ADVANCED DRAINAGE SYSTEMS, INC. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-36557

ADVANCED DRAINAGE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

51-0105665

(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)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	WMS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 29, 2020, the registrant had 70,476,774 shares of common stock outstanding. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS.” In addition, as of October 29, 2020, 390,089 shares of unvested restricted common stock were outstanding and 20,438,321 shares of ESOP, preferred stock, convertible into 15,721,157 shares of common stock, were outstanding. As of October 29, 2020, 86,588,020 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



PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	Page

	Condensed Consolidated Balance Sheets as of September 30, 2020 and March 31, 2020	1

	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2020 and 2019	2

	Condensed Consolidated Statements of Comprehensive Income (loss) for the three and six months ended September 30, 2020 and 2019	3

	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2020 and 2019	4

	Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity for the three and six months ended September 30, 2020 and 2019	5

	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

Signatures		44

Table of Contents

PART I. FINANCIAL INFORMATION

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except par value)

	September 30, 2020			March 31, 2020
ASSETS
Current assets:
Cash	$	203,883		$	174,233
Receivables (less allowance for doubtful accounts of $6,114 and $5,035, respectively)		260,180			200,028
Inventories		223,268			282,398
Other current assets		13,248			9,552
Total current assets		700,579			666,211
Property, plant and equipment, net		481,947			481,380
Other assets:
Goodwill		598,416			597,819
Intangible assets, net		519,660			555,338
Other assets		72,770			69,140
Total assets	$	2,373,372		$	2,369,888
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations	$	7,000		$	7,955
Current maturities of finance lease obligations		19,319			20,382
Accounts payable		114,030			106,710
Other accrued liabilities		119,084			101,116
Accrued income taxes		23,058			2,050
Total current liabilities		282,491			238,213
Long-term debt obligations (less unamortized debt issuance costs of $2,222 and $2,419, respectively)		885,528			1,089,368
Long-term finance lease obligations		37,016			44,501
Deferred tax liabilities		172,183			175,616
Other liabilities		40,551			37,608
Total liabilities		1,417,769			1,585,306
Commitments and contingencies (see Note 12)
Mezzanine equity:
Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized; 44,170 shares issued; 21,030 and 21,562 shares outstanding, respectively		262,872			269,529
Deferred compensation – unearned ESOP shares		(16,779	)		(22,432	)
Total mezzanine equity		246,093			247,097
Stockholders’ equity:
Common stock; $0.01 par value: 1,000,000 shares authorized; 71,002 and 69,810 shares issued, respectively; 70,502 and 69,319 shares outstanding, respectively		11,562			11,555
Paid-in capital		859,254			827,573
Common stock in treasury, at cost		(10,859	)		(10,461	)
Accumulated other comprehensive loss		(30,426	)		(35,325	)
Retained deficit		(133,011	)		(267,619	)
Total ADS stockholders’ equity		696,520			525,723
Noncontrolling interest in subsidiaries		12,990			11,762
Total stockholders’ equity		709,510			537,485
Total liabilities, mezzanine equity and stockholders’ equity	$	2,373,372		$	2,369,888

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except per share data)

	Three Months Ended September 30,						Six Months Ended September 30,
	2020			2019			2020			2019
Net sales	$	544,187		$	495,905		$	1,052,826		$	909,613
Cost of goods sold		338,330			349,381			658,466			656,637
Cost of goods sold - ESOP special dividend compensation		—			—			—			168,610
Gross profit		205,857			146,524			394,360			84,366
Operating expenses:
Selling		30,586			29,971			58,746			56,336
General and administrative		35,115			48,030			68,731			79,463
Selling, general and administrative - ESOP special dividend compensation		—			—			—			78,142
Loss on disposal of assets and costs from exit and disposal activities		627			2,004			2,274			2,711
Intangible amortization		17,955			9,300			35,937			10,842
Income (loss) from operations		121,574			57,219			228,672			(143,128	)
Other expense:
Interest expense		9,360			52,332			19,330			57,596
Derivative gains (loss) and other income (expense), net		(151	)		175			(718	)		79
Income (loss) before income taxes		112,365			4,712			210,060			(200,803	)
Income tax expense (benefit)		31,827			(3,547	)		59,027			18,823
Equity in net income of unconsolidated affiliates		(67	)		(203	)		(240	)		(637	)
Net income (loss)		80,605			8,462			151,273			(218,989	)
Less: net income (loss) attributable to noncontrolling interest		369			873			571			(222	)
Net income (loss) attributable to ADS		80,236			7,589			150,702			(218,767	)
Weighted average common shares outstanding:
Basic		69,843			60,222			69,612			58,906
Diluted		70,755			60,876			70,459			58,906
Net income (loss) per share:
Basic	$	0.95		$	0.10		$	1.78		$	(3.86	)
Diluted	$	0.93		$	0.10		$	1.76		$	(3.86	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited) (In thousands)

	Three Months Ended September 30,					Six Months Ended September 30,
	2020		2019			2020		2019
Net income (loss)	$	80,605	$	8,462		$	151,273	$	(218,989	)
Currency translation gain (loss)		2,406		(2,310	)		5,556		(746	)
Comprehensive income (loss)		83,011		6,152			156,829		(219,735	)
Less: other comprehensive income (loss) attributable to noncontrolling interest		338		(353	)		657		(186	)
Less: net income (loss) attributable to noncontrolling interest		369		873			571		(222	)
Total comprehensive income (loss) attributable to ADS	$	82,304	$	5,632		$	155,601	$	(219,327	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

	Six Months Ended September 30,
	2020			2019
Cash Flows from Operating Activities
Net income (loss)	$	151,273		$	(218,989	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		71,559			43,260
Deferred income taxes		(3,446	)		1,127
Loss on disposal of assets and costs from exit and disposal activities		2,274			2,711
ESOP and stock-based compensation		27,088			16,082
ESOP special dividend compensation		—			246,752
Amortization of deferred financing charges		197			34,285
Inventory step up related to Infiltrator Water Technologies acquisition		—			5,773
Fair market value adjustments to derivatives		(1,455	)		996
Equity in net income of unconsolidated affiliates		(240	)		(637	)
Other operating activities		(236	)		(3,635	)
Changes in working capital:
Receivables		(60,106	)		(44,883	)
Inventories		60,663			57,316
Prepaid expenses and other current assets		(3,666	)		(2,917	)
Accounts payable, accrued expenses, and other liabilities		42,263			34,470
Net cash provided by operating activities		286,168			171,711
Cash Flows from Investing Activities
Capital expenditures		(28,959	)		(25,622	)
Acquisition of Infiltrator Water Technologies, net of cash acquired		—			(1,088,617	)
Other investing activities		455			(116	)
Net cash used in investing activities		(28,504	)		(1,114,355	)
Cash Flows from Financing Activities
Proceeds from Term Loan Facility		—			1,300,000
Payments on Term Loan Facility		—			(1,300,000	)
Proceeds from syndication of Term Loan Facility		—			700,000
Payments on syndicated Term Loan Facility		(103,500	)		—
Proceeds from Senior Notes		—			350,000
Proceeds from Revolving Credit Agreement		—			177,900
Payments on Revolving Credit Agreement		(100,000	)		(177,900	)
Debt issuance costs		—			(34,606	)
Proceeds from PNC Credit Agreement		—			253,900
Payments on PNC Credit Agreement		—			(388,300	)
Payments on Prudential Senior Notes		—			(100,000	)
Payments on finance lease obligations		(10,677	)		(12,375	)
Proceeds from common stock offering, net of offering costs		—			293,648
Cash dividends paid		(15,402	)		(76,324	)
Proceeds from exercise of stock options		3,275			2,430
Other financing activities		(1,489	)		(236	)
Net cash (used in) provided by financing activities		(227,793	)		988,137
Effect of exchange rate changes on cash		(221	)		(177	)
Net change in cash		29,650			45,316
Cash at beginning of period		174,233			8,891
Cash at end of period	$	203,883		$	54,207
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	39,213		$	7,199
Cash paid for interest		20,923			17,771
Non-cash operating, investing and financing activities:
Acquisition of property, plant and equipment under finance lease and incurred lease obligations		2,719			1,469
Balance in accounts payable for the acquisition of property, plant and equipment		4,100			3,669

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY

(Unaudited) (In thousands)

	Common Stock				Paid -In		Common Stock in Treasury					Accumulated Other Compre-hensive			Retained (Deficit)			Total ADS Stockholders’			Non- controlling Interest in			Total Stock- holders’			Redeemable Convertible Preferred Stock						Deferred Compensation Unearned ESOP Shares						Total Mezzanine
	Shares		Amount		Capital		Shares		Amount			Loss			Earnings			Equity			Subsidiaries			Equity			Shares			Amount			Shares			Amount			Equity
Balance at July 1, 2019		58,283	$	11,439	$	501,046		484	$	(10,162	)	$	(24,470	)	$	(278,727	)	$	199,126		$	13,058		$	212,184			22,385		$	279,816			2,559		$	(31,659	)	$	248,157
Net income		—		—		—		—		—			—			7,589			7,589			873			8,462			—			—			—			—			—
Other comprehensive income		—		—		—		—		—			(1,957	)		—			(1,957	)		(353	)		(2,310	)		—			—			—			—			—
Redeemable convertible preferred stock dividends		—		—		—		—		—			—			(1,349	)		(1,349	)		—			(1,349	)		—			—			—			—			—
Common stock dividends ($.09 per share)		—		—		—		—		—			—			(5,238	)		(5,238	)		—			(5,238	)		—			—			—			—			—
Allocation of ESOP shares to participants for compensation		—		—		2,392		—		—			—			—			2,392			—			2,392			—			—			(247	)		3,094			3,094
Exercise of common stock options		54		1		763		—		—			—			—			764			—			764			—			—			—			—			—
Restricted stock awards		57		1		—		—		—			—			—			1			—			1			—			—			—			—			—
Stock-based compensation expense		—		—		3,171		—		—			—			—			3,171			—			3,171			—			—			—			—			—
ESOP distribution in common stock		2		—		31		—		—			—			—			31			—			31			(2	)		(31	)		—			—			(31	)
Common Stock Offering		10,350		104		293,544		—		—			—			—			293,648			—			293,648			—			—			—			—			—
Balance at September 30, 2019		68,746	$	11,545	$	800,947		484	$	(10,162	)	$	(26,427	)	$	(277,725	)	$	498,178		$	13,578		$	511,756			22,383		$	279,785			2,312		$	(28,565	)	$	251,220
Balance at April 1, 2019		57,964	$	11,436	$	391,039		474	$	(9,863	)	$	(25,867	)	$	17,582		$	384,327		$	13,986		$	398,313			22,611		$	282,638			14,452		$	(180,316	)	$	102,322
Net loss		—		—		—		—		—			—			(218,767	)		(218,767	)		(222	)		(218,989	)		—			—			—			—			—
Other comprehensive income		—		—		—		—		—			(560	)		—			(560	)		(186	)		(746	)		—			—			—			—			—
Redeemable convertible preferred stock dividends		—		—		—		—		—			—			(8,195	)		(8,195	)		—			(8,195	)		—			—			—			—			—
Common stock dividends ($1.18 per share)		—		—		—		—		—			—			(68,345	)		(68,345	)		—			(68,345	)		—			—			—			—			—
Allocation of ESOP shares to participants for compensation		—		—		4,882		—		—			—			—			4,882			—			4,882			—			—			(495	)		6,188			6,188
'ESOP special dividend compensation						101,189													101,189						101,189									(11,645	)		145,563			145,563
Exercise of common stock options		168		2		2,430		7		(207	)		—			—			2,225			—			2,225			—			—			—			—			—
Restricted stock awards		88		1		—		3		(92	)		—			—			(91	)		—			(91	)		—			—			—			—			—
Stock-based compensation expense		—		—		5,012		—		—			—			—			5,012			—			5,012			—			—			—			—			—
ESOP distribution in common stock		176		2		2,851		—		—			—			—			2,853			—			2,853			(228	)		(2,853	)		—			—			(2,853	)
Common Stock Offering		10,350		104		293,544		—		—			—			—			293,648			—			293,648			—			—			—			—			—
Balance at September 30, 2019		68,746	$	11,545	$	800,947		484	$	(10,162	)	$	(26,427	)	$	(277,725	)	$	498,178		$	13,578		$	511,756			22,383		$	279,785			2,312		$	(28,565	)	$	251,220

