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 June 30, 2019
OR
|
☐ |
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):
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Large Accelerated Filer |
☒ |
Accelerated Filer |
☐ |
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Non-Accelerated Filer |
☐ |
Smaller Reporting Company |
☐ |
|
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Emerging Growth Company |
☐ |
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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 July 25, 2019, the registrant had 57,844,302 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 July 25, 2019, 304,099 shares of unvested restricted common stock were outstanding and 22,383,938 shares of ESOP, preferred stock, convertible into 17,217,725 shares of common stock, were outstanding. As of July 25, 2019, 75,366,126 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
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Item 1. |
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Condensed Consolidated Financial Statements (Unaudited) |
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Page |
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Condensed Consolidated Balance Sheets as of June 30, 2019 and March 31, 2019 |
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1 |
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Condensed Consolidated Statements of Operations for the three ended June 30, 2019 and 2018 |
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2 |
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3 |
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Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2019 and 2018 |
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4 |
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5 |
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6 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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25 |
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Item 3. |
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38 |
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Item 4. |
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39 |
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Item 1. |
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40 |
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Item 1A. |
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40 |
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Item 2. |
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42 |
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Item 3. |
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42 |
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Item 4. |
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43 |
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Item 5. |
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43 |
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Item 6. |
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44 |
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45 |
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i
PART I. FINANCIAL INFORMATION
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except par value)
|
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June 30, 2019 |
|
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March 31, 2019 |
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ASSETS |
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|
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Current assets: |
|
|
|
|
|
|
|
|
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Cash |
|
$ |
9,357 |
|
|
$ |
8,891 |
|
|
Receivables (less allowance for doubtful accounts of $5,704 and $7,653, respectively) |
|
|
231,829 |
|
|
|
186,991 |
|
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Inventories |
|
|
230,284 |
|
|
|
264,540 |
|
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Other current assets |
|
|
9,185 |
|
|
|
6,091 |
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Total current assets |
|
|
480,655 |
|
|
|
466,513 |
|
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Property, plant and equipment, net |
|
|
396,280 |
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|
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398,891 |
|
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Other assets: |
|
|
|
|
|
|
|
|
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Goodwill |
|
|
102,844 |
|
|
|
102,638 |
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Intangible assets, net |
|
|
35,733 |
|
|
|
37,177 |
|
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Other assets |
|
|
52,903 |
|
|
|
36,940 |
|
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Total assets |
|
$ |
1,068,415 |
|
|
$ |
1,042,159 |
|
|
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY |
|
|
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|
|
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|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Current maturities of debt obligations |
|
$ |
25,939 |
|
|
$ |
25,932 |
|
|
Current maturities of finance lease obligations |
|
|
22,695 |
|
|
|
23,117 |
|
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Accounts payable |
|
|
106,413 |
|
|
|
93,577 |
|
|
Other accrued liabilities |
|
|
76,267 |
|
|
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61,901 |
|
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Accrued income taxes |
|
|
12,669 |
|
|
|
1,758 |
|
|
Total current liabilities |
|
|
243,983 |
|
|
|
206,285 |
|
|
Long-term debt obligations (less unamortized debt issuance costs of $2,119 and $2,293, respectively) |
|
|
230,337 |
|
|
|
208,602 |
|
|
Long-term finance lease obligations |
|
|
56,368 |
|
|
|
61,555 |
|
|
Deferred tax liabilities |
|
|
48,745 |
|
|
|
45,963 |
|
|
Other liabilities |
|
|
28,641 |
|
|
|
19,119 |
|
|
Total liabilities |
|
|
608,074 |
|
|
|
541,524 |
|
|
Commitments and contingencies (see Note 11) |
|
|
|
|
|
|
|
|
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Mezzanine equity: |
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock: $0.01 par value; 47,070 shares authorized; 44,170 shares issued; 22,385 and 22,611 shares outstanding, respectively |
|
|
279,816 |
|
|
|
282,638 |
|
|
Deferred compensation – unearned ESOP shares |
|
|
(31,659 |
) |
|
|
(180,316 |
) |
|
Total mezzanine equity |
|
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248,157 |
|
|
|
102,322 |
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
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Common stock; $0.01 par value: 1,000,000 shares authorized; 58,283 and 57,964 shares issued, respectively; 57,779 and 57,490 shares outstanding, respectively |
|
|
11,439 |
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|
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11,436 |
|
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Paid-in capital |
|
|
501,046 |
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391,039 |
|
|
Common stock in treasury, at cost |
|
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(10,162 |
) |
|
|
(9,863 |
) |
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Accumulated other comprehensive loss |
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|
(24,470 |
) |
|
|
(25,867 |
) |
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Retained (deficit) earnings |
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|
(278,727 |
) |
|
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17,582 |
|
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Total ADS stockholders’ equity |
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|
199,126 |
|
|
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384,327 |
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Noncontrolling interest in subsidiaries |
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|
13,058 |
|
|
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13,986 |
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Total stockholders’ equity |
|
|
212,184 |
|
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|
398,313 |
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Total liabilities, mezzanine equity and stockholders’ equity |
|
$ |
1,068,415 |
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$ |
1,042,159 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 1 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per share data)
|
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Three Months Ended June 30, |
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2019 |
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2018 |
|
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Net sales |
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$ |
413,708 |
|
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$ |
387,847 |
|
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Cost of goods sold |
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307,256 |
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288,156 |
|
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Cost of goods sold - ESOP special dividend compensation |
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168,610 |
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|
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— |
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Gross profit |
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(62,158 |
) |
|
|
99,691 |
|
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Operating expenses: |
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Selling |
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26,365 |
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|
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24,165 |
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General and administrative |
|
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31,433 |
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|
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21,382 |
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Selling, general and administrative - ESOP special dividend compensation |
|
|
78,142 |
|
|
|
— |
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Loss on disposal of assets and costs from exit and disposal activities |
|
|
707 |
|
|
|
1,104 |
|
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Intangible amortization |
|
|
1,542 |
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|
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1,984 |
|
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(Loss) income from operations |
|
|
(200,347 |
) |
|
|
51,056 |
|
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Other expense: |
|
|
|
|
|
|
|
|
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Interest expense |
|
|
5,264 |
|
|
|
3,802 |
|
|
Derivative gains and other income, net |
|
|
(96 |
) |
|
|
(814 |
) |
|
(Loss) income before income taxes |
|
|
(205,515 |
) |
|
|
48,068 |
|
|
Income tax expense |
|
|
22,370 |
|
|
|
14,284 |
|
|
Equity in net (income) loss of unconsolidated affiliates |
|
|
(434 |
) |
|
|
133 |
|
|
Net (loss) income |
|
|
(227,451 |
) |
|
|
33,651 |
|
|
Less: net (loss) income attributable to noncontrolling interest |
|
|
(1,095 |
) |
|
|
1,371 |
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Net (loss) income attributable to ADS |
|
|
(226,356 |
) |
|
|
32,280 |
|
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Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
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Basic |
|
|
57,576 |
|
|
|
56,594 |
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Diluted |
|
|
57,576 |
|
|
|
57,158 |
|
|
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(4.06 |
) |
|
$ |
0.51 |
|
|
Diluted |
|
$ |
(4.06 |
) |
|
$ |
0.51 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 2 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
|
|
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Three Months Ended June 30, |
|
|||||
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|
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2019 |
|
|
2018 |
|
||
|
Net (loss) income |
|
$ |
(227,451 |
) |
|
$ |
33,651 |
|
|
Currency translation gain (loss) |
|
|
1,564 |
|
|
|
(4,812 |
) |
|
Comprehensive (loss) income |
|
|
(225,887 |
) |
|
|
28,839 |
|
|
Less: other comprehensive income (loss) attributable to noncontrolling interest |
|
|
167 |
|
|
|
(1,375 |
) |
|
Less: net (loss) income attributable to noncontrolling interest |
|
|
(1,095 |
) |
|
|
1,371 |
|
|
Total comprehensive (loss) income attributable to ADS |
|
$ |
(224,959 |
) |
|
$ |
28,843 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(227,451 |
) |
|
$ |
33,651 |
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
16,694 |
|
|
|
17,827 |
|
|
Deferred income taxes |
|
|
2,191 |
|
|
|
1,729 |
|
|
Loss on disposal of assets and costs from exit and disposal activities |
|
|
707 |
|
|
|
1,104 |
|
|
ESOP and stock-based compensation |
|
|
7,425 |
|
|
|
5,580 |
|
|
ESOP special dividend compensation |
|
|
246,752 |
|
|
|
— |
|
|
Amortization of deferred financing charges |
|
|
174 |
|
|
|
191 |
|
|
Fair market value adjustments to derivatives |
|
|
1,789 |
|
|
|
(625 |
) |
|
Equity in net (income) loss of unconsolidated affiliates |
|
|
(434 |
) |
|
|
133 |
|
|
Other operating activities |
|
|
(2,880 |
) |
|
|
(1,030 |
) |
|
Changes in working capital: |
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(44,494 |
) |
|
|
(54,910 |
) |
|
Inventories |
|
|
34,803 |
|
|
|
1,040 |
|
|
Prepaid expenses and other current assets |
|
|
(3,089 |
) |
|
|
(3,665 |
) |
|
Accounts payable, accrued expenses, and other liabilities |
|
|
30,653 |
|
|
|
8,806 |
|
|
Net cash provided by operating activities |
|
|
62,840 |
|
|
|
9,831 |
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(9,723 |
) |
|
|
(6,874 |
) |
|
Other investing activities |
|
|
(13 |
) |
|
|
(109 |
) |
|
Net cash used in investing activities |
|
|
(9,736 |
) |
|
|
(6,983 |
) |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
Proceeds from Revolving Credit Facility |
|
|
137,400 |
|
|
|
101,400 |
|
|
Payments on Revolving Credit Facility |
|
|
(115,600 |
) |
|
|
(93,700 |
) |
|
Payments of notes, mortgages and other debt |
|
|
— |
|
|
|
(230 |
) |
|
Payments on finance lease obligations |
|
|
(6,047 |
) |
|
|
(5,885 |
) |
|
Cash dividends paid |
|
|
(69,641 |
) |
|
|
(6,141 |
) |
|
Proceeds from exercise of stock options |
|
|
1,513 |
|
|
|
3,215 |
|
|
Other financing activities |
|
|
(258 |
) |
|
|
(257 |
) |
|
Net cash used in financing activities |
|
|
(52,633 |
) |
|
|
(1,598 |
) |
|
Effect of exchange rate changes on cash |
|
|
(5 |
) |
|
|
(443 |
) |
|
Net change in cash |
|
|
466 |
|
|
|
807 |
|
|
Cash at beginning of period |
|
|
8,891 |
|
|
|
17,587 |
|
|
Cash at end of period |
|
$ |
9,357 |
|
|
$ |
18,394 |
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
535 |
|
|
$ |
952 |
|
|
Cash paid for interest |
|
|
3,920 |
|
|
|
4,000 |
|
|
Non-cash operating, investing and financing activities: |
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment under finance lease and incurred lease obligations |
|
|
296 |
|
|
|
3,171 |
|
|
Balance in accounts payable for the acquisition of property, plant and equipment |
|
|
4,364 |
|
|
|
1,851 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
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 |
|
Redeemable Non-controlling Interest in |
|
Total Mezzanine |
|
||||||||||||||||||||||||
|
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Shares |
|
Amount |
|
Capital |
|
Shares |
|
Amount |
|
Loss |
|
Earnings |
|
Equity |
|
Subsidiaries |
|
Equity |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Subsidiaries |
|
Equity |
|
||||||||||||||||
|
Balance at April 1, 2018 |
|
56,889 |
|
$ |
11,426 |
|
$ |
364,908 |
|
|
413 |
|
$ |
(8,277 |
) |
$ |
(21,247 |
) |
$ |
(39,214 |
) |
$ |
307,596 |
|
$ |
16,663 |
|
$ |
324,259 |
|
|
|
23,300 |
|
$ |
291,247 |
|
|
15,219 |
|
$ |
(190,168 |
) |
$ |
8,471 |
|
$ |
109,550 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
32,280 |
|
|
32,280 |
|
|
1,033 |
|
|
33,313 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
338 |
|
|
338 |
|
|
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,437 |
) |
|
— |
|
|
(3,437 |
) |
|
(1,375 |
) |
|
(4,812 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Redeemable convertible preferred stock dividends |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(497 |
) |
|
(497 |
) |
|
— |
|
|
(497 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Common stock dividends ($0.08 per share) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(4,545 |
) |
|
(4,545 |
) |
|
— |
|
|
(4,545 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Dividend paid to non-controlling interest holder |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(735 |
) |
|
(735 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(335 |
) |
|
(335 |
) |
|
Allocation of ESOP shares to participants for compensation |
|
— |
|
|
— |
|
|
1,625 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,625 |
|
|
— |
|
|
1,625 |
|
|
|
— |
|
|
— |
|
|
(192 |
) |
|
2,396 |
|
|
— |
|
|
2,396 |
|
|
Exercise of common stock options |
|
217 |
|
|
2 |
|
|
3,215 |
|
|
26 |
|
|
(704 |
) |
|
— |
|
|
— |
|
|
2,513 |
|
|
— |
|
|
2,513 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Restricted stock awards |
|
19 |
|
|
1 |
|
|
786 |
|
|
2 |
|
|
(52 |
) |
|
— |
|
|
— |
|
|
735 |
|
|
— |
|
|
735 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense |
|
— |
|
|
— |
|
|
773 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
773 |
|
|
— |
|
|
773 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
ESOP distribution in common stock |
|
241 |
|
|
2 |
|
|
3,908 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,910 |
|
|
— |
|
|
3,910 |
|
|
|
(313 |
) |
|
(3,910 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(3,910 |
) |
|
Balance at June 30, 2018 |
|
57,366 |
|
$ |
11,431 |
|
$ |
375,215 |
|
|
441 |
|
$ |
(9,033 |
) |
$ |
(24,684 |
) |
$ |
(11,976 |
) |
$ |
340,953 |
|
$ |
15,586 |
|
$ |
356,539 |
|
|
|
22,987 |
|
$ |
287,337 |
|
|
15,027 |
|
$ |
(187,772 |
) |
$ |
8,474 |
|
$ |
108,039 |
|
|
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 |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(226,356 |
) |
|
(226,356 |
) |
|
(1,095 |
) |
|
(227,451 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,397 |
|
|
— |
|
|
1,397 |
|
|
167 |
|
|
1,564 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Redeemable convertible preferred stock dividends |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6,846 |
) |
|
(6,846 |
) |
|
— |
|
|
(6,846 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Common stock dividends ($1.09 per share) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(63,107 |
) |
|
(63,107 |
) |
|
— |
|
|
(63,107 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Allocation of ESOP shares to participants for compensation |
|
— |
|
|
— |
|
|
2,490 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,490 |
|
|
— |
|
|
2,490 |
|
|
|
— |
|
|
— |
|
|
(248 |
) |
|
3,094 |
|
|
— |
|
|
3,094 |
|
|
ESOP special dividend compensation |
|
— |
|
|
— |
|
|
101,189 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
101,189 |
|
|
— |
|
|
101,189 |
|
|
|
— |
|
|
— |
|
|
(11,645 |
) |
|
145,563 |
|
|
— |
|
|
145,563 |
|
|
Exercise of common stock options |
|
114 |
|
|
1 |
|
|
1,667 |
|
|
7 |
|
|
(207 |
) |
|
— |
|
|
— |
|
|
1,461 |
|
|
— |
|
|
1,461 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Restricted stock awards |
|
31 |
|
|
— |
|
|
— |
|
|
3 |
|
|
(92 |
) |
|
— |
|
|
— |
|
|
(92 |
) |
|
— |
|
|
(92 |
) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense |
|
— |
|
|
— |
|
|
1,841 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,841 |
|
|
— |
|
|
1,841 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
ESOP distribution in common stock |
|
174 |
|
|
2 |
|
|
2,820 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,822 |
|
|
— |
|
|
2,822 |
|
|
|
(226 |
) |
|
(2,822 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(2,822 |
) |
|
Balance at June 30, 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 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
Advanced Drainage Systems, Inc.
