases
Stock-Based Compensation
Measurement of Credit Losses
Cash Flow Classification
With the exception of pronouncements described above, there have
been no new accounting pronouncements that have significance, or
potential significance, to our consolidated financial
statements. |