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY (CONTINUED)

(Unaudited) (In thousands)

	Common Stock				Paid -In		Common Stock in Treasury					Accumulated Other Compre-hensive			Retained (Deficit)			Total ADS Stockholders’			Non- controlling Interest in		Total Stock- holders’			Redeemable Convertible Preferred Stock						Deferred Compensation Unearned ESOP Shares						Total Mezzanine
	Shares		Amount		Capital		Shares		Amount			Loss			Earnings			Equity			Subsidiaries		Equity			Shares			Amount			Shares			Amount			Equity
Balance at July 1, 2020		69,973	$	11,557	$	839,765		500	$	(10,853	)	$	(32,494	)	$	(205,669	)	$	602,306		$	12,283	$	614,589			21,562		$	269,529			1,624		$	(19,605	)	$	249,924
Net income		—		—		—		—		—			—			80,236			80,236			369		80,605			—			—			—			—			—
Other comprehensive income		—		—		—		—		—			2,068			—			2,068			338		2,406			—			—			—			—			—
Redeemable convertible preferred stock dividends		—		—		—		—		—			—			(1,329	)		(1,329	)		—		(1,329	)		—			—			—			—			—
Common stock dividends ($0.09 per share)		—		—		—		—		—			—			(6,249	)		(6,249	)		—		(6,249	)		—			—			—			—			—
Allocation of ESOP shares to participants for compensation		—		—		6,304		—		—			—			—			6,304			—		6,304			—			—			(226	)		2,826			2,826
Exercise of common stock options		59		1		1,036		—		—			—			—			1,037			—		1,037			—			—			—			—			—
Restricted stock awards		60		—		—		—		(6	)		—			—			(6	)		—		(6	)		—			—			—			—			—
Stock-based compensation expense		—		—		5,496		—		—			—			—			5,496			—		5,496			—			—			—			—			—
ESOP distribution in common stock		410		4		6,653		—		—			—			—			6,657			—		6,657			(532	)		(6,657	)		—			—			(6,657	)
Balance at September 30, 2020		70,502	$	11,562	$	859,254		500	$	(10,859	)	$	(30,426	)	$	(133,011	)	$	696,520		$	12,990	$	709,510			21,030			262,872			1,398			(16,779	)	$	246,093
Balance at April 1, 2020		69,810	$	11,555	$	827,573		491	$	(10,461	)	$	(35,325	)	$	(267,619	)	$	525,723		$	11,762	$	537,485			21,562		$	269,529			1,850		$	(22,432	)	$	247,097
Adoption of ASU 2016-13		—		—		—		—		—			—			(779	)		(779	)		—		(779	)		—			—			—			—			—
Net income		—		—		—		—		—			—			150,702			150,702			571		151,273			—			—			—			—			—
Other comprehensive income		—		—		—		—		—			4,899			—			4,899			657		5,556			—			—			—			—			—
Redeemable convertible preferred stock dividends		—		—		—		—		—			—			(2,695	)		(2,695	)		—		(2,695	)		—			—			—			—			—
Common stock dividends ($0.18 per share)		—		—		—		—		—			—			(12,620	)		(12,620	)		—		(12,620	)		—			—			—			—			—
Allocation of ESOP shares to participants for compensation		—		—		10,340		—		—			—			—			10,340			—		10,340			—			—			(452	)		5,653			5,653
Exercise of common stock options		152		2		3,275		—		—			—			—			3,277			—		3,277			—			—			—			—			—
Restricted stock awards		130		1		—		9		(398	)		—			—			(397	)		—		(397	)		—			—			—			—			—
Stock-based compensation expense		—		—		11,095		—		—			—			—			11,095			—		11,095			—			—			—			—			—
ESOP distribution in common stock		410		4		6,653		—		—			—			—			6,657			—		6,657			(532	)		(6,657	)		—			—			(6,657	)
Other		—		—		318		—		—			—			—			318			—		318			—			—			—			—			—
Balance at September 30, 2020		70,502	$	11,562	$	859,254		500	$	(10,859	)	$	(30,426	)	$	(133,011	)	$	696,520		$	12,990	$	709,510			21,030		$	262,872			1,398		$	(16,779	)	$	246,093

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Advanced Drainage Systems, Inc. and subsidiaries (collectively referred to as “ADS” or the “Company”), incorporated in Delaware, designs, manufactures and markets innovative water management solutions in the stormwater and on-site septic waste water industries, providing superior drainage solutions for use in the construction and agriculture marketplace. ADS’s products are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications.

On July 31, 2019, the Company completed the Acquisition of Infiltrator Water Technologies. Infiltrator Water Technologies is a leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. Infiltrator Water Technologies’ products are used in on-site septic wastewater treatment systems in the United States and Canada. See “Note 3. Acquisitions” for additional information on the Acquisition.

The Company is managed and reports results of operations in three reportable segments: Pipe, Infiltrator Water Technologies and International. The Company also reports the results of its Allied Products and all other business segments as Allied Products and Other.

Historically, sales of the Company’s products have been higher in the first and second quarters of each fiscal year due to favorable weather and longer daylight conditions accelerating construction activity during these periods. Seasonal variations in operating results may also be impacted by inclement weather conditions, such as cold or wet weather, which can delay projects.

Basis of Presentation - The Company prepares its Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Condensed Consolidated Balance Sheet as of March 31, 2020 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 2020 (“Fiscal 2020 Form 10-K”). The accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as of September 30, 2020 and the results of operations for the three and six months ended September 30, 2020 and cash flows for the six months ended September 30, 2020. The interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, including the notes thereto, filed in the Company’s Fiscal 2020 Form 10-K.

Principles of Consolidation - The Condensed Consolidated Financial Statements include the Company, its wholly-owned subsidiaries, its majority-owned subsidiaries and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company uses the equity method of accounting for equity investments where it exercises significant influence but does not hold a controlling financial interest. Such investments are recorded in Other assets in the Condensed Consolidated Balance Sheets and the related equity earnings from these investments are included in Equity in net income of unconsolidated affiliates in the Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.

Recent Accounting Guidance

Recently Adopted Accounting Guidance


Standard	Adoption

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Accounting Standards Update 2016-13 –

Financial Instruments-Credit Losses (ASU 2016-13)

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) which provides amended guidance on the measurement of credit losses on financial instruments, including trade receivables. This standard requires the use of an impairment model referred to as the current expected credit loss model. The Company adopted this standard effective April 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to Retained deficit as of the beginning of the first reporting period in which the guidance is effective. The Company recorded a $0.8 million adjustment to Retained deficit at the date of adoption.

Accounting Policy - The Company extends credit to customers based on an evaluation of their financial condition and collateral is generally not required. The Company records an allowance for credit losses at the time accounts receivable are recorded based on the Company’s historical write-off activity, an evaluation of the current economic environment and the Company’s expectations of future economic conditions.

Recent Accounting Guidance Not Yet Adopted


Standard	Description	Effective Date	Effect on financial statements or other significant matters
ASU 2020-06, FASB Simplifies Issuer’s Accounting for Convertible Instruments and Contracts on an Entity’s Own Equity	In August 2020, the FASB issued an ASU which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity	The amendments are effective after December 15, 2023 and an entity may elect to early adopt beginning after December 15, 2020.	The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Statements	In March 2020, the FASB issued an ASU that provides optional expedients and exceptions related to financial reporting impacts related to the expected market transition from LIBOR to another reference rates.	The amendments are effective on March 12, 2020, and an entity may elect to adopt prospectively through December 31, 2022.	The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	In December 2019, the FASB issued an ASU to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes and improve the comparability of financial statements.	The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and early adoption is permitted.	The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.

Except for the pronouncements described above, there have been no new accounting pronouncements issued or adopted since the filing of the Fiscal 2020 Form 10-K that have significance, or potential significance, to the Condensed Consolidated Financial Statements.

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2.	LOSS ON DISPOSAL OF ASSETS AND COSTS FROM EXIT AND DISPOSAL ACTIVITIES

In fiscal 2021, the Company undertook certain restructuring activities (the “2021 Restructuring Plan”), which followed the Company’s initiation of a restructuring plan in fiscal 2018 (the “2018 Restructuring Plan”). Actions taken under the 2021 Restructuring Plan included reducing headcount and eliminating nonessential costs designed to improve the Company’s cost structure. The Company does not currently have an estimate of additional costs or an expected end date for the restructuring actions. The following table summarizes the activity included in Loss on disposal of assets and costs from exit and disposal activities recorded during the periods presented.

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Headcount reduction	$	498	$	—	$	1,601	$	—
Total 2021 Restructuring Plan activities	$	498	$	—	$	1,601	$	—
Loss on other disposals and partial disposals of property, plant and equipment		129		444		673		1,151
Acquisition related severance and other costs		—		1,560		—		1,560
Total loss on disposal of assets and costs from exit and disposal activities	$	627	$	2,004	$	2,274	$	2,711

The restructuring activities are classified as operating expenses and not allocated to a segment.

A reconciliation of the beginning and ending amounts of restructuring liability related to the 2021 and 2018 Restructuring Plans as of the September 30, 2020 and 2019 is as follows:

	Six Months Ended September 30,
	2020			2019
	(In thousands)
Balance at the beginning of the period	$	574		$	1,696
Expenses		1,601			—
Payments		(1,046	)		(842	)
Balance at the end of the period	$	1,129		$	854

As of September 30, 2020, the Company had $0.1 million of long-term severance liability related to the restructuring activities recorded in other liabilities in the Condensed Consolidated Balance Sheet. The current portion of the restructuring liability is recorded in Other accrued liabilities in the Condensed Consolidated Balance Sheet.

3.	ACQUISITIONS

Acquisition of Infiltrator Water Technologies - On July 31, 2019 (the “Closing Date”), the Company completed its Acquisition of Infiltrator Water Technologies pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated July 31, 2019. Infiltrator Water Technologies manufactures and sells wastewater systems for homes and provides drainage chambers for septic and storm water management. The total fair value of consideration transferred was $1,147.2 million.

The following table summarizes the consideration transferred and the purchase price allocation of the assets acquired and liabilities assumed. The Company finalized the valuations of assets acquired and liabilities assumed during the second quarter of Fiscal 2021.

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(Amounts in thousands)	Initial Amount			Adjustments to Purchase Price		Adjustments to Property, Plant and Equipment			Adjustments to Right-of-use Assets			Adjustments to Intangible Assets			Tax Adjustments			Updated Amount
Cash	$	57,375		$	—	$	—		$	—		$	—		$	—		$	57,375
Total current asset, excluding cash		75,847			—		—			—			—			—			75,847
Property, plant and equipment, net		98,860			—		(6,575	)		—			—			—			92,285
Goodwill		567,034			704		6,575			—			(100,000	)		21,528			495,841
Intangible assets, net		475,000			—		—			—			100,000			—			575,000
Other assets		14,366			—		—			2,909			—			—			17,275
Total current liabilities		(22,756	)		—		—			(213	)		—			931			(22,038	)
Deferred tax liabilities		(109,926	)		—		—			—			—			(22,459	)		(132,385	)
Other liabilities		(9,274	)		—		—			(2,696	)		—			—			(11,970	)
Total fair value of consideration transferred	$	1,146,526		$	704	$	—		$	—		$	—		$	—		$	1,147,230

The fair value of consideration transferred includes $6.0 million of Infiltrator Water Technologies payable to the Company and $6.6 million of Infiltrator Water Technologies receivable due from the Company.