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 high performance thermoplastic corrugated pipe and related water management products, primarily in North and South America and Europe. ADS’s broad product line includes corrugated high density polyethylene (or “HDPE”) pipe, polypropylene (or “PP”) pipe and related water management products.
The Company is managed based primarily on the geographies in which it operates and reports results of operations in two reportable segments: Domestic and International.
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, 2019 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 2019 (“Fiscal 2019 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 June 30, 2019 and the results of operations and cash flows for the three months ended June 30, 2019. 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 2019 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 loss of unconsolidated affiliates in the Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.
Acquisition of Infiltrator Water Technologies - On July 31, 2019, the Company completed its acquisition (the “Acquisition”) of Infiltrator Water Technologies Ultimate Holdings, Inc. (“IWT” or “Infiltrator”). IWT manufactures and sells wastewater systems for homes and provides drainage chambers for septic and storm water management. The Acquisition will combine the Company's industry leading position in stormwater management with IWT's leading platform in onsite septic waste management. See “Note 15. Subsequent Events” for additional information on the Acquisition.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Leases - In February 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard update (“ASU”) which amends the guidance for leases (“ASC 842”). This standard contains principles that will require an entity to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability, unless the lease is a short-term lease that has an accounting lease term of twelve months or less. The standard also contains other changes to the current lease guidance that may result in changes to how entities determine which contractual arrangements qualify as a lease, the accounting for
- 6 -
Advanced Drainage Systems, Inc.
executory costs, such as property taxes and insurance, as well as which lease origination costs will be capitalizable. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company adopted these standards effective April 1, 2019 using the transition method in the July 2018 ASU which does not require adjustments to comparative periods or require modified disclosures for those periods and includes transition relief practical expedients. “Note 4. Leases” for further information on the adoption of the new lease ASUs.
Hedge Accounting - In August 2017, the FASB issued an ASU which expanded an entity’s ability to apply hedge accounting for non-financial and financial risk components and provided a simplified approach for fair value hedging of interest rate risk. The standard also refined how entities assess hedge effectiveness. The Company adopted this standard effective April 1, 2019. The new standard did not have an impact on the Condensed Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Adopted
Measurement of Credit Losses - In June 2016, the FASB issued an 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. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, and early adoption is permitted for fiscal years beginning after December 15, 2018. The Company expects to adopt this standard effective April 1, 2020. The Company is currently evaluating the impact of this standard on the Condensed 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 2019 Form 10-K that have significance, or potential significance, to the Condensed Consolidated Financial Statements.
|
2. |
LOSS ON DISPOSAL OF ASSETS AND COSTS FROM EXIT AND DISPOSAL ACTIVITIES |
In fiscal 2018, the Company initiated restructuring activities (the “2018 Restructuring Plan”), which concluded during fiscal 2019. The following table summarizes the activity included in Loss on disposal of assets and costs from exit and disposal activities recorded during the three months ended June 30, 2019 and 2018:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Plant severance |
|
$ |
— |
|
|
$ |
(35 |
) |
|
Other restructuring activities |
|
|
— |
|
|
|
31 |
|
|
Total 2018 Restructuring Plan activities |
|
$ |
— |
|
|
$ |
(4 |
) |
|
Loss on other disposals and partial disposals of property, plant and equipment |
|
|
707 |
|
|
|
1,108 |
|
|
Total loss on disposal of assets and costs from exit and disposal activities |
|
$ |
707 |
|
|
$ |
1,104 |
|
All 2018 Restructuring Plan activities related to the Domestic reporting segment for the three months ended June 30, 2018.
A reconciliation of the beginning and ending amounts of restructuring liability related to the 2018 Restructuring Plan at June 30, 2019 and 2018 is as follows:
- 7 -
Advanced Drainage Systems, Inc.
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Balance at the beginning of the period |
|
$ |
1,696 |
|
|
$ |
3,901 |
|
|
Expenses |
|
|
— |
|
|
|
55 |
|
|
Non-cash expenses |
|
|
— |
|
|
|
(59 |
) |
|
Payments |
|
|
(598 |
) |
|
|
(1,074 |
) |
|
Balance at the end of the period |
|
$ |
1,098 |
|
|
$ |
2,823 |
|
As of June 30, 2019, the Company had $0.2 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. |
REVENUE RECOGNITION |
Revenue Disaggregation - The Company disaggregates net sales by geographic region and 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 14. 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 June 30, 2019 and March 31, 2019:
|
|
|
June 30, 2019 |
|
|
March 31, 2019 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Contract asset - product returns |
|
$ |
787 |
|
|
$ |
646 |
|
|
Refund liability |
|
|
1,698 |
|
|
|
1,372 |
|
- 8 -
Advanced Drainage Systems, Inc.
|
4. |
LEASES |
ASC 842 Adoption - The Company adopted the provisions of ASC 842 beginning on April 1, 2019 using the transition methodology in ASC 842 which does not require adjustments to comparative periods or require modified disclosures. The Company elected the transition relief practical expedients. ASC 842 provides lessees with the option of electing an accounting policy, by class of underlying asset, in which the lessee may choose not to separate nonlease components from lease components. The Company elected this practical expedient for leases of certain classes of equipment. The Company also elected the accounting policy to not recognize the right-of-use asset and lease liability for leases with an initial expected term of 12 months or less (“Short-term leases”). The adoption of ASC 842 resulted in the recording of $13.3 million of additional lease liabilities and corresponding right-of-use assets to the beginning balance of the Company’s Condensed Consolidated Balance Sheet. The adoption did not have an impact on the Company’s Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows.
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 a remaining term of less than one year to 30 years, some of which include options to extend the leases for up to 5 years.
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.
For all leases with an initial expected term of more than 12 months, the Company recorded, at the adoption date of ASC 842 or lease commencement date for leases entered into after the adoption 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 is lease is determined based on its term and adjusted for the impacts of collateral.
Lease Expense - The components of lease expense for the three months ended June 30, 2019 was as follows:
|
(Amounts in thousands) |
|
Income Statement Classification |
|
2019 |
|
|
|
Operating lease cost |
|
|
|
|
|
|
|
Operating lease expense |
|
Cost of goods sold |
|
$ |
948 |
|
|
Operating lease expense |
|
General and administrative |
|
|
90 |
|
|
Short-term lease expense |
|
Cost of goods sold |
|
|
736 |
|
|
Total operating lease cost |
|
|
|
$ |
1,774 |
|
|
Finance lease cost |
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
Cost of goods sold |
|
|
4,554 |
|
|
Amortization of right-of-use assets |
|
General and administrative |
|
|
356 |
|
|
Interest on lease liabilities |
|
Interest expense |
|
|
1,159 |
|
|
Total finance lease cost |
|
|
|
$ |
6,069 |
|
- 9 -
Advanced Drainage Systems, Inc.
Supplemental cash flow information related to leases for the three months ended June 30, 2019 was as follows:
|
(Amounts in thousands) |
|
2019 |
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
1,038 |
|
|
Operating cash flows from finance leases |
|
|
1,174 |
|
|
Financing cash flows from finance leases |
|
|
6,047 |
|
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
Operating leases |
|
|
1,219 |
|
|
Finance leases |
|
|
296 |
|
Supplemental balance sheet information related to leases as of June 30, 2019 was as follows:
|
(Amounts in thousands) |
|
Balance Sheet Classification |
|
2019 |
|
|
|
Operating leases |
|
|
|
|
|
|
|
Right-of-use assets |
|
Other assets |
|
$ |
13,203 |
|
|
Current lease liabilities |
|
Other accrued liabilities |
|
|
3,809 |
|
|
Non-current lease liabilities |
|
Other liabilities |
|
|
9,407 |
|
|
Total operating lease liabilities |
|
|
|
$ |
13,216 |
|
|
Finance leases |
|
|
|
|
|
|
|
Right-of-use assets |
|
Property, plant and equipment |
|
|
106,018 |
|
|
Current lease liabilities |
|
Current maturities of finance lease obligations |
|
|
22,695 |
|
|
Non-current lease liabilities |
|
Long-term finance lease obligations |
|
|
56,368 |
|
|
Total finance lease liabilities |
|
|
|
$ |
79,063 |
|
|
|
|
|
|
|
|
|
|
Weighted average lease term |
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
8.36 |
|
|
Finance leases |
|
|
|
|
11.15 |
|
|
Weighted average discount rate |
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
3.54 |
% |
|
Finance leases |
|
|
|
|
4.98 |
% |
The following is a schedule by year of future minimum lease payments on a rolling twelve-month basis under operating and finance leases and the present value of the net minimum lease payments as of June 30, 2019:
|
(Amounts in thousands) |
|
Operating Leases |
|
|
Finance Leases |
|
||
|
Year 1 |
|
$ |
4,154 |
|
|
$ |
26,010 |
|
|
Year 2 |
|
|
3,607 |
|
|
|
21,732 |
|
|
Year 3 |
|
|
2,362 |
|
|
|
17,117 |
|
|
Year 4 |
|
|
1,261 |
|
|
|
10,780 |
|
|
Year 5 |
|
|
842 |
|
|
|
6,553 |
|
|
Thereafter |
|
|
4,296 |
|
|
|
7,528 |
|
|
Total minimum lease payments |
|
$ |
16,522 |
|
|
$ |
89,720 |
|
|
Less: amount representing interest |
|
|
3,306 |
|
|
|
10,657 |
|
|
Present value of net minimum lease payments |
|
$ |
13,216 |
|
|
$ |
79,063 |
|
- 10 -
Advanced Drainage Systems, Inc.
Disclosures Related to Periods Prior to Adoption of ASC 842
As of March 31, 2019, total contractual obligations for capital and operating leases were as follows:
|
(Amounts in thousands) |
|
Operating Leases |
|
|
Capital Leases |
|
||
|
2020 |
|
$ |
4,159 |
|
|
$ |
26,604 |
|
|
2021 |
|
|
2,924 |
|
|
|
22,507 |
|
|
2022 |
|
|
1,814 |
|
|
|
18,064 |
|
|
2023 |
|
|
690 |
|
|
|
11,721 |
|
|
2024 |
|
|
325 |
|
|
|
7,143 |
|
|
Thereafter |
|
|
2,236 |
|
|
|
8,198 |
|
|
Total minimum lease payments |
|
$ |
12,148 |
|
|
$ |
94,237 |
|
|
Less: amount representing interest |
|
|
— |
|
|
|
9,565 |
|
|
Present value of net minimum lease payments |
|
$ |
12,148 |
|
|
$ |
84,672 |
|
|
5. |
INVENTORIES |
Inventories as of the periods presented consisted of the following:
|
|
|
June 30, 2019 |
|
|
March 31, 2019 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Raw materials |
|
$ |
44,607 |
|
|
$ |
47,910 |
|
|
Finished goods |
|
|
185,677 |
|
|
|
216,630 |
|
|
Total inventories |
|
$ |
230,284 |
|
|
$ |
264,540 |
|
There were no work-in-process inventories as of the periods presented.
|
6. |
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.
- 11 -
Advanced Drainage Systems, Inc.