The goodwill of $495.8 million represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable to expected revenue synergies, as well as operating efficiencies and cost savings. The goodwill is not deductible for tax purposes and is assigned to the Infiltrator Water Technologies segment.

Of the $132.4 million of the purchase price allocated to deferred tax liabilities, $82.3 million related to the step up of GAAP basis for fair market valuations, while the remaining $50.1 million were acquired deferred tax liabilities. Of the total $82.3 million, $80.2 million was attributed to intangible assets. See “Note 13. Income Taxes” for additional information.

The purchase price excludes transaction costs. During the fiscal year ended March 31, 2020, the Company incurred $22.9 million of transaction costs related to the Acquisition such as legal, accounting, valuation and other professional services. The Company did not incur any transaction costs during the three and six months ended September 30, 2020. The Company estimates approximately $7.3 million of transaction costs are not deductible for tax purposes. These costs are included in general and administrative expenses in the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income.

The identifiable intangible assets recorded in connection with the closing of the Acquisition are based on valuations including customer relationships, patents and developed technology, and tradename and trademarks totaling $575.0 million. Customer relationships are amortized using an accelerated method over an estimated useful life of 20 years. Patents and developed technology and tradename and trademarks are on a straight-line basis over the respective useful lives of 10 and 20 years.

(Amounts in thousands)	Preliminary fair value		Estimated useful lives
Customer relationships	$	360,000	20 years
Patents and developed technology		150,000	10 years
Tradename and trademarks		65,000	20 years
Total identifiable intangible assets	$	575,000

The unaudited pro forma information for the three and six months ended September 30, 2019 presented below includes the effects of the Acquisition as if it had been consummated as of April 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition. Adjustments include those

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related to the amortization of acquired intangible assets, increases in interest expense due to additional borrowings incurred to finance the Acquisition, transaction costs, the elimination of transactions between the Company and Infiltrator Water Technologies and the estimated tax impacts thereof. The unaudited pro forma information does not reflect any operating efficiency or potential cost savings that could result from the consolidation of Infiltrator Water Technologies. Accordingly, the unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the actual results of the combined company if the Acquisition had occurred at the beginning of the period presented, nor is it indicative of the future results of operations.

	Three Months Ended		Six Months Ended
(Amounts in thousands)	September 30, 2019		September 30, 2019
Net sales	$	512,072	$	996,016
Net income (loss) attributable to ADS		45,494		(170,777	)

4.	REVENUE RECOGNITION

Revenue Disaggregation - The Company disaggregates net sales by Domestic, International and Infiltrator Water Technologies and further disaggregates Domestic and International by product type, consistent with its reportable segment disclosure. This disaggregation level best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Refer to “Note 15. Business Segments Information” for the Company’s disaggregation of Net sales by reportable segment.

Contract Balances - The Company recognizes a contract asset representing the Company’s right to recover products upon the receipt of returned products and a contract liability for the customer refund. The following table presents the balance of the Company’s contract asset and liability as of the periods presented:

	September 30, 2020		March 31, 2020
	(In thousands)
Contract asset - product returns	$	879	$	594
Refund liability		2,223		1,458

LEASES

Nature of the Company’s Leases - The Company has operating and finance leases for plants, yards, corporate offices, tractors, trailers and other equipment. The Company’s leases have remaining terms of less than one year to 30 years. A portion of the Company’s yard leases include an option to extend the leases for up to five years. The Company has included renewal options which are reasonably certain to be exercised in its right-of-use assets and lease liabilities.

The Company’s lease payments are generally fixed. Certain equipment leases contain residual value guarantees that create a contingent obligation on the part of the Company to compensate the lessor if the leased asset cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The calculation is based on the original cost of the transportation equipment, less lease payments made, compared to a percentage of the transportation equipment’s fair market value at the time of sale. All leased units covered by this guarantee have been classified as finance leases and a corresponding finance lease obligation was recorded. Therefore, no contingent obligation is needed.

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The Company records at the lease commencement date, a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company will utilize its collateralized incremental borrowing rate commensurate to the lease term as the discount rate for its leases, unless the Company can specifically determine the lessor’s implicit rate. The incremental borrowing rate for each lease is determined based on the Company’s credit rating, adjusted for the impacts of collateral, and the lease term.

6.	INVENTORIES

Inventories as of the periods presented consisted of the following:

	September 30, 2020		March 31, 2020
	(In thousands)
Raw materials	$	61,132	$	66,524
Finished goods		162,136		215,874
Total inventories	$	223,268	$	282,398

There were no work-in-process inventories as of the periods presented.

7.	FAIR VALUE MEASUREMENT

When applying fair value principles in the valuation of assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets or liabilities during the fiscal periods presented. The fair value estimates take into consideration the credit risk of both the Company and its counterparties.

When active market quotes are not available for financial assets and liabilities, the Company uses industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including credit risk, interest rate curves, foreign currency rates and forward and spot prices for currencies. In circumstances where market-based observable inputs are not available, management judgment is used to develop assumptions to estimate fair value. Generally, the fair value of 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 the periods presented were as follows:

	September 30, 2020
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Derivative assets – diesel fuel contracts	$	74	$	—	$	74	$	—
Total assets at fair value on a recurring basis	$	74	$	—	$	74	$	—
Liabilities:
Derivative liabilities – diesel fuel contracts	$	811	$	—	$	811	$	—
Total liabilities at fair value on a recurring basis	$	811	$	—	$	811	$	—

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	March 31, 2020
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Derivative assets – diesel fuel contracts	$	36	$	—	$	36	$	—
Total assets at fair value on a recurring basis	$	36	$	—	$	36	$	—
Liabilities:
Derivative liabilities - diesel fuel contracts	$	2,228	$	—	$	2,228	$	—
Total liabilities at fair value on a recurring basis	$	2,228	$	—	$	2,228	$	—

For the six months ended September 30, 2020 and 2019, respectively, there were no transfers in or out of Levels 1, 2 or 3.

Valuation of Debt - The carrying amounts of current financial assets and liabilities approximate fair value because of the immediate or short-term maturity of these items, or in the case of derivative instruments, because they are recorded at fair value. The following table presents the carrying and fair value of the Company’s Senior Notes (as defined below and further discussed in “Note 11. Debt”) for the periods presented:

	September 30, 2020				March 31, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In thousands)				(In thousands)
Senior Notes	$	366,240	$	350,000	$	314,951	$	350,000

The fair value of the Senior Notes was determined based on a quoted market data for the Company’s Senior Notes. The categorization of the framework used to evaluate the Senior Notes is considered Level 2. The Company believes the carrying amount on the remaining long-term debt, including the Term Loan Facility and Revolving Credit Facility, is not materially different from its fair value as the interest rates and terms of the borrowings are similar to currently available borrowings.

8.	DERIVATIVE TRANSACTIONS

The Company uses commodity options in the form of collars and swaps and has previously used interest rate swaps and foreign currency forward contracts to manage its various exposures to interest rate, commodity price fluctuations and foreign currency exchange rate fluctuations. Interest rate swap gains and losses resulting from the difference between the spot rate and applicable base rate is recorded in the Condensed Consolidated Statements of Operations in Interest expense. For collars, commodity swaps and foreign currency forward contracts, contract settlement gains and losses are recorded in the Condensed Consolidated Statements of Operations in Derivative gains and other income, net. Gains and losses related to mark-to-market adjustments for changes in fair value of the derivative contracts are also recorded in the Condensed Consolidated Statements of Operations in Derivative gains and other income, net.

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The Company recorded net (gains) and net losses on mark-to-market adjustments for changes in the fair value of derivatives contracts as well as net (gains) and net losses on the settlement of derivative contracts as follows:

	Three Months Ended September 30,					Six Months Ended September 30,
	2020			2019		2020			2019
	(In thousands)					(In thousands)
Diesel fuel option collars	$	(373	)	$	7	$	(1,455	)	$	76
Interest rate swaps		—			—		—			1,726
Foreign exchange forward contracts		—			—		—			(7	)
Total net unrealized mark-to-market (gains) loss	$	(373	)	$	7	$	(1,455	)	$	1,795
Diesel fuel option collars		477			150		1,317			157
Foreign exchange forward contracts		—			102		—			102
Interest rate swaps		—			710		—			544
Total net realized loss	$	477		$	962	$	1,317		$	803

A summary of the fair value of derivatives is included in “Note 7. Fair Value Measurement.”

9.	NET INCOME PER SHARE AND STOCKHOLDERS’ EQUITY

The Company is required 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.

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The following table presents information necessary to calculate net income per share for the periods presented, 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:

	Three Months Ended September 30,						Six Months Ended September 30,
(In thousands, except per share data)	2020			2019			2020			2019
NET INCOME PER SHARE—BASIC:
Net income (loss) attributable to ADS	$	80,236		$	7,589		$	150,702		$	(218,767	)
Adjustments for:
Dividends to redeemable convertible preferred stockholders		(1,329	)		(1,355	)		(2,695	)		(8,196	)
Dividends paid to unvested restricted stockholders		—			(4	)		(2	)		(330	)
Net income (loss) available to common stockholders and participating securities		78,907			6,230			148,005			(227,293	)
Undistributed income allocated to participating securities		(12,760	)		(204	)		(24,025	)		—
Net income (loss) available to common stockholders – Basic	$	66,147		$	6,026		$	123,980		$	(227,293	)
Weighted average number of common shares outstanding – Basic		69,843			60,222			69,612			58,906
Net income (loss) per common share – Basic	$	0.95		$	0.10		$	1.78		$	(3.86	)
NET INCOME PER SHARE—DILUTED:
Net income (loss) available to common stockholders – Diluted	$	66,147		$	6,026		$	123,980		$	(227,293	)
Weighted average number of common shares outstanding – Basic		69,843			60,222			69,612			58,906
Assumed exercise of stock options		716			576			662			—
Restricted stock		196			78			185			—
Weighted average number of common shares outstanding – Diluted		70,755			60,876			70,459			58,906
Net income (loss) per common share – Diluted	$	0.93		$	0.10		$	1.76		$	(3.86	)
Potentially dilutive securities excluded as anti-dilutive		14,892			15,084			15,279			13,269

Special Dividend and the Employees Stock Ownership Plan (“ESOP”) - During the three months ended June 30, 2019, the Board of Directors approved a special cash dividend of $1.00 per share and quarterly dividends of $0.09 per share. The special and quarterly dividend were paid to all stockholders on June 14, 2019 to stockholders of record at the close of business on June 3, 2019. The total dividend payment was $81.6 million. The dividends received by the unallocated redeemable convertible preferred stock held in the ESOP trust was used to pay $12.0 million of the ESOP loan back to the Company resulting in approximately 11.6 million shares of the Company’s redeemable convertible preferred stock being allocated to ESOP participants. The Company recognized $246.8 million in stock-based compensation expense based on the fair value on the date the Board of Directors approved the special dividend. The Board of Director’s approval committed the ESOP to use those proceeds to pay down the ESOP loan. The special dividend compensation expense was recognized in Cost of goods sold - ESOP special dividend compensation and Selling, general and administrative expenses - ESOP special dividend compensation on the Company’s Consolidated Statements of Operations. The Company’s ESOP is further described in “Note 16. Employee Benefit Plans” to the Company’s audited financial statements included in the Fiscal 2020 Form 10-K.

10.	RELATED PARTY TRANSACTIONS

ADS Mexicana - ADS conducts business in Mexico and Central America through its joint venture ADS Mexicana, S.A. de C.V. (together with its affiliate ADS Corporativo, S.A. de C.V., “ADS Mexicana”). ADS

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owns 51% of the outstanding stock of ADS Mexicana and consolidates ADS Mexicana for financial reporting purposes.

On June 22, 2018, the Company and ADS Mexicana entered into an Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a borrowing capacity of $12.0 million. The Intercompany Note matures on June 22, 2022. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are determined by certain base rates or London Interbank Offered Rate (“LIBOR”) plus an applicable margin based on the Leverage Ratio. As of September 30, 2020 and March 31, 2020, there were no borrowings outstanding under the Intercompany Note.

South American Joint Venture - The Tuberias Tigre - ADS Limitada joint venture (the “South American Joint Venture”) manufactures and sells HDPE corrugated pipe in certain South American markets. ADS owns 50% of the South American Joint Venture. The Company has concluded that it is appropriate to account for this investment using the equity method, whereby the Company’s share of the income or loss of the joint venture is reported in the Condensed Consolidated Statements of Operations under Equity in net loss (income) of unconsolidated affiliates and the Company’s investment in the joint venture is included in Other assets in the Condensed Consolidated Balance Sheets. ADS is the guarantor of 50% of the South American Joint Venture’s credit facility, and the debt guarantee is shared equally with the joint venture partner. The debt guarantee was renewed in the six months ended September 30, 2020. The Company’s maximum potential obligation under this guarantee is $11.0 million as of September 30, 2020. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $22.0 million. This credit facility allows borrowings in either Chilean pesos or US dollars at a fixed interest rate determined at inception of each draw on the facility. The guarantee of the South American Joint Venture’s debt expires on December 31, 2023. ADS does not anticipate any required contributions related to the balance of this credit facility. As of September 30, 2020 and March 31, 2020, the outstanding principal balances of the credit facility including letters of credit were $10.1 million and $9.3 million, respectively. As of September 30, 2020, there were no U.S. dollar denominated loans. The weighted average interest rate as of September 30, 2020 was 3.5% on Chilean peso denominated loans.

ADS and the South American Joint Venture have shared services arrangements in order to execute the joint venture services. In addition, the South American Joint Venture has entered into agreements for pipe and other product sales to ADS and its other related parties. ADS also sells pipe products to the South American Joint Venture.

Tigre USA - Tigre USA was a joint venture that ADS no longer has an ownership interest in, but the owner is the partner for the South American Joint Venture. ADS purchases Tigre USA manufactured products for use in the production of ADS products.

The following tables summarizes the purchases by ADS from related parties and sales by ADS to related parties for the periods presented:

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Purchases from South American Joint Venture	$	218	$	71	$	268	$	508
Sales to South American Joint Venture		194		141		279		394
Purchases from Tigre USA		502		640		1,035		1,171

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11.

DEBT

Long-term debt as of the periods presented consisted of the following:

	September 30, 2020			March 31, 2020
	(In thousands)
Term Loan Facility	$	544,750		$	648,250
Senior Notes		350,000			350,000
Revolving Credit Facility		—			100,000
Equipment financing		—			1,492
Total		894,750			1,099,742
Unamortized debt issuance costs		(2,222	)		(2,419	)
Current maturities		(7,000	)		(7,955	)
Long-term debt obligation	$	885,528		$	1,089,368

Senior Secured Credit Facilities – In July 2019, the Company entered into the credit agreement (the “Base Credit Agreement”) by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto. In September 2019, the Company amended the Base Credit Agreement (as amended the “Senior Secured Credit Facility”). The Senior Secured Credit Facility provides for a term loan facility in an initial aggregate principal amount of $700 million (the “Term Loan Facility”), a revolving credit facility in an initial aggregate principal amount of up to $350 million (the “Revolving Credit Facility”), a letter of credit sub-facility in the initial aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility (the “L/C Facility”) and a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving Credit Facility (together with the Term Loan Facility, the Revolving Credit Facility and the L/C Facility, the “Senior Secured Credit Facility”).

During the six months ended September 30, 2020, the Company repaid $103.5 million of the Term Loan Facility and repaid $100.0 million of the Revolving Credit Facility. Letters of credit outstanding at September 30, 2020 and March 31, 2020 amount to $11.0 million and $8.5 million, respectively, and reduced the availability of the Revolving Credit Facility.

Senior Notes – On September 23, 2019, the Company issued $350.0 million aggregate principal amount of 5.0% senior notes due 2027 (the “Senior Notes”) pursuant to an Indenture, dated September 23, 2019 (the “Indenture”), among the Company, the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as Trustee (the “Trustee”). The Senior Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) or to persons outside the United States under Regulation S of the Securities Act.

12.	COMMITMENTS AND CONTINGENCIES

Purchase Commitments

The Company has historically secured supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts typically ranged from 1 to 12 months and occur in the ordinary course of business. The Company also enters into equipment purchase contracts with manufacturers. The Company does not have any outstanding purchase commitments as of September 30, 2020.

Litigation and Other Proceedings – The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and

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administrative proceedings will have a material adverse impact on the Company’s financial position or results of operations. The Company records a liability when a loss is considered probable, and the amount can be reasonably estimated.

Other Commitments and Contingencies – In March 2019, the Company initiated an internal investigation process, under the guidelines of the Company’s Code of Business Conduct and Ethics, into its consolidated joint venture affiliate ADS Mexicana’s senior management’s ethical and business conduct, as well as compliance of certain products with, along with considerations into, Mexican laws and regulations over the previous 12 months. The Company has recorded an accrual for the current estimate of probable losses resulting from the investigation, which is not material to the Condensed Consolidated Financial Statements. However, due to the inherent uncertainties in determining the use, installation application and location of ADS Mexicana products sold, along with the consideration of Mexican laws and regulations related to warranty and product liability obligations, the Company is unable to determine the maximum potential future losses that may occur, which could be material to the Condensed Consolidated Financial Statements.

13.	INCOME TAXES

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 the occurrence of discrete events. For the three months ended September 30, 2020 and 2019, the Company utilized an effective tax rate of 28.3% and (75.3%), respectively, to calculate its provision for income taxes. State and local income taxes and the Company’s Employee Stock Ownership Plan (“ESOP”) increased the effective rate for the three months ended September 30, 2020 and 2019. The decrease in the effective tax rate for the three months ended September 30, 2019 is primarily driven by the nearly break-even pre-tax income in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2021 and the changes to the Company’s projected annual effective tax rate. The change in the Company’s projected annual effective tax rate was due to the financial results of the acquisition of Infiltrator Water Technologies. Further, the Company recognized additional tax expense of approximately $1.1 million related to non-deductible transaction costs.

For the six months ended September 30, 2020 and 2019, the Company utilized an effective tax rate of 28.1% and (9.4%), respectively, to calculate its provision for income taxes. State and local income taxes and the Company’s ESOP increased the effective rate for the six months ended September 30, 2020 and 2019. Additionally, the effective tax rate for the six months ended September 30, 2019 differed from the federal statutory rate primarily due to a $60.7 million discrete income tax expense. This discrete event related to the 11.6 million shares allocated from the ESOP as a result of the special dividend made on June 14, 2019 and the Company recognizing approximately $246.8 million in additional stock-based compensation expense. Of the total stock-based compensation expense and dividends paid, approximately $242.9 million related to non-deductible stock appreciation and deductible dividends. This discrete event reduced the effective tax rate by 30.3%.

As discussed in “Note 3. Acquisitions”, the Company acquired Infiltrator Water Technologies on July 31, 2019. As part of the purchase price, approximately $132.4 million was attributed to deferred tax liabilities. Of the $132.4 million, $82.3 million related to the step up of GAAP basis for fair market valuations, while the remaining $50.1 million were acquired deferred tax liabilities. Of the total $82.3 million, $80.2 million was attributed to intangibles. The Company also acquired a federal net operating loss of $24.0 million.

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14.	STOCK-BASED COMPENSATION

ADS has several programs for stock-based payments to employees and non-employee members of its Board of Directors, including stock options and restricted stock. Equity-classified restricted stock awards are measured based on the grant-date estimated fair value of each award. The Company accounts for all restricted stock granted to Directors as equity-classified awards. The Company recognized stock-based compensation expense in the following line items of the Condensed Consolidated Statements of Operations for the periods presented:

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Component of income before income taxes:
Cost of goods sold	$	565	$	189	$	966	$	301
Selling expenses		296		179		491		235
General and administrative expenses		4,635		2,803		9,638		4,476
Total stock-based compensation expense	$	5,496	$	3,171	$	11,095	$	5,012

The following table summarizes stock-based compensation expense by award type for the periods presented:

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Stock-based compensation expense:
Equity-classified Stock Options	$	750	$	700	$	1,631	$	1,251
Restricted Stock		1,344		957		2,761		1,599
Performance Units		3,070		1,201		6,054		1,573
Non-Employee Directors		332		313		649		589
Total stock-based compensation expense	$	5,496	$	3,171	$	11,095	$	5,012

2017 Omnibus Plan

On May 24, 2017, the Board of Directors approved the 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) which was approved by the Company’s stockholders on July 17, 2017. The 2017 Incentive Plan provides for the issuance of a maximum of 3.5 million shares of the Company’s common stock for awards made thereunder, which awards may consist of stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, cash-based awards, performance awards (which may take the form of performance cash, performance units or performance shares) or other stock-based awards.

Restricted Stock - During the three and six months ended September 30, 2020, the Company granted 0.1 million and 0.1 million shares of restricted stock with a grant date fair value of $1.6 million and $5.7 million, respectively.

Performance Units –During the three and six months ended September 30, 2020, the Company granted 0.1 million shares at a grant date fair value of $5.2 million performance share units or performance units.

Options - During the three and six months ended September 30, 2020, the Company granted less than 0.1 million and 0.3 million nonqualified stock options under the 2017 Incentive Plan. The grant date fair value of the nonqualified stock options was $0.1 million and $3.4 million, respectively. The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The following table summarizes the assumptions used to estimate the fair value of stock-options during the periods presented:

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		Six Months Ended September 30,
Common stock price		$41.97 - $54.95
Expected stock price volatility		35.5% - 36.3%
Risk-free interest rate		0.4%
Weighted-average expected option life (years)		6.0
Dividend yield		0.7% - 0.9%

15.	BUSINESS SEGMENTS INFORMATION

The Company operates its business in three distinct reportable segments: “Pipe”, “International” and “Infiltrator Water Technologies.” “Allied Products & Other” represents the Company’s Allied Products and all other business segments. “Pipe” and “Allied Products & Other” were previously included as Domestic. The Chief Operating Decision Maker (the “CODM”) evaluates segment reporting based on Net Sales and Segment Adjusted Gross Profit. The Company calculated Segment Adjusted Gross Profit as net sales less costs of goods sold, depreciation and amortization, stock-based compensation and non-cash charges. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources.

Pipe – The Pipe segment manufactures and markets high performance thermoplastic corrugated pipe throughout the United States. The Company maintains and serves these markets through product distribution relationships with many of the largest national and independent waterworks distributors, buying groups and co-ops, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the United States.

Products include single wall pipe, N-12 HDPE pipe sold into the Storm sewer, Infrastructure and Agriculture markets, High Performance polypropylene pipe sold into the Storm sewer, Infrastructure and sanitary sewer markets. Products are designed primarily for storm water management in the construction and infrastructure marketplace across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure. Products are manufactured using HDPE and polypropylene plastic material.

Infiltrator Water Technologies – Infiltrator Water Technologies is a leading national provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. Infiltrator Water Technologies products are used in on-site septic wastewater treatment systems in the United States and Canada.

International – The International segment manufactures and markets pipe and allied products in certain regions outside of the United States, including Company owned facilities in Canada, subsidiaries that distribute to Europe and the Middle East, exports and through the Company’s joint ventures with local partners in Mexico and South America. The Company’s Mexican joint venture, ADS Mexicana, primarily serves the Mexican and Central American markets, while its South American Joint Venture, Tigre-ADS, is the primary channel to serve the South American markets. The Company’s International product lines include single wall pipe, N-12 HDPE pipe, high performance PP pipe and certain geographies also sell our broad line of Allied Products.

Allied Products & Other – Allied Products and Other manufactures and markets products throughout the United States. Products include StormTech, Nyloplast, ARC Septic Chambers, Inserta Tee, BaySaver filters and water quality structures, Fittings, and FleXstorm. The Company maintains and serves these markets through product distribution relationships with many of the largest national and independent waterworks distributors, major national retailers as well as an extensive network of hundreds of small to medium-sized distributors across the United States. The Company also sells through a broad variety of buying groups and co-ops in the United States.