Recurring Fair Value Measurements - The assets and liabilities carried at fair value as of the periods presented were as follows:
|
|
|
June 30, 2019 |
|
|||||||||||||
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets – diesel fuel contracts |
|
$ |
151 |
|
|
$ |
— |
|
|
$ |
151 |
|
|
$ |
— |
|
|
Total assets at fair value on a recurring basis |
|
$ |
151 |
|
|
$ |
— |
|
|
$ |
151 |
|
|
$ |
— |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – diesel fuel contracts |
|
$ |
314 |
|
|
$ |
— |
|
|
$ |
314 |
|
|
$ |
— |
|
|
Interest rate swaps |
|
|
638 |
|
|
|
— |
|
|
|
638 |
|
|
|
— |
|
|
Contingent consideration for acquisitions |
|
|
57 |
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
Foreign exchange forward contracts |
|
|
53 |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
|
Total liabilities at fair value on a recurring basis |
|
$ |
1,062 |
|
|
$ |
— |
|
|
$ |
1,005 |
|
|
$ |
57 |
|
|
|
|
March 31, 2019 |
|
|||||||||||||
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets – diesel fuel contracts |
|
$ |
189 |
|
|
$ |
— |
|
|
$ |
189 |
|
|
$ |
— |
|
|
Interest rate swaps |
|
|
1,088 |
|
|
|
— |
|
|
|
1,088 |
|
|
|
— |
|
|
Total assets at fair value on a recurring basis |
|
$ |
1,277 |
|
|
$ |
— |
|
|
$ |
1,277 |
|
|
$ |
— |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - diesel fuel contracts |
|
$ |
283 |
|
|
$ |
— |
|
|
$ |
283 |
|
|
$ |
— |
|
|
Foreign exchange contracts |
|
|
60 |
|
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
Contingent consideration for acquisitions |
|
|
203 |
|
|
|
— |
|
|
|
— |
|
|
|
203 |
|
|
Total liabilities at fair value on a recurring basis |
|
$ |
546 |
|
|
$ |
— |
|
|
$ |
343 |
|
|
$ |
203 |
|
For the three months ended June 30, 2019 and 2018, respectively, there were no transfers in or out of Levels 1, 2 or 3.
Valuation of Contingent Consideration for Acquisitions - The method used to price these liabilities is considered Level 3. Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the periods presented were as follows:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Balance at the beginning of the period |
|
$ |
203 |
|
|
$ |
578 |
|
|
Change in fair value |
|
|
— |
|
|
|
2 |
|
|
Payments of contingent consideration liability |
|
|
(146 |
) |
|
|
(120 |
) |
|
Balance at the end of the period |
|
$ |
57 |
|
|
$ |
460 |
|
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 carrying and fair value of the Company’s Senior Notes (as defined below and further discussed in “Note 13. Debt” to the Company’s audited financial statements included in the Fiscal 2019 Form 10-K) were $100.0 million and $100.5 million, respectively, as of June 30, 2019 and $100.0 million and $98.9 million, respectively, at March 31, 2019. The fair value of the Senior Notes was determined
- 12 -
Advanced Drainage Systems, Inc.
based on a comparison of the interest rate and terms of such borrowings to the rates and terms of similar debt available for the period. The Company believes the carrying amount on the remaining long-term debt, including debt under the PNC Credit Agreement (as defined below), is not materially different from its fair value as the interest rates and terms of the borrowings are similar to currently available borrowings. The categorization of the framework used to evaluate this debt is considered Level 2.
|
7. |
DERIVATIVE TRANSACTIONS |
The Company uses interest rate swaps, commodity options in the form of collars and swaps, and foreign currency forward contracts to manage its various exposures to interest rate, commodity price 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.
The Company recorded net losses and net (gains) on mark-to-market adjustments for changes in the fair value of derivatives contracts as well as net losses and net (gains) on the settlement of derivative contracts as follows:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Diesel fuel option collars |
|
$ |
69 |
|
|
$ |
(12 |
) |
|
Interest rate swaps |
|
|
1,726 |
|
|
|
(613 |
) |
|
Foreign exchange forward contracts |
|
|
(7 |
) |
|
|
— |
|
|
Total net unrealized mark-to-market loss (gains) |
|
$ |
1,788 |
|
|
$ |
(625 |
) |
|
Diesel fuel option collars |
|
|
7 |
|
|
|
(308 |
) |
|
Foreign exchange forward contracts |
|
|
— |
|
|
|
(51 |
) |
|
Interest rate swaps |
|
|
(166 |
) |
|
|
(25 |
) |
|
Total net realized gains |
|
$ |
(159 |
) |
|
$ |
(384 |
) |
A summary of the fair value of derivatives is included in “Note 6. Fair Value Measurement.” On July 24, 2019, the Company liquidated its interest rate swap, diesel fuel option collars and foreign exchange forward contracts.
8.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.
- 13 -
Advanced Drainage Systems, Inc.
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 June 30, |
|
|||||
|
(In thousands, except per share data) |
|
2019 |
|
|
2018 |
|
||
|
NET INCOME PER SHARE—BASIC: |
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to ADS |
|
$ |
(226,356 |
) |
|
$ |
32,280 |
|
|
Adjustments for: |
|
|
|
|
|
|
|
|
|
Dividends to redeemable convertible preferred stockholders |
|
|
(6,841 |
) |
|
|
(497 |
) |
|
Dividends paid to unvested restricted stockholders |
|
|
(328 |
) |
|
|
(15 |
) |
|
Net (loss) income available to common stockholders and participating securities |
|
|
(233,525 |
) |
|
|
31,768 |
|
|
Undistributed income allocated to participating securities |
|
|
— |
|
|
|
(2,712 |
) |
|
Net (loss) income available to common stockholders – Basic |
|
$ |
(233,525 |
) |
|
$ |
29,056 |
|
|
Weighted average number of common shares outstanding – Basic |
|
|
57,576 |
|
|
|
56,594 |
|
|
Net (loss) income per common share – Basic |
|
$ |
(4.06 |
) |
|
$ |
0.51 |
|
|
NET INCOME PER SHARE—DILUTED: |
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders – Diluted |
|
$ |
(233,525 |
) |
|
$ |
29,056 |
|
|
Weighted average number of common shares outstanding – Basic |
|
|
57,576 |
|
|
|
56,594 |
|
|
Assumed exercise of stock options |
|
|
— |
|
|
|
564 |
|
|
Weighted average number of common shares outstanding – Diluted |
|
|
57,576 |
|
|
|
57,158 |
|
|
Net (loss) income per common share – Diluted |
|
$ |
(4.06 |
) |
|
$ |
0.51 |
|
|
Potentially dilutive securities excluded as anti-dilutive |
|
|
10,806 |
|
|
|
6,166 |
|
Stockholders’ Equity - The Company did not repurchase any shares of common stock during the three months ended June 30, 2019 and 2018. The Company’s Board of Directors’ in February 2017 authorized the Company to repurchase up to $50 million of ADS common stock in accordance with applicable securities laws. As of June 30, 2019, approximately $42.1 million of common stock may be repurchased under the authorization. The repurchase program does not obligate the Company to acquire any particular amount of common stock and may be suspended or terminated at any time at the Company’s discretion.
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 a quarterly dividend of $0.09. 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 Statement of Operations. The
- 14 -
Advanced Drainage Systems, Inc.
Company’s ESOP is further described in “Note16. Employee Benefit Plans” to the Company’s audited financial statements included in the Fiscal 2019 Form 10-K.
|
9. |
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 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 other joint venture partner indemnifies the Company 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 June 30, 2019, there were no borrowings 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 these investments 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 Company’s maximum potential obligation under this guarantee is $11.0 million as of June 30, 2019. 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, 2020. ADS does not anticipate any required contributions related to the balance of this credit facility. As of June 30, 2019 and March 31, 2019, the outstanding principal balances of the credit facility including letters of credit were $12.2 million and $12.3 million, respectively. As of June 30, 2019, there were no U.S. dollar denominated loans. The weighted average interest rate as of June 30, 2019 was 5.6% 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 sales to ADS and its other related parties, which totaled $0.4 million for the three months ended June 30, 2019, and $0.6 million for the three months ended June 30, 2018. ADS pipe sales to the South American Joint Venture were $0.3 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively.
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 purchased $0.5 million of Tigre USA manufactured products for use in the production of ADS products during the three months ended June 30, 2019 and 2018.
- 15 -
Advanced Drainage Systems, Inc.
|
10. |
DEBT |
Long-term debt as of the periods presented consisted of the following:
|
|
|
June 30, 2019 |
|
|
March 31, 2019 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Revolving Credit Facility |
|
$ |
156,200 |
|
|
$ |
134,400 |
|
|
Senior Notes payable |
|
|
100,000 |
|
|
|
100,000 |
|
|
Equipment financing |
|
|
2,195 |
|
|
|
2,427 |
|
|
Total |
|
|
258,395 |
|
|
|
236,827 |
|
|
Unamortized debt issuance costs |
|
|
(2,119 |
) |
|
|
(2,293 |
) |
|
Current maturities |
|
|
(25,939 |
) |
|
|
(25,932 |
) |
|
Long-term debt obligation |
|
$ |
230,337 |
|
|
$ |
208,602 |
|
Letters of credit outstanding at June 30, 2019 and March 31, 2019 amounted to $8.4 million and $8.5 million, respectively, and reduce the availability of the existing revolving credit facilities under the Company’s Second Amended and Restated Credit Agreement (the “PNC Credit Agreement”) with PNC Bank, National Association, as administrative agent and various financial institutions thereto.
In July 2019, the Company entered into a credit agreement (as amended, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto, and Barclays Bank PLC and Morgan Stanley Senior Funding, Inc., as joint lead arrangers, joint bookrunners, syndication agents and documentation agents.
On the Closing Date, the Company borrowed under the Credit Agreement to repay the outstanding indebtedness under the PNC Credit Agreement. See “Note 15. Subsequent Events” for additional details on the Credit Agreement and the debt repayment.
|
11. |
COMMITMENTS AND CONTINGENCIES |
Purchase Commitments - The Company secures supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts typically range from 1 to 12 months and occur in the ordinary course of business. Under such non-cancelable purchase contracts in place at June 30, 2019, the Company has agreed to purchase resin over the period July 2019 through December 2019 at a committed purchase cost of $11.8 million.
Litigation and Other Proceedings - On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all others similarly situated v. Advanced Drainage Systems, Inc., et al. (Case No. 1:15-cv-05955-KPF), was commenced in the U.S. District Court for the Southern District of New York (the “District Court”), naming the Company, along with Joseph A. Chlapaty, the Company’s former Chief Executive Officer, and Mark B. Sturgeon, the Company’s former Chief Financial Officer, as defendants and alleging violations of the federal securities laws. An amended complaint was filed on April 28, 2016. The amended complaint alleged that the Company made material misrepresentations and/or omissions of material fact in its public disclosures during the period from July 25, 2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On March 10, 2017, the District Court dismissed plaintiff’s claims against all defendants in their entirety and with prejudice. Plaintiff appealed to the United States Court of Appeals for the Second Circuit, and on October 13, 2017 the District Court’s judgment was affirmed by the Second Circuit. On October 27, 2017, plaintiff filed a petition for rehearing with the Second Circuit. The Second Circuit denied the petition for rehearing on November 28, 2017. On November 27, 2018, the plaintiff filed with the District Court a motion for relief from final judgment and for leave to file an amended complaint, which, the defendants opposed. On July 3, 2019, the District Court denied the plaintiff’s motion. While it is reasonably possible that this matter
- 16 -
Advanced Drainage Systems, Inc.
ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but it could be material.
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. 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 our Condensed Consolidated Financial Statements. However due to the inherent uncertainties in determining the use, installation application and location of our 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.
|
12. |
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 discrete events. For the three months ended June 30, 2019 and 2018, the Company utilized an effective tax rate of (10.9%) and 29.7%, respectively, to calculate its provision for income taxes. Consistent with the three months ended June 30, 2018, state and local income taxes and the Company’s ESOP increased the rate for the three months ended June 30, 2019. Additionally, the effective tax rate for the three months ended June 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, approximately $237.6 million related to non-deductible stock appreciation. This discrete event reduced the effective tax rate by (29.6%).
- 17 -
Advanced Drainage Systems, Inc.
|
13. |
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 three months ended June 30, 2019 and 2018:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Component of income before income taxes: |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
112 |
|
|
$ |
62 |
|
|
Selling expenses |
|
|
56 |
|
|
|
36 |
|
|
General and administrative expenses |
|
|
1,673 |
|
|
|
1,461 |
|
|
Total stock-based compensation expense |
|
$ |
1,841 |
|
|
$ |
1,559 |
|
The following table summarizes stock-based compensation expense by award type for the three months ended June 30, 2019 and 2018:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
Equity-classified Stock Options |
|
$ |
551 |
|
|
$ |
773 |
|
|
Restricted Stock |
|
|
642 |
|
|
|
543 |
|
|
Performance Units |
|
|
372 |
|
|
|
— |
|
|
Non-Employee Directors |
|
|
276 |
|
|
|
243 |
|
|
Total stock-based compensation expense |
|
$ |
1,841 |
|
|
$ |
1,559 |
|
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 months ended June 30, 2019, the Company granted 0.1 million shares of restricted stock with a grant date fair value of $3.3 million.