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The following table sets forth reportable segment information with respect to the amount of Net sales contributed by each class of similar products for the periods presented:

	Three Months Ended
	September 30, 2020								September 30, 2019
	Net Sales			Intersegment Net Sales			Net Sales from External Customers		Net Sales			Intersegment Net Sales			Net Sales from External Customers
Pipe	$	292,133		$	(1,637	)	$	290,496	$	281,405		$	(342	)	$	281,063
Infiltrator Water Technologies		105,986			(18,692	)		87,294		64,889			(12,189	)		52,700
International
International - Pipe		35,592			(896	)		34,696		34,617			—			34,617
International - Allied Products & Other		13,706			—			13,706		13,167			—			13,167
Total International		49,298			(896	)		48,402		47,784			—			47,784
Allied Products & Other		117,995			—			117,995		114,358			—			114,358
Intersegment Eliminations		(21,225	)		21,225			—		(12,531	)		12,531			—
Total Consolidated	$	544,187		$	—		$	544,187	$	495,905		$	—		$	495,905

	Six Months Ended
	September 30, 2020								September 31, 2019
	Net Sales			Intersegment Net Sales			Net Sales from External Customers		Net Sales			Intersegment Net Sales			Net Sales from External Customers
Pipe	$	565,785		$	(3,482	)	$	562,303	$	543,586		$	(342	)	$	543,244
Infiltrator Water Technologies		208,139			(36,760	)		171,379		64,889			(12,189	)		52,700
International
International - Pipe		62,542			(896	)		61,646		63,902			—			63,902
International - Allied Products & Other		22,585			—			22,585		23,216			—			23,216
Total International		85,127			(896	)		84,231		87,118			—			87,118
Allied Products & Other		234,913			—			234,913		226,551			—			226,551
Intersegment Eliminations		(41,138	)		41,138			—		(12,531	)		12,531			—
Total Consolidated	$	1,052,826		$	—		$	1,052,826	$	909,613		$	—		$	909,613

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The following sets forth certain financial information attributable to the reportable segments for the periods presented:

	Three Months Ended September 30,					Six Months Ended September 30,
	2020		2019			2020		2019
	(In thousands)					(In thousands)
Segment adjusted gross profit
Pipe	$	100,496	$	74,246		$	191,095	$	131,739
Infiltrator Water Technologies		53,105		30,144			101,033		30,144
International		14,582		10,841			25,990		20,068
Allied Products & Other		60,380		57,621			120,848		114,808
Intersegment Eliminations		372		(978	)		14		(978	)
Total	$	228,935	$	171,874		$	438,980	$	295,781
Depreciation and amortization
Pipe	$	11,543	$	11,557		$	22,903	$	23,104
Infiltrator Water Technologies		3,005		1,859			6,138		1,859
International		1,302		1,590			2,600		3,097
Allied Products & Other^(a)		19,928		11,560			39,918		15,200
Total	$	35,778	$	26,566		$	71,559	$	43,260
Capital expenditures
Pipe	$	3,911	$	9,383		$	8,142	$	16,357
Infiltrator Water Technologies		13,781		3,883			17,979		3,883
International		297		623			747		1,877
Allied Products & Other^(a)		675		2,010			2,091		3,505
Total	$	18,664	$	15,899		$	28,959	$	25,622

(a)

Includes depreciation, amortization and capital expenditures not allocated to a reportable segment. The amortization expense of Infiltrator Water Technologies intangible assets acquired is included in Allied Products & Other.

Reconciliation of Gross Profit to Segment Adjusted Gross profit

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Reconciliation of Segment Adjusted Gross Profit:
Total Gross Profit	$	205,857	$	146,524	$	394,360	$	84,366
Depreciation and amortization		16,463		15,708		32,886		29,392
ESOP and stock-based compensation expense		6,598		3,869		11,537		7,640
ESOP special dividend compensation		—		—		—		168,610
COVID-19 related costs^(a)		17		—		197		—
Inventory step up related to Infiltrator Water Technologies acquisition		—		5,773		—		5,773
Total Segment Adjusted Gross Profit	$	228,935	$	171,874	$	438,980	$	295,781

(a)

Includes expenses directly related to our response to the COVID-19 pandemic, including adjustments to our pandemic pay program and expenses associated with our third-party crisis management vendor.

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16.	SUBSEQUENT EVENTS

Common Stock Dividend - During the third quarter of fiscal 2021, the Company declared a quarterly cash dividend of $0.09 per share of common stock. The dividend is payable on December 15, 2020 to stockholders of record at the close of business on December 1, 2020.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” “us,” “ADS” and the “Company” refer to Advanced Drainage Systems, Inc. and its directly- and indirectly-owned subsidiaries as a combined entity, except where it is clear that the terms mean only Advanced Drainage Systems, Inc. exclusive of its subsidiaries.

Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, references to “year” pertain to our fiscal year. For example, 2021 refers to fiscal 2021, which is the period from April 1, 2020 to March 31, 2021.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our Condensed Consolidated Financial Statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements included in our Fiscal 2020 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on June 1, 2020. 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 our joint ventures for purposes of GAAP, except for our South American Joint Venture.

Overview

We are the leading global manufacturer of water management products and solutions for non-residential, residential, infrastructure and agricultural applications. With the acquisition of Infiltrator Water Technologies in the second quarter of fiscal 2020, we are now a leading provider of plastic leach field chambers, septic tanks and accessories, for use primarily in residential applications.

Impact of COVID-19

In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it continues to spread throughout the United States and globally. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruptions and may have an adverse effect on our business. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. While our production facilities are operating as essential businesses, the Company continues to assess the potential effects and may experience future impacts such as reduced operations or temporarily closing facilities.

Executive Summary

Second Quarter Fiscal 2021 Results

•	Net sales increased 9.7% to $544.2 million

•	Net income of $80.6 million, compared to $8.5 million in the prior year

•	Adjusted EBITDA, a non-GAAP measure, increased 47.3% to $174.1 million

Net sales increased $48.3 million, or 9.7%, to $544.2 million, as compared to $495.9 million in the prior year. Domestic pipe sales increased $10.7 million, or 3.8%, to $292.1 million. Domestic allied products & other sales increased $3.6 million, or 3.2%, to $118.0 million. These increases were driven by sales growth in the U.S. construction end markets. Infiltrator Water Technologies sales increased $41.1 million, or 63.3%, to $106.0 million, as compared to $64.9 million in the prior year.

Gross profit increased $59.3 million, or 40.5%, to $205.9 million as compared to $146.5 million in the prior year. The increase is primarily due to the incremental benefit from the acquisition of Infiltrator Water Technologies,

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favorable material cost, leverage from sales growth in both pipe and allied product sales and operational improvements offsetting inflationary costs.

Adjusted EBITDA, a non-GAAP measure, increased $55.9 million, or 47.3%, to $174.1 million, as compared to $118.2 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 32.0% as compared to 23.8% in the prior year.

Year-to-Date Fiscal 2021 Results

•	Net sales increased 15.7% to $1.1 billion

•	Net income increased to $151.3 million, compared to a net loss of $219.0 million in the prior year

•	Adjusted EBITDA, a non-GAAP measure, increased 68.1% to $333.5 million

•	Cash provided by operating activities increased 66.7% to $286.2 million

•	Free cash flow, a non-GAAP measure, increased 76.1% to $257.2 million

Net sales increased $143.2 million, or 15.7%, to $1.053 billion, as compared to $909.6 million in the prior year. Domestic pipe sales increased $22.2 million, or 4.1%, to $565.8 million. Domestic allied products & other sales increased $8.4 million, or 3.7%, to $234.9 million. These increases were driven by growth in both the U.S. construction and agriculture end markets. Infiltrator Water Technologies sales increased $143.3 million, or 220.8%, to $208.1 million, as compared to $64.9 million in the prior year.

Gross profit increased $310.0 million to $394.4 million as compared to $84.4 million in the prior year. The prior year gross profit includes $168.6 million of ESOP special dividend compensation expense. The remaining increase is primarily due to the acquisition of Infiltrator Water Technologies, favorable material cost, an increase in operational efficiency and increases in both pipe and allied product sales.

Adjusted EBITDA, a non-GAAP measure, increased $135.1 million, or 68.1%, to $333.5 million, as compared to $198.5 million in the prior year. The increase is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 31.7% as compared to 21.8% in the prior year.

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Results of Operations

Comparison of the Three Months ended September 30, 2020 to the Three Months ended September 30, 2019

The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.

	For the Three Months Ended September 30,
	2020					2019
Consolidated Statements of Operations data:	(In thousands)					(In thousands)
Net sales	$	544,187		100.0	%	$	495,905		100.0	%
Cost of goods sold		338,330		62.2			349,381		70.5
Gross profit		205,857		37.8			146,524		29.5
Selling expenses		30,586		5.6			29,971		6.0
General and administrative expenses		35,115		6.5			48,030		9.7
Loss on disposal of assets and costs from exit and disposal activities		627		0.1			2,004		0.4
Intangible amortization		17,955		3.3			9,300		1.9
Income (loss) from operations		121,574		22.3			57,219		11.5
Interest expense		9,360		1.7			52,332		10.6
Derivative gains (loss) and other income (expense), net		(151	)	—			175		—
Income (loss) before income taxes		112,365		20.6			4,712		1.0
Income tax expense (benefit)		31,827		5.8			(3,547	)	(0.7	)
Equity in net income of unconsolidated affiliates		(67	)	—			(203	)	—
Net income (loss)		80,605		14.8			8,462		1.7
Less: net income (loss) attributable to noncontrolling interest		369		0.1			873		0.2
Net income (loss) attributable to ADS	$	80,236		14.7	%	$	7,589		1.5	%

Net sales - Net sales increased by $48.3 million, or 9.7%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

	Three Months Ended
	September 30, 2020								September 30, 2019
	Net Sales			Intersegment Net Sales			Net Sales from External Customers		Net Sales			Intersegment Net Sales			Net Sales from External Customers
Pipe	$	292,133		$	(1,637	)	$	290,496	$	281,405		$	(342	)	$	281,063
Infiltrator Water Technologies		105,986			(18,692	)		87,294		64,889			(12,189	)		52,700
International
International - Pipe		35,592			(896	)		34,696		34,617			—			34,617
International - Allied Products & Other		13,706			—			13,706		13,167			—			13,167
Total International		49,298			(896	)		48,402		47,784			—			47,784
Allied Products & Other		117,995			—			117,995		114,358			—			114,358
Intersegment Eliminations		(21,225	)		21,225			—		(12,531	)		12,531			—
Total Consolidated	$	544,187		$	—		$	544,187	$	495,905		$	—		$	495,905

•

Pipe net sales to all customers for the three months ended September 30, 2020 increased by $10.7 million, or 3.8%, compared to the three months ended September 30, 2019. The increase was due to an increase in pipe volume resulting in a $10.5 million increase in sales.

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•

Infiltrator Water Technologies net sales to all customers increased $41.1 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The Company acquired Infiltrator Water Technologies on July 31, 2019 and therefore did not report any Infiltrator Water Technologies sales for the month of July 2019.

•

International net sales for the three months ended September 30, 2020 increased by $1.5 million, or 3.2%, compared to the three months ended September 30, 2019. The increase was primarily attributable to a $1.0 million increase in International Pipe Sales and a $0.5 million increase in International Allied Product sales.

•

Allied Products & Other net sales for the three months ended September 30, 2020 increased by $3.6 million, or 3.2%, compared to the three months ended September 30, 2019. The increase was due to an increase in price and product mix and an increase in sales volume.

Cost of goods sold and Gross profit - Cost of goods sold decreased by $11.1 million, or 3.2%, and gross profit increased by $59.3 million, or 40.5%, in the three months ended September 30, 2020 over the comparable period in the previous year. Gross profit excluding Infiltrator Water Technologies, referred to as Legacy ADS gross profit, a Non-GAAP measure, increased 24.4%.

	For the Three Months Ended September 30,
	2020		2019			$ Variance		% Variance
	(In thousands)
Pipe	$	82,944	$	59,103		$	23,841		40.3	%
International		13,260		9,247			4,013		43.4
Allied Products & Other		59,335		56,653			2,682		4.7
Legacy ADS gross profit		155,539		125,003			30,536		24.4
Infiltrator Water Technologies		49,946		22,499			27,447		122.0
Intersegment eliminations		372		(978	)		1,350		(138.0	)
Total gross profit	$	205,857	$	146,524		$	59,333		40.5	%

•

Pipe gross profit increased primarily due to lower costs in material, labor and overhead. The increase was also attributable to the increase in volume sold discussed above.

•

The Company acquired Infiltrator Water Technologies on July 31, 2019 and therefore did not report any Infiltrator Water Technologies gross profit for the month of July 2019.

•

International gross profit increased primarily due to the increased sales discussed above and lower costs of materials.

•

Allied Products & Other gross profit increased primarily due to the increase in net sales discussed above and lower labor and overhead costs.

Operating expenses

	Three Months Ended September 30,
	2020			2019
Selling expenses		5.6	%		6.0	%
General and administrative expenses		6.5	%		9.7	%
Selling, general and administrative expenses		12.1	%		15.7	%

Selling expenses - As a percentage of net sales, selling expenses decreased to 5.6% in the three months ended September 30, 2020 compared to 6.0% in the three months ended September 30, 2019. The decrease as a percentage of net sales is the result of the Company’s cost mitigation steps.

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General and administrative expenses - General and administrative expenses for the three months ended September 30, 2020 decreased $12.9 million from the prior year period. The decrease was primarily due to a $15.9 million decrease in transaction costs due to the Infiltrator Water Technologies acquisition.

Loss on disposal of assets and costs from exit and disposal activities - The decrease in Loss on disposal of assets and costs from exit and disposal activities is primarily due to asset disposals in fiscal 2020. See “Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities” for additional discussion.

Intangible amortization - Intangible amortization increased primarily due to the addition of intangible assets related to the acquisition of Infiltrator Water Technologies.

Interest expense - Interest expense decreased $43.0 million in the three months ended September 30, 2020 compared to the same period in the previous fiscal year. The decrease was primarily due to $33.2 million of the write-off of deferred financing costs and $4.2 million prepayment penalty related to the extinguishment of debt instruments in the three months ended September 30, 2019. The remainder of the decrease is due to decreased debt levels.

Derivative gain (loss) and other income (expense), net - Derivative gain (loss) and other income (expense) increased by $0.3 million for the three months ended September 30, 2020 compared to the same period in the previous fiscal year.

Income tax expense (benefit) - The following table presents the effective tax rates for the three months ended September 30, 2020 and 2019.

Three Months Ended

September 30,

2020

2019

Effective tax rate

28.3

(75.3

The change in the effective tax rate was primarily due to the Acquisition. See “Note 13. Income Taxes” for additional information.

Equity in net income of unconsolidated affiliates - Equity in net income of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net income loss of unconsolidated affiliates decreased for the three months ended September 30, 2020 as compared to the same period in the previous fiscal year due to a decrease in the current period income at our South American Joint Venture.

Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest decreased for three months ended September 30, 2020 due to a net income at our ADS Mexicana joint venture.

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Comparison of the Six Months ended September 30, 2020 to the Six Months ended September 30, 2019

	For the Six Months Ended September 30,
	2020					2019
Consolidated Statements of Operations data:	(In thousands)					(In thousands)
Net sales	$	1,052,826		100.0	%	$	909,613		100.0	%
Cost of goods sold		658,466		62.5			656,637		72.2
Cost of goods sold - ESOP special dividend compensation		—		—			168,610		18.5
Gross profit		394,360		37.5			84,366		9.3
Selling		58,746		5.6			56,336		6.2
General and administrative		68,731		6.5			79,463		8.7
Selling, general and administrative - ESOP special dividend compensation		—		—			78,142		8.6
Loss on disposal of assets and costs from exit and disposal activities		2,274		0.2			2,711		0.3
Intangible amortization		35,937		3.4			10,842		1.2
Income (loss) from operations		228,672		21.7			(143,128	)	(15.7	)
Interest expense		19,330		1.8			57,596		6.3
Derivative gains (loss) and other income (expense), net		(718	)	(0.1	)		79		—
Income (loss) before income taxes		210,060		20.0			(200,803	)	(22.1	)
Income tax expense (benefit)		59,027		5.6			18,823		2.1
Equity in net income of unconsolidated affiliates		(240	)	—			(637	)	(0.1	)
Net income (loss)		151,273		14.4			(218,989	)	(24.1	)
Less: net income (loss) attributable to noncontrolling interest		571		—			(222	)	—
Net income (loss) attributable to ADS	$	150,702		14.3	%	$	(218,767	)	(24.1	)%

Net sales - Net sales increased by $143.2 million, or 15.7%, for the six months ended September 30, 2020 compared to the six months ended September 30, 2019.

	Six Months Ended
	September 30, 2020								September 31, 2019
	Net Sales			Intersegment Net Sales			Net Sales from External Customers		Net Sales			Intersegment Net Sales			Net Sales from External Customers
Pipe	$	565,785		$	(3,482	)	$	562,303	$	543,586		$	(342	)	$	543,244
Infiltrator Water Technologies		208,139			(36,760	)		171,379		64,889			(12,189	)		52,700
International
International - Pipe		62,542			(896	)		61,646		63,902			—			63,902
International - Allied Products & Other		22,585			—			22,585		23,216			—			23,216
Total International		85,127			(896	)		84,231		87,118			—			87,118
Allied Products & Other		234,913			—			234,913		226,551			—			226,551
Intersegment Eliminations		(41,138	)		41,138			—		(12,531	)		12,531			—
Total Consolidated	$	1,052,826		$	—		$	1,052,826	$	909,613		$	—		$	909,613

•

Pipe net sales to all customers for the six months ended September 30, 2020 increased by $22.2 million, or 4.1%, compared to the six months ended September 30, 2019. The increase was due to an increase in pipe

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volume resulting in a $27.7 million increase in sales partially offset by a $5.7 million decrease as a result of price and product mix.

•

Infiltrator Water Technologies net sales to all customers for the six months ended September 30, 2020 increased by $143.3 million compared to the six months ended September 30, 2019. The Company acquired Infiltrator Water Technologies on July 31, 2019 and therefore did not report any Infiltrator Water Technologies sales prior to August 2019.

•

International net sales for the six months ended September 30, 2020 decreased by $2.0 million, or 2.3%, compared to the six months ended September 30, 2019. The decrease was primarily attributable to a $1.4 million decrease in International Pipe Sales, attributable to volume decreases, and a $0.6 million decrease in International Allied Product sales.

•

Allied Products & Other net sales for the six months ended September 30, 2020 increased by $8.4 million, or 3.7%, compared to the six months ended September 30, 2019. The increase was due to an increase in price and product mix and an increase in sales volume.

Cost of goods sold and Gross profit - Cost of goods sold increased by $1.8 million, or 0.3%, and gross profit increased by $310.0 million, or 367.4%, in the six months ended September 30, 2020 over the comparable period in the previous year. The increase in gross profit was primarily due to the ESOP special dividend compensation expense from the special dividend in fiscal 2020 of $168.6 million allocated to Cost of goods sold. Gross profit excluding Infiltrator Water Technologies and Cost of goods sold – ESOP special dividend compensation, referred to as Legacy ADS gross profit, a Non-GAAP measure, increased 29.5%.

	For the Six Months Ended September 30,
	2020		2019			$ Variance		% Variance
	(In thousands)
Pipe	$	157,639	$	101,561		$	56,078		55.2	%
International		23,367		16,963			6,404		37.8
Allied Products & Other		118,663		112,931			5,732		5.1
Legacy ADS gross profit		299,669		231,455			68,214		29.5
Infiltrator Water Technologies		94,677		22,499			72,178		320.8
Cost of goods sold - ESOP special dividend compensation		—		(168,610	)		168,610		100.0
Intersegment eliminations		14		(978	)		992		100.0
Total gross profit	$	394,360	$	84,366		$	309,994		367.4	%

•

Pipe gross profit increased primarily due to lower costs in material, labor and overhead. The increase was also attributable to the increase in volume sold, offset by the decrease in the price and product mix of net sales discussed above.

•

The Company acquired Infiltrator Water Technologies on July 31, 2019 and therefore did not report any Infiltrator Water Technologies gross profit prior to August 2019.

•

International gross profit increased primarily due to lower cost of materials offset by the decreased sales discussed above.

•

Allied Products & Other gross profit increased primarily due to the increase in net sales discussed above and lower labor and overhead costs.

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Operating expenses

	For the Six Months Ended September 30,
	2020			2019
Selling expenses		5.6	%		6.2	%
General and administrative expenses		6.5	%		8.7	%
Selling, general and administrative expenses		12.1	%		14.9	%

Selling expenses - As a percentage of net sales, selling expenses decreased to 5.6% in the six months ended September 30, 2020 compared to 6.2% in the six months ended September 30, 2019. The decrease as a percentage of net sales is the result of the Company’s cost mitigation steps.

General and administrative expenses - General and administrative expenses for the six months ended September 30, 2020 decreased $10.7 million from the prior year period. The decrease was primarily due to a $19.5 million decrease in transaction costs. The decrease was offset by a $7.4 million increase in general and administrative expenses, including stock-based compensation, reported at Infiltrator Water Technologies.

Selling, general and administrative – ESOP special dividend compensation – In fiscal 2019, ESOP special dividend compensation expense of $78.1 million was allocated to selling, general and administrative expenses.

Intangible amortization - Intangible amortization increased primarily due the addition of intangible assets related to the acquisition of Infiltrator Water Technologies.

Interest expense - Interest expense decreased $38.3 million in the six months ended September 30, 2020 compared to the same period in the previous fiscal year. The decrease was primarily due to $33.2 million of the write-off of deferred financing costs and $4.2 million prepayment penalty related to the extinguishment of debt instruments in the six months ended September 30, 2019. The remainder of the decrease is due to decreased debt levels.

Derivative gain (loss) and other income (expense), net - Derivative gain (loss) and other income (expense) increased by $0.8 million for the six months ended September 30, 2020 compared to the same period in the previous fiscal year.

Income tax expense (benefit) – The following table presents the effective tax rates for the six months ended September 30, 2020 and 2019.

	For the Six Months Ended September 30,
	2020			2019
Effective tax rate		28.1	%		(9.4	)%

The change in the effective tax rate was primarily due to a discrete income tax event related to stock appreciation from the additional ESOP shares allocated and the Acquisition. See “Note 13. Income Taxes” for additional information.

Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net (income) loss of unconsolidated affiliates decreased for the six months ended September 30, 2020 as compared to the same period in the previous fiscal year due to a decrease in the current period income at our South American Joint Venture.

Net income attributable to noncontrolling interest - Net income attributable to noncontrolling interest increased for the six months ended September 30, 2020 due to a net income at our ADS Mexicana joint venture.

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Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP and should not be considered as alternatives to net income as measures of financial performance or cash flows from operations or any other performance measure derived in accordance with GAAP. We calculate Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.

Adjusted EBITDA and Adjusted EBITDA Margin are included in this Form 10-Q because they are key metrics used by management and our board of directors to assess our consolidated financial performance. These non-GAAP financial measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use these non-GAAP financial measures to supplement GAAP measures of performance to evaluate the effectiveness of our consolidated business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We use Adjusted EBITDA Margin to evaluate our ability to generate profitable sales.

Adjusted EBITDA and Adjusted EBITDA Margin contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs, cash expenditures to replace assets being depreciated and amortized and interest expense, or the cash requirements necessary to service interest on principal payments on our indebtedness. In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency transaction losses. Management compensates for these limitations by relying on our GAAP results and using non-GAAP measures on a supplemental basis.