Performance Units - In addition, during the three months ended June 30, 2019, the Company granted 0.1 million performance units, subject to performance and services conditions. The grant date fair value of the performance units was $3.4 million, based on the market price of the Company’s common stock at the date of the grant. For the performance units, 50% of the award is based upon the achievement of certain levels of Return on Invested Capital for the performance period and 50% is based upon the achievement of certain levels of Free Cash Flow for the performance period. The performance units have a 3-year performance period from April 1, 2019 through March 31, 2022. The performance units, and any accrued dividend equivalents, will be settled in shares of the Company’s common stock, if the applicable performance and service conditions are satisfied.
- 18 -
Advanced Drainage Systems, Inc.
Options - During the three months ended June 30, 2019, the Company granted 0.3 million nonqualified stock options under the 2017 Incentive Plan. The grant date fair value of the nonqualified stock options was $2.7 million. The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The following table summarizes the assumptions used in estimate the fair value of stock-options during the three months ended June 30, 2019:
|
|
|
Three Months Ended June 30, |
|
|
Common stock price |
|
$27.44 |
|
|
Expected stock price volatility |
|
30.9% |
|
|
Risk-free interest rate |
|
2.3% |
|
|
Weighted-average expected option life (years) |
|
6.0 |
|
|
Dividend yield |
|
1.3% |
|
|
14. |
BUSINESS SEGMENTS INFORMATION |
The Company operates its business in two distinct operating and reportable segments based on the markets it serves: “Domestic” and “International.” The Chief Operating Decision Maker evaluates segment reporting based on Net sales and Segment Adjusted EBITDA. The Company calculates Segment Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. 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:
- 19 -
Advanced Drainage Systems, Inc.
The following sets forth certain additional financial information attributable to the reportable segments for the periods presented:
|
|
|
Domestic |
|
|
International |
|
|
Total |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
For the three months ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
374,375 |
|
|
$ |
39,333 |
|
|
$ |
413,708 |
|
|
Segment Adjusted EBITDA |
|
|
74,328 |
|
|
|
5,968 |
|
|
|
80,296 |
|
|
Interest expense |
|
|
5,188 |
|
|
|
76 |
|
|
|
5,264 |
|
|
Income tax expense |
|
|
17,430 |
|
|
|
4,940 |
|
|
|
22,370 |
|
|
Depreciation and amortization |
|
|
14,803 |
|
|
|
1,891 |
|
|
|
16,694 |
|
|
Equity in net income of unconsolidated affiliates |
|
|
— |
|
|
|
(434 |
) |
|
|
(434 |
) |
|
Capital expenditures |
|
|
8,469 |
|
|
|
1,254 |
|
|
|
9,723 |
|
|
For the three months ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
342,498 |
|
|
$ |
45,349 |
|
|
$ |
387,847 |
|
|
Segment Adjusted EBITDA |
|
|
68,832 |
|
|
|
6,311 |
|
|
|
75,143 |
|
|
Interest expense |
|
|
3,757 |
|
|
|
45 |
|
|
|
3,802 |
|
|
Income tax expense |
|
|
13,257 |
|
|
|
1,027 |
|
|
|
14,284 |
|
|
Depreciation and amortization |
|
|
15,953 |
|
|
|
1,874 |
|
|
|
17,827 |
|
|
Equity in net loss of unconsolidated affiliates |
|
|
— |
|
|
|
133 |
|
|
|
133 |
|
|
Capital expenditures |
|
|
5,881 |
|
|
|
993 |
|
|
|
6,874 |
|
The following sets forth certain additional financial information attributable to the reportable segments as of the periods presented:
|
|
|
June 30, 2019 |
|
|
March 31, 2019 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Investments in unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
International |
|
$ |
10,891 |
|
|
$ |
10,467 |
|
|
Total |
|
$ |
10,891 |
|
|
$ |
10,467 |
|
|
Total identifiable assets |
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
945,000 |
|
|
$ |
918,806 |
|
|
International |
|
|
130,300 |
|
|
|
128,085 |
|
|
Eliminations |
|
|
(6,885 |
) |
|
|
(4,732 |
) |
|
Total |
|
$ |
1,068,415 |
|
|
$ |
1,042,159 |
|
- 20 -
Advanced Drainage Systems, Inc.
The following reconciles net (loss) income to segment adjusted EBITDA for the periods presented:
|
|
|
For the Three Months Ended June 30, |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
Domestic |
|
|
International |
|
|
Domestic |
|
|
International |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Reconciliation of Segment Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(225,291 |
) |
|
$ |
(2,160 |
) |
|
$ |
30,589 |
|
|
$ |
3,062 |
|
|
Depreciation and amortization |
|
|
14,803 |
|
|
|
1,891 |
|
|
|
15,953 |
|
|
|
1,874 |
|
|
Interest expense |
|
|
5,188 |
|
|
|
76 |
|
|
|
3,757 |
|
|
|
45 |
|
|
Income tax expense |
|
|
17,430 |
|
|
|
4,940 |
|
|
|
13,257 |
|
|
|
1,027 |
|
|
Segment EBITDA |
|
|
(187,870 |
) |
|
|
4,747 |
|
|
|
63,556 |
|
|
|
6,008 |
|
|
Loss on disposal of assets and costs from exit and disposal activities |
|
|
435 |
|
|
|
272 |
|
|
|
1,009 |
|
|
|
95 |
|
|
ESOP and stock-based compensation expense |
|
|
7,425 |
|
|
|
— |
|
|
|
5,580 |
|
|
|
— |
|
|
ESOP special dividend compensation(a) |
|
|
246,752 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Transaction costs(b) |
|
|
4,207 |
|
|
|
38 |
|
|
|
256 |
|
|
|
— |
|
|
Strategic growth and operational improvement initiatives(c) |
|
|
2,195 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other adjustments(d) |
|
|
1,184 |
|
|
|
911 |
|
|
|
(1,569 |
) |
|
|
208 |
|
|
Segment Adjusted EBITDA |
|
$ |
74,328 |
|
|
$ |
5,968 |
|
|
$ |
68,832 |
|
|
$ |
6,311 |
|
|
(a) |
In the first quarter of fiscal 2020, the Company paid a special cash dividend of $1.00 per share and a quarterly cash dividend of $0.09 per share. The dividends were used to pay back a portion of the ESOP loan resulting in $246.8 million in additional stock-based compensation. See “Note 8. 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 the debt refinancing and potential business or asset acquisitions and dispositions. |
|
(c) |
Represents professional fees incurred in connection with the Company’s strategic growth and operational improvement initiatives, which include various market feasibility assessments and acquisition strategies, along with operational improvement initiatives, which include evaluation of the Company’s manufacturing network and improvement initiatives. |
|
(d) |
Includes derivative fair value adjustments, foreign currency transaction (gains) losses, the proportional share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which are accounted for under the equity method of accounting, contingent consideration remeasurement, executive retirement expense (benefit) and restatement related costs. The other adjustments in fiscal 2020 also includes expenses related to the ADS Mexicana’s investigation as described in “Note 11. Commitments and Contingencies”. The other adjustments for fiscal 2019 also includes insurance proceeds received in connection with the Company’s restatement of prior period financial statements as reflected in the Company’s Form 10-K for the fiscal year ended March 31, 2015 and the Form 10-K for the fiscal year ended March 31, 2016, as amended. |
|
15. |
SUBSEQUENT EVENTS |
Acquisition of Infiltrator - On July 31, 2019 (the “Closing Date”), the Company completed its Acquisition of IWT pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated July 31, 2019. IWT manufactures and sells wastewater systems for homes and provides drainage chambers for septic and storm water management. The Acquisition will combine the Company's industry leading position in stormwater management with IWT's leading platform in onsite septic waste management. The Merger Agreement was funded through the new Senior Secured Credit Facilities as further described below.
The following table summarizes the preliminary consideration paid, net of cash acquired. The amounts below are preliminary and are subject to closing adjustments as outlined in the Merger Agreement.
- 21 -
Advanced Drainage Systems, Inc.
|
(Amounts in thousands) |
|
Amount |
|
|
|
Total fair value of consideration transferred |
|
$ |
1,128,489 |
|
|
Less: cash acquired |
|
|
48,489 |
|
|
Total net cash consideration paid |
|
$ |
1,080,000 |
|
The following table summarizes the consideration paid and the preliminary purchase price allocation of the assets acquired and liabilities assumed. Due to the recent closing of the Acquisition, on July 31, 2019, the purchase price allocation for assets acquired and liabilities assumed is preliminary and will be finalized when valuations are complete and final assessments of the fair value of acquired assets and assumed liabilities are completed. Such finalizations may result in material changes from the preliminary purchase price allocations. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the Closing Date), as the Company finalizes the valuations of assets acquired and liabilities assumed.
|
(Amounts in thousands) |
|
Amount |
|
|
|
Cash |
|
$ |
48,489 |
|
|
Total current assets, excluding cash |
|
|
68,675 |
|
|
Property, plant and equipment, net |
|
|
82,424 |
|
|
Goodwill |
|
|
578,709 |
|
|
Intangible assets, net |
|
|
475,000 |
|
|
Other assets |
|
|
14,410 |
|
|
Total current liabilities |
|
|
(26,495 |
) |
|
Deferred tax liabilities |
|
|
(109,846 |
) |
|
Other liabilities |
|
|
(2,877 |
) |
|
Total fair value of consideration transferred |
|
$ |
1,128,489 |
|
The preliminary goodwill of $578.7 million represents the excess of consideration transferred over the preliminary fair value of assets acquired and liabilities assumed and is attributable to expected revenue synergies, as well as operating efficiencies and cost savings. The Company does not expect any of this goodwill to be deductible for income tax purposes and is assessing the impact of the Acquisition on the Company’s reportable segments.
The preliminary purchase price excludes transaction costs. During the three months ended June 30, 2019, the Company incurred $4.2 million of transaction costs related to the Acquisition such as legal, accounting, valuation and other professional services. These costs are included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.
The identifiable intangible assets recorded in connection with the closing of the Acquisition are based on preliminary valuations include customer relationships, patents and developed technology, and tradename and trademarks totaling $475.0 million. Customer relationships are expected to be amortized using an accelerated method over an estimated useful life of 15 years. Patents and developed technology and tradename and trademarks are expected to be amortized on a straight-line basis over the respective useful lives of 10 and 20 years.
The unaudited pro forma information for the three months ended June 30, 2019 and 2018 presented below includes the effects of the Acquisition as if it had been consummated as of April 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the Acquisition. Adjustments include those 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 IWT and the estimated tax impacts thereof. The three months ended June 30, 2019 supplemental pro forma earnings were adjusted to exclude transaction cost of $4.5 million incurred in the three months ended June 30, 2019. The June 30, 2018 supplemental pro forma earnings were adjusted to include these charges and an additional $12.5 million of transaction costs. The unaudited pro forma information does not reflect any operating efficiency or potential cost savings that could result from the
- 22 -
Advanced Drainage Systems, Inc.
consolidation of IWT. 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 June 30, |
|
|||||
|
(Amounts in thousands) |
|
2019 |
|
|
2018 |
|
||
|
Net sales |
|
$ |
483,944 |
|
|
$ |
450,655 |
|
|
Net loss attributable to ADS |
|
|
(222,156 |
) |
|
|
(14,778 |
) |
New Senior Secured Credit Facilities - On July 31, 2019, the Company entered into the Credit Agreement by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto, and Barclays Bank PLC and Morgan Stanley Senior Funding, Inc., as joint lead arrangers, joint bookrunners, syndication agents and documentation agents.
The Credit Agreement provides for a term loan facility in an initial aggregate principal amount of up to $1.3 billion (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”).
On the Closing Date, the Company borrowed under the Credit Agreement which was used to (i) finance the Merger Consideration paid in connection with the closing of the Acquisition, (ii) repay the total outstanding amount as of the Closing Date under the Company’s PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred by IWT under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Credit Agreement.
The Term Loan Facility must be repaid in equal quarterly installments commencing on January 1, 2020 and continuing on the first day of each consecutive April, July, October and January thereafter. To the extent not previously paid, all then-outstanding amounts under the Term Loan Facility are due and payable on the maturity date of the Term Loan Facility, which is seven years from the Closing Date. Borrowings under the Revolving Credit Facility are available beginning on the Closing Date and, to the extent not previously paid, all then-outstanding amounts under the Revolving Credit Facility are due and payable on the maturity date of the Revolving Credit Facility, which is five years from the Closing Date.
At the option of the Company, borrowings under the Term Loan Facility and under the Revolving Credit Facility (subject to certain limitations) bear interest at either a base rate (as determined pursuant to the Credit Agreement) or at a Eurocurrency Rate (as defined in the Credit Agreement), plus the applicable margin as set forth therein from time to time. In the case of the Revolving Credit Facility, the applicable margin is based on the Company’s consolidated senior secured net leverage ratio (as defined in the Credit Agreement). All borrowings under the Term Loan Facility used to finance the Merger Consideration as described above initially bear interest at a Eurocurrency Rate applicable to Eurocurrency Loans (as defined in the Credit Agreement) denominated in U.S. Dollars. Beginning 53 days after the Closing Date, the applicable margin for the Term Loan Facility will be increased by 25 basis points every thirty days following the Closing Date until the earlier of (i) the Marketing Commencement Date (as defined in the Credit Agreement) or (ii) 113 days after the Closing Date.
The Company has agreed to secure all of its obligations under the Credit Agreement by granting a first priority lien on substantially all of its assets (subject to certain exceptions and limitations), and each of Stormtech, LLC, Advanced Drainage of Ohio, Inc. and Infiltrator Water Technologies, LLC (collectively the “Guarantors”) has agreed to guarantee the obligations of the Company under the Credit Agreement and to
- 23 -
Advanced Drainage Systems, Inc.
secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s assets (subject to certain exceptions and limitations).