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

	Three Months Ended September 30,						Six Months Ended September 30,
	2020			2019			2020			2019
	(In thousands)						(In thousands)
Net income (loss)	$	80,605		$	8,462		$	151,273		$	(218,989	)
Depreciation and amortization		35,778			26,566			71,559			43,260
Interest expense		9,360			52,332			19,330			57,596
Income tax expense		31,827			(3,547	)		59,027			18,823
EBITDA		157,570			83,813			301,189			(99,310	)
Loss on disposal of assets and costs from exit and disposal activities		627			2,004			2,274			2,711
ESOP and stock-based compensation expense		14,626			8,657			27,088			16,082
ESOP special dividend compensation^(a)		—			—			—			246,752
Transaction costs^(b)		718			16,590			1,374			20,835
Inventory step up related to the Acquisition		—			5,773			—			5,773
Strategic growth and operational improvement initiatives^(c)		361			701			2,116			2,896
COVID-19 related costs^(d)		242			—			806			—
Other adjustments^(e)		(70	)		626			(1,303	)		2,721
Adjusted EBITDA	$	174,074		$	118,164		$	333,544		$	198,460
Adjusted EBITDA Margin		32.0	%		23.8	%		31.7	%		21.8	%

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(a)

In the first quarter of fiscal 2020, the Company paid a special dividend of $1.00 per share. The dividend was used to pay back a portion of the ESOP loan resulting in $246.8 million in additional stock-based compensation. See “Note 9. Net Income Per Share and Stockholders’ Equity” for additional information.

(b)	Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with business or asset acquisitions and dispositions.

(c)

Represents professional fees incurred in connection with our strategic growth and operational improvement initiatives, which include various market feasibility assessments and acquisition strategies, along with our operational improvement initiatives, which include evaluation of our manufacturing network and improvement initiatives.

(d)	Includes expenses directly related to our response to the COVID-19 pandemic, including adjustments to our pandemic pay program and expenses associated with our third party crisis management vendor.

(e)

Includes derivative fair value adjustments, foreign currency transaction (gains) losses, the proportionate share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is accounted for under the equity method of accounting and executive retirement expense. The other adjustments in fiscal 2020 also includes expenses related to the ADS Mexicana’s investigation.

The following table presents our Adjusted EBITDA for the Company prior to the Acquisition (“Legacy ADS”), which consists of the combination of the Segment Adjusted Gross Profit for Pipe, Allied Products & Other, and International plus the portion of corporate and selling expenses which impacts Adjusted EBITDA and Infiltrator Water Technologies prior to the Acquisition (“Legacy Infiltrator Water Technologies”), which consists of the combination of the Segment Adjusted Gross Profit for Infiltrator Water Technologies plus the portion of corporate and selling expenses which impacts Adjusted EBITDA.

	Three Months Ended September 30,						Six Months Ended September 30,
	2020			2019			2020			2019
	(In thousands)						(In thousands)
Legacy ADS Adjusted EBITDA
Pipe Adjusted Gross Profit	$	100,496		$	74,246		$	191,095		$	131,739
International Adjusted Gross Profit		14,582			10,841			25,990			20,068
Allied Products & Other Adjusted Gross Profit		60,380			57,621			120,848			114,808
Unallocated corporate and selling expenses		(48,449	)		(48,621	)		(93,093	)		(92,232	)
Legacy ADS Adjusted EBITDA	$	127,009		$	94,087		$	244,840		$	174,383
Legacy Infiltrator Water Technologies Adjusted EBITDA
Infiltrator Water Technologies Adjusted Gross Profit		53,105			30,144			101,033			30,144
Unallocated corporate and selling expenses		(6,600	)		(5,089	)		(12,531	)		(5,089	)
Legacy Infiltrator Water Technologies Adjusted EBITDA	$	46,505		$	25,055		$	88,502		$	25,055
Intersegment eliminations		560			(978	)		202			(978	)
Consolidated Adjusted EBITDA	$	174,074		$	118,164		$	333,544		$	198,460

Liquidity and Capital Resources

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

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The following table presents key liquidity metrics utilized by management. The table includes the Non-GAAP measure, Free Cash Flow, which is further discussed and defined below, and Leverage ratio which is calculated as the trailing twelve months Adjusted EBITDA divided by net debt.

	Six Months Ended September 30,
(Amounts in thousands)	2020			2019
Net cash provided by operating activities	$	286,168		$	171,711
Capital expenditures		(28,959	)		(25,622	)
Free Cash Flow		257,209			146,089
Total debt (debt and finance lease obligations)		948,863
Cash		203,883
Net debt (total debt less cash)		744,980
Leverage Ratio		1.5

Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures. Free cash flow is a measure used by management and our Board of Directors to assess our ability to generate cash. Accordingly, free cash flow has been presented in this Quarterly Report on Form 10-Q as a supplemental measure of liquidity that is not required by, or presented in accordance with GAAP, because management believes that free cash flow provides useful information to investors and others in understanding and evaluating our ability to generate cash flow from operations after capital expenditures.

Free cash flow is not a GAAP measure of our liquidity and should not be considered as an alternative to cash flow from operating activities as a measure of liquidity or any other liquidity measure derived in accordance with GAAP. Our measure of free cash flow is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

Net cash provided by operating activities increased $114.5 million to $286.2 million, as compared to $171.7 million in the prior year, primarily due to improvements in profitability and lower cash transaction costs for the Infiltrator Water Technologies acquisition. Free cash flow (Non-GAAP) increased $111.1 million to $257.2 million, as compared to $146.1 million in the prior year. Net debt (total debt and finance lease obligations net of cash) was $745.0 million as of September 30, 2020.

The following table summarizes our available liquidity for the periods presented .

(Amounts in thousands)	September 30, 2020
Revolver capacity	$	350,000
Less: outstanding borrowings		—
Less: letters of credit		11,005
Revolver available liquidity	$	338,995

In addition to the available liquidity above, we have the ability to borrow up to $1.3 billion under our Term Loan Facility, subject to leverage ratio restrictions.

Working Capital and Cash Flows

As of September 30, 2020, we had $542.9 million in liquidity, including $203.9 million of cash, $339.0 million in borrowings available under our Revolving Credit Agreement, net of $11.0 million of outstanding letters of credit. We believe that our cash on hand, together with the availability of borrowings under our new Credit Agreement and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, scheduled principal and interest payments on our indebtedness and the dividend payment requirement for our convertible preferred stock for at least the next twelve months.

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Working Capital - Working capital decreased to $418.1 million as of September 30, 2020, from $428.0 million as of March 31, 2020. The decrease in working capital is primarily due to decreased inventory and increased accounts payable and other current liabilities. These decreases were offset by increased cash and accounts receivable.

	Six Months Ended September 30,
(Amounts in thousands)	2020			2019
Net cash provided by operating activities	$	286,168		$	171,711
Net cash used in investing activities		(28,504	)		(1,114,355	)
Net cash (used in) provided by financing activities		(227,793	)		988,137

Operating Cash Flows – Cash flows from operating activities during the six months ended September 30, 2020 was primarily impacted by improved profitability and lower cash transaction costs for the Infiltrator Water Technologies acquisition.

Investing Cash Flows - Capital expenditures during the six months ended September 30, 2020 increased by $3.3 million compared to the same period in fiscal 2020. The net cash used in investing activities were primarily due to the acquisition of Infiltrator Water Technologies in fiscal 2020. Our capital expenditures for the six months ended September 30, 2020 were used primarily for new equipment and operational efficiency and productivity projects.

Capital expenditures totaled $29.0 million and $25.6 million for the six months ended September 30, 2020 and 2019, respectively. Infiltrator Water Technologies capital expenditures for the six months ended September 30, 2020 was $18.0 million of our total capital expenditures. Our capital expenditures for the six months ended September 30, 2020 were used primarily to support facility expansions, equipment replacements, our recycled resin and technology improvement initiatives.

We currently anticipate that we will make capital expenditures of approximately $80 to $90 million in fiscal year 2021. Such capital expenditures are expected to be financed using funds generated by operations. As of September 30, 2020, there were no material contractual obligations or commitments related to these planned capital expenditures.

Financing Cash Flows - During the six months ended September 30, 2020, cash used in financing activities included the repayment of $103.5 million on the Term Loan Facility, the repayment of $100.0 million on the Revolving Credit Facility, quarterly dividend payments of $15.4 million and payments on our finance lease obligations of $12.2 million.

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During the six months ended September 30, 2019, cash provided by financing activities was $988.1 million due to the new Term Loan Facility, Senior Notes and common stock offering. These cash inflows were offset by the repayment of the Company’s Second Amended and Restated Credit Agreement (the “PNC Credit Agreement”) and Prudential Senior Notes, the special and quarterly dividend payments of $76.3 million and payments on our finance lease obligations of $12.3 million. The table below summarizes the cash flows from the Acquisition, and the related debt and equity transactions:

(Amounts in thousands)	Sources		Uses
Bridge Loan Facility	$	1,300,000	$	—
Bridge Revolver		145,000		—
PNC Credit Agreement draw		104,429		—
Prudential Senior Notes payoff		—		(104,429	)
PNC Credit Agreement payoff		—		(239,240	)
Acquisition of Infiltrator Water Technologies, fair value of consideration transferred		—		(1,146,526	)
Common stock offering, net of offering costs		293,648		—
Bridge Loan Facility - payment		—		(300,000	)
Proceeds from Senior Notes Issuance		350,000		—
Bridge Loan Facility - payment		—		(300,000	)
Term Loan Facility		700,000		—
Bridge Loan Facility - payment		—		(700,000	)
Debt issuance costs		—		(34,606	)
Cash to Balance Sheet		—		(68,276	)
Total	$	2,893,077	$	(2,893,077	)

Cash held by Foreign Subsidiaries - As of September 30, 2020, we had $14.8 million in cash that was held by our foreign subsidiaries. We continue to evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested.

Employee Stock Ownership Plan (“ESOP”)

The Company established the Advanced Drainage Systems, Inc. ESOP (the “ESOP” or the “Plan”) effective April 1, 1993 to enable eligible employees to acquire stock ownership in ADS in the form of redeemable convertible preferred shares. The Plan was funded by an existing tax-qualified profit-sharing retirement plan, as well as a 30-year term loan from ADS. Within 30 days following the repayment of the ESOP loan, which will occur no later than March 2023, the ESOP committee can direct the shares of redeemable convertible preferred stock owned by the ESOP to be converted into shares of the Company’s common stock.

The Company is obligated to make contributions to the Plan, which, when aggregated with the Plan’s dividends, equal the amount necessary to enable the Plan to make its regularly scheduled payments of principal and interest due on its term loan to ADS. Compensation expense is recognized based upon the average annual fair value of the shares during the period which ADS receives payments on the term loan, and the number of ESOP shares allocated to participant accounts.

As disclosed in “Note 16. Employee Benefit Plans” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2020 Form 10-K, redeemable convertible preferred stock can convert to common stock upon retirement, disability, death, or vested terminations over the life of the Plan. As stated above, within 30 days following the repayment of the ESOP loan, all redeemable convertible preferred stock will be converted to common stock, which will be no later than March 2023.

The ESOP’s conversion of redeemable convertible preferred stock into common stock will have a meaningful impact on the Company’s net income, net income per share and common shares outstanding. The outstanding shares of common stock would be 24% greater after conversion.

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Impact on Net Income - Following the repayment of the ESOP loan discussed above, the Company will no longer be required to apply the two-class method to determine Net income per share. In addition, the Company would not be required to recognize the fair value of ESOP deferred compensation attributable to the shares of redeemable convertible preferred shares allocated.

The impact of the ESOP on net income includes the fair value of ESOP deferred compensation attributable to the shares of redeemable convertible preferred stock allocated to employee ESOP accounts during the applicable period, which is a non-cash charge to our earnings and not deductible for income tax purposes.