Repayment of Prudential Senior Notes - On July 29, 2019, the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $104.4 million under that certain Second Amended and Restated Private Shelf Agreement, dated as of June 22, 2017 (as amended the “Shelf Note Agreement”) of the Company’s Senior Notes (“Senior Notes”), by and among the Company, as issuer, the guarantors from time to time a party thereto, PGIM, Inc., as a purchaser and the other purchasers from time to time a party thereto (the “Shelf Noteholders”). The Company repaid the outstanding indebtedness under the Shelf Note Agreement using borrowings from the PNC Credit Agreement as in effect as of July 29, 2019. Concurrently with the repayment, the Shelf Noteholders authorized and directed PNC Bank, National Association, in its capacity as Collateral Agent (as defined in the Shelf Note Agreement) to release the security interests and liens securing the Shelf Note Agreement and the Shelf Note Agreement was terminated.
Repayment of PNC Credit Agreement - On the Closing Date, using borrowings of the new Term Loan Facility the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $239.2 million under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens held by the Collateral Agent (as defined in the PNC Credit Agreement) securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was terminated.
- 24 -
Advanced Drainage Systems, Inc.
|
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, 2020 refers to fiscal 2020, which is the period from April 1, 2019 to March 31, 2020.
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 2019 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 30, 2019. 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 manufacturer of high performance thermoplastic corrugated pipe, providing a comprehensive suite of water management products and superior drainage solutions for use in the underground construction and infrastructure marketplace. Our innovative products are used across a broad range of end markets and applications, including non-residential, residential, agriculture and infrastructure applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, our overall product breadth and scale and our manufacturing excellence. In the United States, our national footprint combined with our strong local presence and broad product offering make us the leader in an otherwise highly fragmented sector comprised of many smaller competitors. We believe the markets we serve in the United States represent approximately $11 billion of annual revenue opportunity. In addition, we believe the increasing acceptance of thermoplastic pipe products in international markets represents an attractive growth opportunity.
Our products are generally lighter, more durable, more cost effective and easier to install than comparable alternatives made with traditional materials. Following our entrance into the non-residential construction market with the introduction of N-12 corrugated polyethylene pipe in the late 1980s, our pipe products have been displacing products made with traditional materials, such as reinforced concrete, corrugated steel and polyvinyl chloride (“PVC”), across an ever expanding range of end markets. This has allowed us to consistently gain market share and achieve above-market growth throughout economic cycles. We expect to continue to drive conversion to our products from traditional materials as contractors, civil design engineers and municipal agencies increasingly acknowledge the superior physical attributes and compelling value proposition of our thermoplastic products. In addition, we believe that overall demand for our products will benefit as the regulatory environment continues to evolve.
Our broad product line includes HDPE pipe, PP pipe and related water management products. Building on our core drainage businesses, we have aggressively pursued attractive ancillary product categories such as storm and septic chambers, PVC drainage structures, fittings and filters, and water quality filters and separators. We refer to these ancillary product categories as Allied Products. Given the scope of our overall sales and distribution platform, we have been able to drive growth within our Allied Products and believe there are significant growth opportunities going forward.
- 25 -
Advanced Drainage Systems, Inc.
Recent Developments
Acquisition of Infiltrator
On July 31, 2019, the Company, Ocean Sub, Inc., a wholly-owned subsidiary of the Company (the “Merger Sub”), IWT and 2461461 Ontario Limited, entered into Merger Agreement, pursuant to which Merger Sub merged with and into Infiltrator, with Infiltrator continuing as the surviving corporation and a wholly-owned subsidiary of the Company. The closing of the Merger took place simultaneously upon the Closing Date.
The Company paid aggregate purchase price of approximately $1,080.0 million billion in cash in connection with the Merger, net of cash acquired of $48.5 million, subject to certain post-closing purchase price adjustments as described in the Merger Agreement. Each holder of vested and unexercised Infiltrator stock options outstanding as of the Closing Date received cash in an amount equal to per share cash portion of Merger Consideration in excess of the applicable exercise price per share of such options, subject to adjustment. The Company financed the Merger Consideration with borrowings under the Company’s new credit agreement, which replaced the Company’s existing PNC Credit Agreement and Senior Notes, as further described below.
The Merger Agreement contains customary representations, warranties and covenants from Infiltrator, Merger Sub and the Company, which representations and warranties do not survive the consummation of the Merger. The Company has obtained a representation and warranty insurance policy that will provide a source of recourse for breaches of the representations and warranties of Infiltrator contained in the Merger Agreement, subject to a retention amount, exclusions, policy limits and certain other terms and conditions.
New Senior Secured Credit Facilities
On July 31, 2019, the Company entered into the Credit Agreement by and among the Company, as borrower, Barclays Bank PLC, as administrative agent, the several lenders from time to time party thereto, Barclays Bank PLC and Morgan Stanley Senior Funding, Inc., as joint lead arrangers and joint bookrunners
The Credit Agreement provides for the Term Loan Facility in an initial aggregate principal amount of $1.3 billion, the Revolving 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 Facility and a swing line sub-facility in the aggregate available amount of up to $50 million, as a sublimit of the Revolving Facility.
On the Closing Date, the Company borrowed under the Credit Agreement which was used to (i) finance the Merger Consideration paid in connection with the closing of the Merger, (ii) and repay the total outstanding amount as of the Closing Date under the Company’s PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred by IWT under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Credit Agreement.
Additional information with regard to the Credit Facility and its terms is set forth in the Company’s Current Report on Form 8-K filed on August 1, 2019 and as set forth below under “Liquidity and Capital Resources.”
Repayment of Prudential Senior Notes
On July 29, 2019, the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $104.4 million under the Shelf Note Agreement, dated as of June 22, 2017, by and among the Company, as issuer, the guarantors from time to time a party thereto, PGIM, Inc., as a purchaser and the other purchasers from time to time a party thereto. The Company repaid the outstanding indebtedness under the Shelf Note Agreement using borrowings from the PNC Credit Agreement with PNC Bank, National Association, as administrative agent, and various financial institutions party thereto as in effect as of July 29, 2019. Concurrently with the repayment, all security interests and liens securing the Shelf Note Agreement were terminated and released, and the Shelf Note Agreement was terminated. Additional information with regard to the Credit Facility and its terms is set forth in the
- 26 -
Advanced Drainage Systems, Inc.
Company’s Current Report on Form 8-K filed on August 1, 2019 and as set forth below under “— Liquidity and Capital Resources.”
Repayment of PNC Credit Agreement
On the Closing Date, using borrowings of the new Term Loan Facility, the Company repaid in full all of its and its subsidiaries indebtedness and other obligations totaling $239.2 under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was terminated.
Results of Operations
Three months ended June 30, 2019 Compared with three months ended June 30, 2018
The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the three months ended June 30, 2019 and 2018. We believe this presentation is useful to investors in comparing historical results.
|
|
|
For the Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Consolidated Statements of Operations data: |
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of goods sold |
|
|
74.3 |
|
|
|
74.3 |
|
|
Cost of goods sold - ESOP special dividend compensation |
|
|
40.8 |
|
|
|
— |
|
|
Gross profit |
|
|
(15.0 |
) |
|
|
25.7 |
|
|
Selling |
|
|
6.4 |
|
|
|
6.2 |
|
|
General and administrative |
|
|
7.6 |
|
|
|
5.5 |
|
|
Selling, general and administrative - ESOP special dividend compensation |
|
|
18.9 |
|
|
|
— |
|
|
Loss on disposal of assets and costs from exit and disposal activities |
|
|
0.2 |
|
|
|
0.3 |
|
|
Intangible amortization |
|
|
0.4 |
|
|
|
0.5 |
|
|
(Loss) income from operations |
|
|
(48.4 |
) |
|
|
13.2 |
|
|
Interest expense |
|
|
1.3 |
|
|
|
1.0 |
|
|
Derivative gains and other income, net |
|
|
— |
|
|
|
(0.2 |
) |
|
(Loss) income before income taxes |
|
|
(49.7 |
) |
|
|
12.4 |
|
|
Income tax expense |
|
|
5.4 |
|
|
|
3.7 |
|
|
Equity in net (income) loss of unconsolidated affiliates |
|
|
(0.1 |
) |
|
|
— |
|
|
Net (loss) income |
|
|
(55.0 |
) |
|
|
8.7 |
|
|
Less: net (loss) income attributable to noncontrolling interest |
|
|
(0.3 |
) |
|
|
0.4 |
|
|
Net (loss) income attributable to ADS |
|
|
(54.7 |
%) |
|
|
8.3 |
% |
- 27 -
Advanced Drainage Systems, Inc.
Net sales - Net sales increased over the comparable period in fiscal 2019.
|
|
|
For the Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
$ Variance |
|
|
% Variance |
|
||||
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|||||
|
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
|
$ |
262,121 |
|
|
$ |
242,026 |
|
|
$ |
20,095 |
|
|
|
8.3 |
% |
|
Allied Products |
|
|
112,254 |
|
|
|
100,472 |
|
|
|
11,782 |
|
|
|
11.7 |
% |
|
Total domestic |
|
|
374,375 |
|
|
|
342,498 |
|
|
|
31,877 |
|
|
|
9.3 |
% |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipe |
|
|
29,284 |
|
|
|
34,448 |
|
|
|
(5,164 |
) |
|
|
(15.0 |
%) |
|
Allied Products |
|
|
10,049 |
|
|
|
10,901 |
|
|
|
(852 |
) |
|
|
(7.8 |
%) |
|
Total international |
|
|
39,333 |
|
|
|
45,349 |
|
|
|
(6,016 |
) |
|
|
(13.3 |
%) |
|
Total net sales |
|
$ |
413,708 |
|
|
$ |
387,847 |
|
|
$ |
25,861 |
|
|
|
6.7 |
% |
Domestic net sales increased in the three months ended June 30, 2019, over the comparable period in the previous fiscal year. Our domestic pipe sales increase was primarily attributable to a $18.3 million increase in pipe volume and price increases and changes in product mix of $1.2 million. Allied Product sales increased by $11.8 million, or 11.7%.
International net sales decreased $6.0 million, or 13.3%, in the three months ended June 30, 2019 over the comparable period in the previous fiscal year. Our international pipe sales decreased by $5.2 million, or 15.0%, which was primarily attributable to volume decreases. In addition, Allied Product sales decreased $0.9 million.
Cost of goods sold and Gross profit - Cost of goods sold increased by $19.1 million, or 6.6%, Cost of goods sold - ESOP special dividend compensation increased by $168.6 million and gross profit decreased by $161.8 million, or 162.4%, in the three months ended June 30, 2019 over the comparable period in the previous fiscal year.
|
|
|
For the Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
$ Variance |
|
|
% Variance |
|
||||
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|||||
|
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
374,375 |
|
|
$ |
342,498 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
275,638 |
|
|
|
251,063 |
|
|
|
24,575 |
|
|
|
9.8 |
% |
|
Cost of goods sold - ESOP special dividend compensation |
|
|
168,610 |
|
|
|
— |
|
|
|
168,610 |
|
|
|
100.0 |
% |
|
Domestic gross profit |
|
|
(69,873 |
) |
|
|
91,435 |
|
|
|
(161,308 |
) |
|
|
(176.4 |
%) |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
39,333 |
|
|
|
45,349 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
31,618 |
|
|
|
37,093 |
|
|
|
(5,475 |
) |
|
|
(14.8 |
%) |
|
International gross profit |
|
|
7,715 |
|
|
|
8,256 |
|
|
|
(541 |
) |
|
|
(6.6 |
%) |
|
Total gross profit |
|
$ |
(62,158 |
) |
|
$ |
99,691 |
|
|
$ |
(161,849 |
) |
|
|
(162.4 |
%) |
The decrease in domestic gross profit of $161.3 million, or 176.4%, was primarily due to the ESOP special dividend compensation expense from the special dividend of $168.6 million allocated to Cost of goods sold. The decrease in gross profit due to the ESOP special dividend compensation expense was partially offset by the gross profit impact of the increased net sales discussed above. The increase in net sales was partially offset by increased labor and overhead costs of $18.7 million and increased material and transportation costs of $5.9 million.
International gross profit decreased $0.5 million, or 6.6%, in the three months ended June 30, 2019 compared to the same period in the previous fiscal year. The decrease is primarily due to the gross profit impact of the decreased net sales discussed above.
- 28 -
Advanced Drainage Systems, Inc.
Selling expenses - As a percentage of net sales, selling expenses were relatively flat at 6.4% in the three months ended June 30, 2019 compared to 6.2% in three months ended June 30, 2018.
General and administrative expenses - General and administrative expenses for the three months ended June 30, 2019 increased $10.1 million from the prior year period. The increase was primarily due to an increase of $4.0 million in transaction costs, $2.2 million of strategic growth and operational improvement initiatives expenses, $1.7 million of expenses related to our investigation into our consolidated joint venture and partially offset by $1.2 million of insurance proceeds received in fiscal 2019 that did not recur.
Selling, general and administrative expenses - ESOP special dividend compensation - In the first quarter of fiscal 2020, we recorded $78.1 million of ESOP compensation expense due to the special dividend. See “Note 8. Net Income Per Share and Stockholders’ Equity” for additional information on the special dividend.
Loss on disposal of assets and costs from exit and disposal activities - In the three months ended June 30, 2019, we recorded a loss on the sale of property, plant and equipment of approximately $0.7 million. See “Note 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities” for additional discussion.
Intangible amortization - Intangible amortization remained relatively flat as a percentage of net sales.
Interest expense - Interest expense increased $1.5 million in the three months ended June 30, 2019 compared to the same period in the previous fiscal year, primarily due to a $1.8 million unrealized loss on the interest rate swap.
Derivative gains and other income, net - Derivative gains and other income decreased by $0.7 million for the three months ended June 30, 2019 compared to the same period in the previous fiscal year. The decrease is primarily due to changes in realized and unrealized losses on diesel fuel option collar contracts in fiscal 2019.
Income tax expense - For the three months ended June 30, 2019 and 2018, the effective tax rates were (10.9%) and 29.7%, respectively. 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. See “Note 12. Income Taxes” for additional information.
Equity in net (income) loss of unconsolidated affiliates - Equity in net (income) loss of unconsolidated affiliates represents our proportionate share of income or loss attributed to our unconsolidated joint venture in which we have significant influence, but not control, over operations. The Equity in net (income) loss of unconsolidated affiliates increased by $0.5 million for the three months ended June 30, 2019 as compared to the same period in the previous fiscal year.
Net (loss) income attributable to noncontrolling interest - Net (loss) income attributable to noncontrolling interest decreased by $2.5 million for the three months ended June 30, 2019 to a net loss of $1.1 million compared to a net income of $1.4 million in the same period in the previous fiscal year. The decrease was primarily due to net loss at ADS Mexicana and due to the acquisition of the noncontrolling interest in BaySaver.
Non-GAAP Financial Measures
In addition to financial results reported in accordance with GAAP, we have provided the following non-GAAP financial measures: Adjusted EBITDA and Free Cash Flow. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. However, these measures are not intended to be a substitute for those reported in accordance with GAAP. These measures may be different from non-GAAP financial measures used by other companies, even when similar terms are used to identify such measures.
Adjusted EBITDA - Adjusted EBITDA, a non-GAAP financial measure, has been presented in this Quarterly Report on Form 10-Q as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We calculate adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses.
- 29 -
Advanced Drainage Systems, Inc.
Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key metric used by management and our Board of Directors to assess our financial performance. Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.
Adjusted EBITDA is not a GAAP measure of our financial performance and should not be considered as an alternative to net (loss) income as a measure of financial performance or cash flows from operations or any other performance measure derived in accordance with GAAP, and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency transaction losses. Our presentation of adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using adjusted EBITDA as a supplemental measurement. Our measure of adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods indicated.
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Net (loss) income |
|
$ |
(227,451 |
) |
|
$ |
33,651 |
|
|
Depreciation and amortization |
|
|
16,694 |
|
|
|
17,827 |
|
|
Interest expense |
|
|
5,264 |
|
|
|
3,802 |
|
|
Income tax expense |
|
|
22,370 |
|
|
|
14,284 |
|
|
EBITDA |
|
|
(183,123 |
) |
|
|
69,564 |
|
|
Loss on disposal of assets and costs from exit and disposal activities |
|
|
707 |
|
|
|
1,104 |
|
|
ESOP and stock-based compensation expense |
|
|
7,425 |
|
|
|
5,580 |
|
|
ESOP special dividend compensation(a) |
|
|
246,752 |
|
|
|
— |
|
|
Transaction costs(b) |
|
|
4,245 |
|
|
|
256 |
|
|
Strategic growth and operational improvement initiatives(c) |
|
|
2,195 |
|
|
|
— |
|
|
Other adjustments(d) |
|
|
2,095 |
|
|
|
(1,361 |
) |
|
Adjusted EBITDA |
|
$ |
80,296 |
|
|
$ |
75,143 |
|
|
(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 8. 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 the debt refinancing and potential 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 derivative fair value adjustments, foreign currency transaction (gains) losses, the proportional share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which are accounted for under the equity method of accounting, contingent consideration remeasurement, executive |
- 30 -
Advanced Drainage Systems, Inc.
|
retirement expense (benefit) and restatement related costs. The other adjustments in fiscal 2020 also includes expenses related to the ADS Mexicana’s investigation as described in “Note 11. Commitments and Contingencies”. The other adjustments for fiscal 2019 also includes insurance proceeds received in connection with the Company’s restatement of prior period financial statements as reflected om the Company’s Form 10-K for the fiscal year ended March 31, 2015 and the Form 10-K for the fiscal year ended March 31, 2016, as amended. |
Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures. Free cash flow is a measure used by management and our Board of Directors to assess our ability to generate cash. Accordingly, free cash flow has been presented in this Quarterly Report on Form 10-Q as a supplemental measure of liquidity that is not required by, or presented in accordance with GAAP, because management believes that free cash flow provides useful information to investors and others in understanding and evaluating our ability to generate cash flow from operations after capital expenditures.
Free cash flow is not a GAAP measure of our liquidity and should not be considered as an alternative to cash flow from operating activities as a measure of liquidity or any other liquidity measure derived in accordance with GAAP. Our measure of free cash flow is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
The following table presents a reconciliation of free cash flow to Cash flow from operating activities, the most comparable GAAP measure, for each of the periods indicated.
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Cash flow from operating activities |
|
$ |
62,840 |
|
|
$ |
9,831 |
|
|
Capital expenditures |
|
|
(9,723 |
) |
|
|
(6,874 |
) |
|
Free Cash Flow |
|
$ |
53,117 |
|
|
$ |
2,957 |
|
Liquidity and Capital Resources
Our primary liquidity requirements are working capital, capital expenditures, debt service, and dividend payments for our convertible preferred stock and common stock. We have historically funded, and expect to continue to fund, our operations primarily through internally generated cash flow, debt financings, equity issuance and capital and operating leases. From time to time, we may explore additional financing methods and other means to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.
As of June 30, 2019, we had $6.9 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.
As further described below, on July 29, 2019, we repaid in full all of our indebtedness and other obligations totaling $104.4 under our Shelf Note Agreement by using borrowings from the Company’s existing credit facility under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens securing the Shelf Note Agreement were terminated and released, and the Shelf Note Agreement was terminated.
Thereafter, on the Closing Date, using borrowings of the Term Loan Facility and Revolving Facility, we repaid in full all of our indebtedness and other obligations totaling $239.2 under the PNC Credit Agreement. Concurrently with the repayment, all security interests and liens securing the PNC Credit Agreement were terminated and released and the PNC Credit Agreement was terminated.
On July 31, 2019, the Company entered into the Credit Agreement with Barclays Bank PLC, as administrative agent and the several lenders from time to time party thereto, pursuant to which the Company borrowed under the Credit Agreement which was used to (i) finance the Merger Consideration for the acquisition of Infiltrator, (ii) repay the total outstanding amount under the existing PNC Credit Agreement, (iii) repay outstanding amounts of existing
- 31 -
Advanced Drainage Systems, Inc.
indebtedness incurred by IWT under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Credit Agreement.
Working Capital and Cash Flows
As of June 30, 2019, we had $469.8 million in liquidity, including $9.4 million of cash, $385.4 million in borrowings available under our existing PNC Credit Agreement net of $8.4 million of outstanding letters of credit, and $75.0 million under the Senior Notes, described below. All outstanding indebtedness under these borrowings were repaid in full in connection with the establishment of the new Credit Agreement, as further described below. We believe that our cash on hand, together with the availability of borrowings under our new Credit Facility 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.
Working Capital - Working capital decreased to $236.7 million as of June 30, 2019, from $260.2 million as of March 31, 2019. The decrease in working capital is primarily due to a decrease in inventory of $34.3 million, an increase of $27.2 million in accounts payable and other accrued liabilities and an increase in accrued income taxes of $10.9 million. These increases were partially offset by an increase in accounts receivable of $44.8 million. These changes relate to the seasonality of our business.
Operating Cash Flows - Cash flows provided by operating activities for the three months ended June 30, 2019 was $62.8 million as compared with cash provided by operating activities of $9.8 million for the three months ended June 30, 2018. Cash flows from operating activities during the three months ended June 30, 2019 was primarily impacted by changes in working capital.
Investing Cash Flows - During the three months ended June 30, 2019 and 2018, cash used in investing activities was $9.7 million and $7.0 million, respectively. The increase in cash used for investing activities was primarily due to increases in capital expenditures and purchases of property, plant and equipment through financing. Our capital expenditures for the three months ended June 30, 2019 were used primarily for new equipment and facility expansions and upgrades.
Financing Cash Flows - During the three months ended June 30, 2019, cash used in financing activities was $52.6 million due to the special and quarterly dividend payment of $69.6 million and payments on our finance lease obligations of $6.0 million. These uses were partially offset by $21.8 million of net borrowings on our PNC Credit Agreement. During the three months ended June 30, 2018, used in financing activities was $1.6 million due to dividends paid and payments on our finance lease obligations offset by net borrowings on our PNC Credit Agreement.
Capital Expenditures
Capital expenditures totaled $9.7 million and $6.9 million for the three months ended June 30, 2019 and 2018, respectively. Our capital expenditures for the three months ended June 30, 2019 were used primarily to support facility expansions, equipment replacements, our recycled resin initiatives and technology.
We currently anticipate that we will make capital expenditures of approximately $55 to $65 million in fiscal year 2020. Such capital expenditures are expected to be financed using funds generated by operations. As of June 30, 2019, there were no material contractual obligations or commitments related to these planned capital expenditures.
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.
- 32 -
Advanced Drainage Systems, Inc.
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 2019 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 30% greater after conversion.
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 June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Net (loss) income attributable to ADS |
|
$ |
(226,356 |
) |
|
$ |
32,280 |
|
|
ESOP special dividend compensation |
|
|
246,752 |
|
|
|
— |
|
|
ESOP deferred stock-based compensation |
|
|
5,584 |
|
|
|
4,021 |
|
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 June 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(Shares in millions) |
|
|||||
|
Weighted average common shares outstanding |
|
|
57.6 |
|
|
|
56.6 |
|
|
Conversion of redeemable convertible shares |
|
|
17.5 |
|
|
|
17.9 |
|
Financing Transactions
Secured Bank Term Loans - On June 22, 2017, we entered into the PNC Credit Agreement, which amends and restates the original agreement dated as of June 12, 2013, to provide us a $550 million revolving credit facility, which is more fully described in our Fiscal 2019 Form 10-K.
As of June 30, 2019, the outstanding principal drawn on the PNC Credit Agreement was $156.2 million, with $385.4 million available to be drawn on the U.S. facility, net of $8.4 million of outstanding letters of credit. All outstanding indebtedness under the PNC Credit Agreement was repaid in full as of July 30, 2019 in connection with the establishment of the new Senior Secured Credit Facilities with Barclays Bank PLC, as further described below.
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
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Advanced Drainage Systems, Inc.
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 June 30, 2019 there were no borrowings under the Intercompany Note.
Fiscal 2019 Amendment to the Secured Bank Term Loans - On July 9, 2018, the Company amended the PNC Credit Agreement and the Shelf Note Agreement to amend the definition of Consolidated EBITDA and changed the timing of the quarterly rate adjustments. In addition, the amendment to the PNC Credit Agreement clarified the process of a transition to replace LIBOR which is being phased out.
Senior Notes - On June 22, 2017, we entered into the Shelf Note Agreement to provide for the issuance of secured senior notes to the Shelf Note Lenders from time to time in the aggregate principal amount of up to $175 million, which is more fully described in our Fiscal 2019 Form 10-K. As of June 30, 2019, we have $75 million available for issuance of senior notes under the Shelf Note Agreement. At June 30, 2019, the outstanding principal balance on these notes was $100 million. All outstanding indebtedness under the Shelf Note Agreement was repaid in full as of July 29, 2019, as further described below.
New Senior Secured Credit Facilities - On July 31, 2019, we entered into the Credit Agreement with Barclays Bank PLC, as administrative agent and the several lenders from time to time party thereto. The Credit Agreement provides for up to $1.3 billion as a Term Loan Facility, up to $350 million as a Revolving Facility, up to $50 million as an L/C Facility and up to $50 million, as a sublimit of the Revolving Facility.
On July 31, 2019, the Company borrowed under the Credit Agreement which was used to (i) finance the Merger Consideration paid in connection with the closing of the Merger, (ii) and repay the total outstanding amount as of the Closing Date under the PNC Credit Agreement, (iii) repay outstanding amounts of existing indebtedness incurred by IWT under its outstanding credit facility in effect prior to the Acquisition, and (iv) pay certain transaction fees and expenses associated with the Acquisition and the Credit Agreement.
The Term Loan Facility must be repaid in equal quarterly installments commencing on January 1, 2020 and continuing on the first day of each consecutive April, July, October and January thereafter. To the extent not previously paid, all then-outstanding amounts under the Term Loan Facility are due and payable on the maturity date of the Term Loan Facility, which is seven years from the Closing Date. Borrowings under the Revolving Facility are available beginning on the Closing Date and, to the extent not previously paid, all then-outstanding amounts under the Revolving Facility are due and payable on the maturity date of the Revolving Facility, which is five years from the Closing Date.
The Credit Agreement includes customary representations, warranties, covenants and events of default.
At the option of the Company, borrowings under the Term Loan Facility and under the Revolving Facility (subject to certain limitations) bear interest at either a base rate (as determined pursuant to the Credit Agreement) or at a Eurocurrency Rate (as defined in the Credit Agreement), plus the applicable margin as set forth therein from time to time. In the case of the Revolving Facility, the applicable margin is based on the Company’s consolidated senior secured net leverage ratio (as defined in the Credit Agreement). All borrowings under the Term Loan Facility used to finance the Merger Consideration as described above initially bear interest at a Eurocurrency Rate (as defined in the Credit Agreement). Beginning 53 days after the Closing Date, the applicable margin for the Term Loan Facility will be increased by 25 basis points every thirty days following the Closing Date until the earlier of (i) the Marketing Commencement Date (as defined in the Credit Agreement) or (ii) 113 days after the Closing Date.