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)				(In thousands)
Net income (loss) attributable to ADS	$	80,236	$	7,589	$	150,702	$	(218,767	)
ESOP special dividend compensation		—		—		—		246,752
ESOP deferred stock-based compensation		9,130		5,486		15,993		11,070

Impact on Common Stock Outstanding - The repayment of the ESOP loan and related conversion of redeemable convertible preferred shares will have an impact on the number of common shares outstanding. As shares are converted, the number of common shares outstanding will increase.

	Three Months Ended September 30,				Six Months Ended September 30,
	2020		2019		2020		2019
	(Shares in millions)				(Shares in millions)
Weighted average common shares outstanding		69.8		60.2		69.6		58.9
Conversion of redeemable convertible shares		16.3		17.2		16.4		17.3

Financing Transactions

New Senior Secured Credit Facility - In July 2019, the Company entered into the Base Credit Agreement by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto. In September 2019, the Company amended the Base Credit Agreement. The Senior Secured Credit Facility provides the Term Loan Facility in an initial aggregate principal amount of $700 million, the Revolving Credit Facility in an initial aggregate principal amount of up to $350 million, the L/C Facility in the initial aggregate available amount of up to $50 million, as a sublimit of such Revolving Credit Facility and a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving Credit Facility. As of September 30, 2020, the outstanding principal drawn on Term Loan Facility was $544.8 million and the no outstanding principal on the Revolving Credit Facility. The Company had $339.0 million available to be drawn on the Revolving Credit Facility, net of $11.0 million of outstanding letters of credit.

ADS Mexicana Revolving Credit Facility - The Company and ADS Mexicana entered into an Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a capacity of $12.0 million on June 22, 2018. The Intercompany Note matures on June 22, 2022. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49% of any unpaid borrowing. The interest rates under the Intercompany Note are determined by certain base rates or LIBOR rates plus an applicable margin based on the Leverage Ratio. As of September 30, 2020 and March 31, 2020, there were no borrowings under the Intercompany Note.

Issuance of Senior Notes due 2027 - On September 23, 2019, the Company issued $350.0 million aggregate principal amount of its Senior Notes, pursuant to the Indenture among the Company, the Guarantors and the Trustee. The Senior Notes are guaranteed by each of the Company’s present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Company's Senior Secured Credit Facility. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act or to persons outside the United States under Regulation S of the Securities Act.

Interest on the Senior Notes will be payable semi-annually in cash in arrears on March 31 and September 30 of each year, commencing on March 31, 2020, at a rate of 5.000% per annum. The Senior Notes will mature on September

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30, 2027. The Company used the majority of the net proceeds from the offering of the Senior Notes for the repayment of $300.0 million of its outstanding borrowings under the Company’s Base Credit Agreement.

The Company may redeem the Senior Notes, in whole or in part, at any time on or after September 30, 2022 at established redemption prices. At any time prior to September 30, 2022, the Company may also redeem up to 40% of the Senior Notes with net cash proceeds of certain equity offerings at a redemption price equal to 105.000% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to September 30, 2022, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium.

The Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants.

Covenant Compliance - The Senior Secured Credit Facility requires, if the aggregate amount of outstanding exposure under the Revolving Facility exceeds $122.5 million at the end of any fiscal quarter, the Company to maintain a consolidated senior secured net leverage ratio (commencing with the fiscal quarter ending March 31, 2020) not to exceed 4.25 to 1.00 for any four consecutive fiscal quarter periods.

The Senior Secured Credit Facility also includes other covenants, including negative covenants that, subject to certain exceptions, limit the Company’s and its restricted subsidiaries’ (as defined in the Credit Agreement) ability to, among other things: (i) incur additional debt, including guarantees; (ii) create liens upon any of their property; (iii) enter into any merger, consolidation or amalgamation, liquidate, wind up or dissolve, or dispose of all or substantially all of their property or business; (iv) dispose of assets; (v) pay subordinated debt; (vi) make certain investments; (vii) enter into swap agreements; (viii) engage in transactions with affiliates; (ix) engage in new lines of business; (x) modify certain material contractual obligations, organizational documents, accounting policies or fiscal year; or (xi) create or permit restrictions on the ability of any subsidiary of any Loan Party (as defined in the Senior Secured Credit Facility) to pay dividends or make distributions to the Company or any of its subsidiaries.

The Senior Secured Credit Facility also contains customary provisions requiring the following mandatory prepayments (subject to certain exceptions and limitations): (i) annual prepayments (beginning with the fiscal year ending March 31, 2021) with a percentage of excess cash flow (as defined in the Senior Secured Credit Facility); (ii) 100% of the net cash proceeds from any non-ordinary course sale of assets and certain casualty or condemnation events; and (iii) 100% of the net cash proceeds of indebtedness not permitted to be incurred under the Senior Secured Credit Facility.

For further information, see “Note 11. Debt” to the Consolidated Financial Statements in our Fiscal 2020 Form 10-K. We are in compliance with our debt covenants as of September 30, 2020.

Off-Balance Sheet Arrangements

Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 10. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of September 30, 2020, our South American Joint Venture had approximately $10.1 million of outstanding debt subject to our guarantees. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity, or capital resources.

Critical Accounting Policies and Estimates

There have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2020 Form 10-K, except as disclosed in Note 1. Background and Summary of Significant Accounting Policies.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q (“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,” “would,” “should,” “could,” “seeks,” “predict,” “potential,” “continue,” “intends,” “plans,” “projects,” “estimates,” “anticipates” or other comparable terms. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this Form 10-Q and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects, growth strategies, and the industries in which we operate and include, without limitation, statements relating to our future performance.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations, financial condition, liquidity and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our actual consolidated results of operations, financial condition, liquidity and industry development are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including those reflected in forward-looking statements relating to our operations and business, the risks and uncertainties discussed in this Form 10-Q (including under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and those described from time to time in our other filings with the SEC. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:

•

fluctuations in the price and availability of resins and other raw materials and our ability to pass any increased costs of raw materials on to our customers in a timely manner;

•

volatility in general business and economic conditions in the markets in which we operate, including the adverse impact on the U.S. and global economy of the COVID-19 global pandemic, and the impact of COVID-19 in the near, medium and long-term on our business, results of operations, financial position, liquidity or cash flows, and other factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence;

•

cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending;

•

the risks of increasing competition in our existing and future markets, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials;

•

uncertainties surrounding the integration of acquisitions and similar transactions, including the acquisition and integration of Infiltrator Water Technologies;

•

our ability to realize the anticipated benefits from the acquisition of Infiltrator Water Technologies;

•

risks that the acquisition of Infiltrator Water Technologies and related transactions may involve unexpected costs, liabilities or delays;

•

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

•

the effect of any claims, litigation, investigations or proceedings, including those described below under “Part II. Other Information Item 1. Legal Proceedings” of this Quarterly Report;

•

the effect of weather or seasonality;

•

the loss of any of our significant customers;

•

the risks of doing business internationally;

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•

our ability to remediate the material weakness in our internal control over financial reporting, including remediation of the control environment for our joint venture affiliate ADS Mexicana, S.A. de C.V. as described in “Item 9A. Controls and Procedures” of our Fiscal 2020 Form 10-K;

•

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

•

our ability to expand into new geographic or product markets, including risks associated with new markets and products associated with our recent acquisition of Infiltrator Water Technologies; our ability to achieve the acquisition component of our growth strategy;

•

the risk associated with manufacturing processes;

•

our ability to manage our assets;

•

the risks associated with our product warranties;

•

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

•

the risks associated with our self-insured programs;

•

our ability to control labor costs and to attract, train and retain highly qualified employees and key personnel;

•

our ability to protect our intellectual property rights;

•

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

•

our ability to project product mix;

•

the risks associated with our current levels of indebtedness, including borrowings under our new Credit Agreement and outstanding indebtedness under our Senior Notes;

•

the nature, cost and outcome of any future litigation and other legal proceedings, including any such proceedings related to our acquisition of Infiltrator Water Technologies as may be instituted against the Company and others;

•

fluctuations in our effective tax rate, including from the Tax Cuts and Jobs Act of 2017;

•

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

•

the risk that information may arise that would require the Company to make adjustments or revisions or to restate further the financial statements and other financial data for certain prior periods and any future periods;

•

any delay in the filing of any filings with the SEC;

•

the review of potential weaknesses or deficiencies in the Company’s disclosure controls and procedures, and discovering further weaknesses of which we are not currently aware or which have not been detected; and

•

additional uncertainties related to accounting issues generally.

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

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are subject to various market risks, primarily related to changes in interest rates, credit, 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. Our exposure to market risk has not materially changed from what we previously disclosed in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, except as disclosed below.

Interest Rate Risk - We are subject to interest rate risk associated with our bank debt. Changes in interest rates impact the fair value of our fixed-rate debt, but there is no impact to earnings and cash flow. Alternatively, changes in interest rates do not affect the fair value of our variable-rate debt, but they do affect future earnings and cash flow. The Revolving Credit Facility and the Term Note, notes bear variable interest rates. The Revolving Credit Facility and Term Note bear interest either at LIBOR or the Prime Rate, at our option, plus applicable pricing margins. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $5.4 million based on our borrowings as of September 30, 2020. Assuming the Revolving Credit Facility is fully drawn, each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately $9.9 million, for the twelve months ended September 30, 2020.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for evaluating the effectiveness of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), rules 13a-15(e) and 15d-15(e). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As previously disclosed in our Fiscal 2020 Form 10-K, we concluded that our internal control over financial reporting was not effective based upon the material weakness identified as of March 31, 2020. See “Item 9A - Controls and Procedures” in our Fiscal 2019 Form 10-K. Our CEO and CFO have concluded that the material weakness previously identified in the Fiscal 2019 Form 10-K was still present as of September 30, 2020 (the “Evaluation Date”). Based on the material weakness, and the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of the Evaluation Date.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and administrative proceedings will have a material adverse impact on the Company’s financial position or results of operations.

Please see “Note 12. Commitments and Contingencies,” of the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for more information regarding legal proceedings.

Item 1A.

Risk Factors

Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in “Part I, Item 1A — Risk Factors” of our Fiscal 2020 Form 10-K. These factors are further supplemented by those discussed in “Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2020 Form 10-K and in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and “Part II, Item 1 — Legal Proceedings” of this Quarterly Report on Form 10-Q.

Item 2.Unregistered Sale of Equity Securities and Use of Proceeds

In February 2017, our Board of Directors authorized the repurchase of up to $50 million of our common stock. Repurchases of common stock will be made in accordance with applicable securities laws. We did not repurchase any shares of common stock during the three months ended September 30, 2020. As of September 30, 2020, approximately $42.1 million of common stock may be repurchased under the authorization. The stock repurchase program does not obligate us to acquire any particular amount of common stock and may be suspended or terminated at any time at our discretion.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

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Item 6.

Exhibits

The following exhibits are filed herewith or incorporated herein by reference.

Exhibit Number		Exhibit Description

3.1		Amended and Restated Certificate of Incorporation of Advanced Drainage Systems, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange Commission on July 30, 2014).

3.2		Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange Commission on July 24, 2020).

3.3		Second Amended and Restated Bylaws of Advanced Drainage Systems, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange Commission on July 30, 2014).

3.4		First Amendment to Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36557) filed with the Securities and Exchange Commission on July 24, 2020).

31.1*		Certification of President and Chief Executive Officer of Advanced Drainage Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Executive Vice President and Chief Financial Officer of Advanced Drainage Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Principal Executive Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Principal Financial Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema.

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase.

104		The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, has been formatted in Inline XBRL.

* Filed herewith

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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: November 5, 2020

ADVANCED DRAINAGE SYSTEMS, INC.

By:		/s/ D. Scott Barbour
		D. Scott Barbour
		President and Chief Executive Officer
		(Principal Executive Officer)

By:		/s/ Scott A. Cottrill
		Scott A. Cottrill
		Executive Vice President, Chief Financial Officer and Secretary
		(Principal Financial Officer)

By:		/s/ Tim A. Makowski
		Tim A. Makowski
		Vice President, Controller, and Chief Accounting Officer

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