The Company has agreed to secure all of its obligations under the Credit Agreement by granting a first priority lien on substantially all of its assets (subject to certain exceptions and limitations), and each of Stormtech, LLC, Advanced Drainage of Ohio, Inc. and Infiltrator Water Technologies, LLC (together with the Company, the “Guarantors”) has agreed to guarantee the obligations of the Company under the Credit Agreement and to secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s assets (subject to certain exceptions and limitations).
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Advanced Drainage Systems, Inc.
The Credit Agreement requires, if the aggregate amount of outstanding exposure under the Revolving Facility exceeds $122,500,000 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 Credit Agreement 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 Credit Agreement) to pay dividends or make distributions to the Company or any of its subsidiaries.
The Credit Agreement 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 Credit Agreement); (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 Credit Agreement.
Covenant Compliance
Our outstanding debt agreements and instruments contain various restrictive covenants including, but not limited to, limitations on additional indebtedness and capital distributions, including dividend payments. The two primary debt covenants of the PNC Credit Agreement and Senior Notes include a Leverage Ratio and an Interest Coverage Ratio maintenance covenant. For any relevant period of determination, the Leverage Ratio is calculated by dividing Total Consolidated Indebtedness (funded debt plus guarantees) by Consolidated EBITDA, as defined by the credit facility. The current upper limit is 4.0 times (or 4.25 as of the date of any acquisitions permitted under the amended agreement for which the aggregate consideration is $100.0 million or greater). The Interest Coverage Ratio is calculated by dividing the sum of Consolidated EBITDA by consolidated interest expense. The current minimum ratio is 3.0 times.
For further information, see “Note 13. Debt” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Fiscal 2019 Form 10-K. We are in compliance with our debt covenants as of June 30, 2019.
Our new Credit Agreement also includes covenants, including negative covenants, as further described above.
Universal Shelf Registration Statement
On August 1, 2019, the Company filed a universal shelf Registration Statement on Form S-3 (the “Registration Statement”) with the SEC in accordance with the Securities Act of 1933, as amended, which has not yet been declared effective. Upon being declared effective, the Registration Statement will register debt securities, common stock, preferred stock, depositary shares, warrants, purchase contracts, units, subscription rights and any combination of the foregoing, for a maximum aggregate offering price of up to $500 million, which may be sold from time to time. The terms of any securities offered under the Registration Statement and intended use of proceeds will be established at the times of the offerings and will be described in prospectus supplements filed with the SEC at the times of the offerings. Once declared effective, the Registration Statement will have a three year term.
Off-Balance Sheet Arrangements
Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 9. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of June 30, 2019, our South American Joint Venture had
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Advanced Drainage Systems, Inc.
approximately $12.2 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
With the exception of the accounting pronouncements adopted during fiscal 2020 discussed in “Note 1. Background and Summary of Significant Accounting Policies” and “Note 4. Leases,” 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 2019 Form 10-K.
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Advanced Drainage Systems, Inc.
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 without limitation, factors relating to availability of credit, interest rates, fluctuations in capital and business and consumer confidence; |
|
|
• |
cyclicality and seasonality of the non-residential and residential construction markets and infrastructure spending; |
|
|
• |
the risks of increasing competition in our existing and future markets, including competition from both manufacturers of high performance thermoplastic corrugated pipe and manufacturers of products using alternative materials; |
|
|
• |
uncertainties surrounding the integration of acquisitions and similar transactions, including the recently completed acquisition of Infiltrator and the integration of Infiltrator; |
|
|
• |
our ability to realize the anticipated benefits from the acquisition of Infiltrator; |
|
|
• |
risks that the acquisition of Infiltrator 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 weather or seasonality; |
|
|
• |
the loss of any of our significant customers; |
|
|
• |
the risks of doing business internationally; |
|
|
• |
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 2019 Form 10-K; |
|
|
• |
the risks of conducting a portion of our operations through joint ventures; |
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Advanced Drainage Systems, Inc.
|
|
• |
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; 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; |
|
|
• |
the nature, cost and outcome of any future litigation and other legal proceedings, including any such proceedings related to our acquisition of Infiltrator 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; |
|
|
• |
changes to our operating results, cash flows and financial condition attributable to 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.
|
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, 2019.
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Advanced Drainage Systems, Inc.
|
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 2019 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, 2019. 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 June 30, 2019 (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 June 30, 2019 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
- 39 -
Advanced Drainage Systems, Inc.
PART II. OTHER INFORMATION
|
Item 1. |
Legal Proceedings |
On July 29, 2015, a putative stockholder class action, Christopher Wyche, individually and on behalf of all others similarly situated v. Advanced Drainage Systems, Inc., et al. (Case No. 1:15-cv-05955-KPF), was commenced in the U.S. District Court for the Southern District of New York (the “District Court”), naming the Company, along with Joseph A. Chlapaty, the Company’s former Chief Executive Officer, and Mark B. Sturgeon, the Company’s former Chief Financial Officer, as defendants and alleging violations of the federal securities laws. An amended complaint was filed on April 28, 2016. The amended complaint alleged that the Company made material misrepresentations and/or omissions of material fact in its public disclosures during the period from July 25, 2014 through March 29, 2016, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On March 10, 2017, the District Court dismissed plaintiff’s claims against all defendants in their entirety and with prejudice. Plaintiff appealed to the United States Court of Appeals for the Second Circuit, and on October 13, 2017 the District Court’s judgment was affirmed by the Second Circuit. On October 27, 2017, plaintiff filed a petition for rehearing with the Second Circuit. The Second Circuit denied the petition for rehearing on November 28, 2017. On November 27, 2018, the plaintiff filed with the District Court a motion for relief from final judgment and for leave to file an amended complaint, which, the defendants opposed. On July 3, 2019, the District Court denied the plaintiff’s motion. While it is reasonably possible that this matter ultimately could be decided unfavorably to the Company, the Company is currently unable to estimate the range of the possible losses, but it could be material.
Please see “Note 11. 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 |
The following risk factors are related to the acquisition of Infiltrator and related financings. Additional 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 2019 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 2019 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.
We may be unable to successfully integrate our and Infiltrator’s businesses in order to realize the anticipated benefits of the acquisition or do so within the intended timeframe.
We will be required to devote significant management attention and resources to integrating the business practices and operations of Infiltrator with our business. We may be unable to realize the planned synergies from the acquisition or other benefits in the timeframe that we expect or at all. We continue to assess synergies that we may realize as a combined company, the realization of which will depend on a number of factors.
The success of the acquisition, including anticipated synergies, benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate our current operations with Infiltrator’s business. If we experience difficulties with the integration process or other unforeseen costs, the anticipated benefits and cost savings of the acquisition may not be realized fully or at all, or may take longer to realize than expected. The integration planning and implementation process will result in significant costs and divert management attention and resources. These integration matters could have an adverse effect on our combined company for an undetermined period after completion of the acquisition. In addition, the actual cost savings of the acquisition could be less than anticipated, or otherwise offset by other factors.
Additional difficulties we may encounter as part of the integration process include the following:
|
|
• |
the costs of integration and compliance and the possibility that the full benefits anticipated to result from our acquisition of Infiltrator will not be realized; |
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Advanced Drainage Systems, Inc.
|
|
• |
any delay in the integration of management teams, strategies, operations, products and services; |
|
|
• |
diversion of the attention of each company’s management as a result of our acquisition of Infiltrator; |
|
|
• |
differences in business backgrounds, corporate cultures and management philosophies that may delay successful integration; |
|
|
• |
the ability to retain key employees; |
|
|
• |
the ability to create and enforce uniform standards, controls, procedures, policies and information systems; |
|
|
• |
the challenge of integrating complex systems, technology, networks and other assets of Infiltrator into those of ours in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; |
|
|
• |
potential unknown liabilities and unforeseen increased expenses or delays associated with the acquisition, including costs to integrate Infiltrator beyond current estimates; and |
|
|
• |
the disruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies. |
Any of these factors could adversely affect each company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or could reduce each company’s earnings or otherwise adversely affect our business and financial results after the acquisition. These risks are not limited to our acquisition of Infiltrator and could also apply to our future acquisitions.
Uncertainties associated with our acquisition of Infiltrator may cause a loss of management personnel and other key employees, which could adversely affect our future business, operations and financial results.
The acquisition of Infiltrator could disrupt our and Infiltrator’s businesses. We are dependent on the experience and industry knowledge of senior management and other key employees to execute our business plans, which could be disrupted by the unanticipated departure of any key member of our management team or employee base, as well as management or key employees of Infiltrator. Our and Infiltrator’s current and prospective employees may experience uncertainty about their roles within our company, which may have an adverse effect on the ability of each of us to attract or retain key management and other key personnel.
Accordingly, no assurance can be given that we will be able to attract or retain our and Infiltrator’s key management personnel and other key employees to the same extent that our companies have previously been able to attract or retain such employees. In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, engineering, technical, marketing and support personnel. Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel.
Our results after our acquisition of Infiltrator may suffer if we do not effectively manage our expanded operations following the acquisition.
Following our acquisition of Infiltrator, the size and complexity of our business will increase significantly beyond the current size of either our or Infiltrator’s existing business. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and new types of manufacturing processes and products and associated increased costs and complexity. There can be no assurances that we will be successful after completion of the acquisition or that we will realize the expected benefits currently anticipated from our acquisition of Infiltrator.
The business of Infiltrator may underperform relative to our expectations.
We may not be able to maintain the levels of revenue, earnings or operating efficiency that we and Infiltrator have achieved or might achieve separately. The business and financial performance of Infiltrator is subject to certain risks and uncertainties, including the risk of the loss of, or changes to, its relationships with its customers. We may be unable to achieve the same growth, revenues and profitability that Infiltrator has achieved in the past.
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Advanced Drainage Systems, Inc.
The unaudited pro forma financial information related to the acquisition may not accurately reflect our financial position or results of operations.
The unaudited pro forma financial information contained in “Note 15 - Subsequent Events” to the notes to our unaudited financial statements included in this Quarterly Report and the unaudited pro forma financing information included in our Current Report on Form 8-K dated August 1, 2019, was presented for illustrative purposes only and may not be an indication of what our financial position or results of operations would have been had the Merger been completed on the dates indicated. The unaudited pro forma financial information was derived from our audited and unaudited historical financial statements along with those of Infiltrator, and certain adjustments and assumptions were made regarding the combined company after giving effect to the Merger. The assets and liabilities of Infiltrator were measured at fair value based on various preliminary estimates using assumptions that Infiltrator’s management believed to be reasonable utilizing information currently available. The process for estimating the fair value of acquired assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. These estimates and assumptions may be revised as additional information becomes available and as additional analyses are performed. Differences between preliminary estimates in the pro forma financial information and the final acquisition accounting will occur and could have a material impact on the pro forma financial information and the combined company’s financial position and future results of operations. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the Merger. Any potential decline in our financial condition or results of operations may cause significant variations in the trading price of our common stock following the Merger.
We borrowed under our new Credit Agreement to finance our acquisition of Infiltrator. Any failure by us to comply with operating and financial restrictions and covenants under the new Credit Facility could result in the accelerated maturity of debt obligations, which could materially and adversely affect our liquidity.
In connection with our acquisition of Infiltrator, we replaced our existing PNC Credit Agreement and Senior Notes with the Senior Secured Credit Facilities under the new Credit Agreement, which was used to finance the acquisition of Infiltrator. The new senior credit facility was provided under the new Credit Agreement that contains numerous restrictive covenants that limit our discretion in the operation of our business, which could have a materially adverse effect on our business, financial condition and results of operations. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required repayments under the Credit Agreement, or if we fail to comply with the requirements of our indebtedness, we could create an event of default under the Credit Agreement. Any default that is not cured or waived could result in the acceleration of the obligations under the Credit Agreement. Any such default which actually causes an acceleration of obligations could have a material adverse effect on our liquidity and financial condition. Additionally, the covenants in the Credit Agreement may restrict the conduct of our business, which could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be beneficial to our business. Our ability to comply with covenants contained in the Credit Agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions.
Item 2.Unregistered Sale of Equity Securities
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 June 30, 2019. As of June 30, 2019, 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.
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Advanced Drainage Systems, Inc.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
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Advanced Drainage Systems, Inc.
|
Item 6. |
Exhibits |
The following exhibits are filed herewith or incorporated herein by reference.
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Exhibit Number |
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Exhibit Description |
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4.1* |
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Advanced Drainage Systems, Inc. Employee Stock Ownership Plan, as amended May 30, 2019. |
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS* |
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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. |
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101.SCH* |
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XBRL Taxonomy Extension Schema. |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase. |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase. |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase. |
* Filed herewith
- 44 -
Advanced Drainage Systems, Inc.
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: August 1, 2019
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ADVANCED DRAINAGE SYSTEMS, INC. |
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By: |
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/s/ D. Scott Barbour |
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D. Scott Barbour |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
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/s/ Scott A. Cottrill |
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Scott A. Cottrill |
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Executive Vice President, Chief Financial Officer and Secretary |
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(Principal Financial Officer) |
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By: |
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/s/ Tim A. Makowski |
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Tim A. Makowski |
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Vice President, Controller, and Chief Accounting Officer |
- 45 -
Exhibit 4.1
ADVANCED DRAINAGE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective April 1, 2015)
Incorporating Amendments through May 30, 2019
ADVANCED DRAINAGE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective April 1, 2015)
Table of Contents
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Page Number |
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DEFINITIONS |
2 |
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1.1 |
Definitions |
2 |
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1.2 |
Acquisition Loan |
2 |
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1.3 |
Bargaining Unit |
2 |
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1.4 |
Beneficiary |
2 |
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1.5 |
Board of Directors |
2 |
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1.6 |
Break in Service |
2 |
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1.7 |
Code |
2 |
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1.8 |
Committee |
2 |
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1.9 |
Company |
2 |
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1.1 |
Company Stock |
2 |
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1.11 |
Compensation |
3 |
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1.12 |
Controlled Group Member |
4 |
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1.13 |
Eligible Employee |
4 |
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1.14 |
Employee |
4 |
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1.15 |
Employer |
6 |
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1.16 |
Employer ESOP Contribution |
6 |
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1.17 |
Employment Commencement Date |
6 |
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1.18 |
ERISA |
6 |
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1.19 |
ESOP Account or “Account” |
6 |
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1.20 |
Financed Shares |
6 |
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1.21 |
Forfeitures |
7 |
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1.22 |
Highly Compensated Employee |
7 |
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1.23 |
Hour of Service |
7 |
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1.24 |
Loan Suspense Account |
8 |
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1.25 |
Normal Retirement Age |
9 |
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1.26 |
Participant |
9 |
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1.27 |
[Reserved] |
9 |
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1.28 |
Period of Service |
9 |
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1.29 |
Period of Severance |
9 |
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1.30 |
Plan |
9 |
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1.31 |
Plan Administrator |
9 |
Table of Contents
(continued)
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Plan Year |
9 |
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1.33 |
Profit Sharing Plan |
9 |
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1.34 |
Reemployment Commencement Date |
9 |
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1.35 |
Severance from Service Date |
9 |
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1.36 |
Spouse |
10 |
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1.37 |
Suspended Participant |
10 |
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1.38 |
Termination Date |
10 |
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1.39 |
Total and Permanent Disability |
10 |
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1.40 |
Trust Agreement and Trust |
10 |
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1.41 |
Trustee |
11 |
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1.42 |
Trust Fund |
11 |
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1.43 |
Valuation Date |
11 |
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1.44 |
Year of Service |
11 |
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1.45 |
Special Dividend |
11 |
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ARTICLE II |
ELIGIBILITY AND PARTICIPATION |
12 |
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2.1 |
Eligibility and Participation |
12 |
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2.2 |
Termination and Rehiring |
12 |
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2.3 |
Duration of Participation |
13 |
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2.4 |
Special Eligibility and Vesting Rules |
13 |
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2.5 |
Special Eligibility and Vesting Rules for Employees of Hancor, Inc |
13 |
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2.6 |
Special Eligibility and Vesting Rules for Employees of ADS Ventures, Inc |
13 |
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ARTICLE III |
CONTRIBUTIONS |
14 |
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3.1 |
Employer ESOP Contributions |
14 |
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3.2 |
Acquisition Loans |
14 |
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3.3 |
No Participant Contributions |
17 |
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3.4 |
Reversion of Employer Contributions |
17 |
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ARTICLE IV |
ALLOCATIONS, ACCOUNTING AND ADJUSTMENTS |
19 |
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4.1 |
Participants’ ESOP Accounts |
19 |
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4.2 |
Adjustment of ESOP Stock Accounts |
19 |
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4.3 |
Adjustment of ESOP Cash Accounts |
19 |
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4.4 |
Adjustment of Profit Sharing Accounts |
20 |
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4.5 |
Allocation and Crediting of Employer ESOP Contributions and Forfeitures |
20 |
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4.6 |
Limitation on Allocations to Participants |
23 |
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4.7 |
Statement of Plan Interest |
25 |
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-ii- |
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Table of Contents
(continued)
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Page Number |
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Omission of Eligible Employee |
25 |
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4.9 |
Inclusion of Ineligible Employee |
25 |
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ARTICLE V |
VESTING |
26 |
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5.1 |
Full Vesting |
26 |
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5.2 |
Partially Vested Benefits |
26 |
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5.3 |
Termination of Employment and Forfeitures |
27 |
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5.4 |
Vesting After Break in Service |
28 |
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5.5 |
Deemed Distributions |
28 |
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ARTICLE VI |
TIME AND METHOD OF PAYMENT |
30 |
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6.1 |
Form of Distribution |
30 |
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6.2 |
Time for Distribution |
31 |
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6.3 |
Facility of Payment; Missing Payees |
33 |
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6.4 |
Absence of Guaranty |
33 |
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6.5 |
Designation of Beneficiary |
33 |
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6.6 |
Qualified Domestic Relations Order |
34 |
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6.7 |
Pre-Retirement Diversification Rights |
36 |
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6.8 |
Direct Rollovers |
38 |
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6.9 |
Minimum Distribution Requirements |
39 |
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ARTICLE VII |
VOTING AND TENDERING OF COMPANY STOCK |
46 |
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7.1 |
Voting |
46 |
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ARTICLE VIII |
RIGHTS, RESTRICTIONS AND OPTIONS ON COMPANY STOCK |
48 |
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8.1 |
Right of First Refusal |
48 |
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8.2 |
Put Option |
48 |
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8.3 |
Share Legend |
49 |
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8.4 |
Nonterminable Rights |
49 |
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ARTICLE IX |
DIVIDENDS |
50 |
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9.1 |
Dividends Credited to ESOP Cash Accounts |
50 |
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9.2 |
Dividends Paid to Participants |
50 |
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9.3 |
Dividends Used to Repay Acquisition Loan |
50 |
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9.4 |
Article IX Priority |
51 |
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ARTICLE X |
ADMINISTRATION OF PLAN |
52 |
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10.1 |
Named Fiduciaries |
52 |
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10.2 |
Membership and Authority |
52 |
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10.3 |
Delegation by Committee |
53 |
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10.4 |
Uniform Rules |
54 |
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-iii- |
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Table of Contents
(continued)
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Page Number |
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Information to Be Furnished to Committee |
54 |
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10.6 |
Committee’s Decision Final |
54 |
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10.7 |
Exercise of Committee’s Duties |
54 |
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10.8 |
Remuneration and Expenses |
55 |
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10.9 |
Resignation or Removal of Committee Member |
55 |
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10.10 |
Appointment of Successor Committee Members |
55 |
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10.11 |
Interested Committee Member |
55 |
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10.12 |
Records |
55 |
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10.13 |
Claims Procedure |
55 |
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10.14 |
Formal Review |
57 |
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ARTICLE XI |
AMENDMENT AND TERMINATION |
61 |
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11.1 |
Termination |
61 |
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11.2 |
Right to Amend, Modify, Change or Revise Plan |
61 |
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11.3 |
Merger and Consolidation of Plan, Transfer of Plan Assets |
61 |
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11.4 |
Vesting and Distribution on Termination and Partial Termination |
62 |
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ARTICLE XII |
TOP-HEAVY PROVISIONS |
63 |
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12.1 |
Applicability |
63 |
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12.2 |
Top-Heavy Definitions |
63 |
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12.3 |
Minimum Employer Contributions |
64 |
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12.4 |
Adjustments to Code Section 415 Limitations |
65 |
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12.5 |
Minimum Vesting Requirement |
65 |
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12.6 |
Coordination with Other Plans |
65 |
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ARTICLE XIII |
MISCELLANEOUS |
67 |
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13.1 |
Adoption of the Plan by Other Employers |
67 |
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13.2 |
No Contract of Employment |
67 |
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13.3 |
Restrictions upon Assignments and Creditor’s Claims |
67 |
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13.4 |
Restriction of Claims Against Trust |
68 |
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13.5 |
Benefits Payable by Trust |
68 |
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13.6 |
Successor to Plan |
68 |
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13.7 |
Applicable Laws |
68 |
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13.8 |
Illegality of Particular Provision |
68 |
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-iv- |
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Table of Contents
(continued)
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Page Number |
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13.9 |
Notices |
68 |
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13.10 |
Evidence |
68 |
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13.11
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Contributions Are for Exclusive Benefit of Participants and Beneficiaries |
68 |
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13.12 |
Provisions with Respect to Uniformed Services Employment and Reemployment Rights Act of 1994 |
68 |
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ARTICLE XIV |
INDEPENDENT FIDUCIARY |
70 |
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14.1 |
Appointment of Special Fiduciary |
70 |
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14.2 |
Special Fiduciary Trustee Direction |
70 |
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14.3 |
Special Fiduciary Indemnification |
70 |
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EXECUTION |
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71 |
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-v- |
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Composite
ADVANCED DRAINAGE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective April 1, 2015)
Advanced Drainage Systems, Inc. (the “Company”) hereby amends and completely restates the Advanced Drainage Systems, Inc. Employee Stock Ownership Plan (the “Plan”) effective, except as otherwise indicated, April 1, 2015 (the “Effective Date”). The Plan was originally effective April 1, 1993. The Plan is designed to invest primarily in Company Stock and is intended to meet the applicable requirements of Section 401(a), 409 and 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the “Code”).
The Plan as amended and restated, effective April 1, 2015, hereby incorporates all amendments to the April 1, 2010 amendment and restatement of the Plan (that was executed on December 3, 2013) from 2010 through 2014. The Plan is maintained for the exclusive benefit of Eligible Employees, former Employees, and their Beneficiaries. The provisions of this amended and restated Plan document apply only to Employees who retire, die or otherwise terminate their employment on or after April 1, 2015. Employees who retired, died or otherwise terminated their employment prior to April 1, 2015 shall have their interest determined under the provisions of the Plan in effect at that time.
DEFINITIONS
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1.4 |
Beneficiary. The term “Beneficiary” as used in the Plan means the person or persons to whom a deceased Participant’s benefits are payable under Section 6.5. |
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1.6 |
Break in Service. The term “Break in Service” means a Plan Year (or other applicable period) during which an Employee fails to complete more than 500 Hours of Service. |
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1.8 |
Committee. The persons to whom the Company has delegated its administrative duties as Plan Administrator pursuant to Article X of the Plan. |
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1.9 |
Company. The term “Company” means Advanced Drainage Systems, Inc., a C corporation within the meaning of Code Section 1361(a)(2). |
- 2 -
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(a) |
that class of common stock of the Company or a Controlled Group Member having the greatest voting power, and |
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(b) |
that class of common stock of the Company or a Controlled Group Member having the greatest dividend rights. |
Non-callable preferred stock shall be treated as Company Stock if such stock is convertible at any time into stock which meets the requirements of (a) and (b) next above and if such conversion is at a conversion price which (as of the date of the acquisition by the Plan) is reasonable. For purposes of the last preceding sentence, preferred stock shall be treated as non-callable if, after the call, there will be a reasonable opportunity for a conversion which meets the requirements of the last preceding sentence. If the proceeds from an Acquisition Loan that is subject to the provisions of Section 133 of the Code are used to acquire preferred shares of Company Stock, then such preferred shares must have voting rights equivalent to the common stock into which they may be converted.
The annual Compensation of each Employee taken into account under the Plan shall not exceed the dollar amount specified in Code Section 401(a)(17)(A), currently $265,000 as of the Effective Date, as adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (the “determination period”) beginning in such calendar year. If a determination period consists of fewer than 12 months, the annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12.
For purposes of the limitation on allocations under Section 415 of the Code, Compensation is further defined in Section 4.6 of the Plan.
Notwithstanding the foregoing, effective March 1, 2005, for purposes of contributions and allocations pursuant to the Plan (including, but not limited to, Sections 3.1, 4.5 and 9.3 of the Plan), Compensation excludes (i) income described in Code Sections 931(a)(1) and (2) from sources within a “specified possession” as defined in Code Section 931(c); (ii) income described in Code Section 932(a)(1)(A)(ii) from sources within the Virgin Islands; and (iii) income described in Code Sections 933(1) and (2) from sources within Puerto Rico.
- 3 -
Effective for limitation years beginning on or after July 1, 2007, payments made by the later of 2 ½ months after severance from employment or the end of the limitation year that includes the severance from employment will be Compensation if they are payments that, absent a severance from employment, would have been paid to the Participant while the Participant continued in employment with the Employer and are regular compensation for services during the Participant’s regular working hours, compensation for services outside the Participant’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar compensation. Any payments not described above are not considered Compensation if paid after severance from employment, even if they are paid within 2 ½ months following severance from employment, except for payments to an individual who does not currently perform services for the Employer by reason of qualified military service (within the meaning of Code Section 414(u)(1)) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service.
Notwithstanding the foregoing, (i) for the purposes of the contribution and allocation of Employer contributions pursuant to the Plan for the Plan Year ending March 31, 2010, the Compensation of a Participant who is an Employee of ADS Ventures, Inc. includes his Compensation received during the period from March 1, 2010, through March 31, 2010; and (ii) for the purposes of the contribution and allocation of Employer contributions pursuant to the Plan for the Plan Year ending March 31, 2011, the Compensation of a Participant who is an Employee of ADS Ventures, Inc. includes his Compensation received during the period from April 1, 2010, through December 31, 2010.
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1.13 |
Eligible Employee. An Employee of an Employer who is eligible to participate in the Plan in accordance with Article II. |
- 4 -
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(b) |
Exclusion of Independent Contractors. No individual who is deemed to be an independent contractor, as determined by the Plan Administrator in its sole discretion, or individual performing services for the Employer pursuant to an agreement that provides that such individual shall not be eligible to participate in the retirement or other benefit plans of the Employer, shall be considered to be employed in Covered Employment for purposes of the Plan, irrespective of whether such individual is or is not an Employee. |
- 5 -
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designating such person as an Employee of the Employer who is no longer a reclassified employee. |
The ESOP Stock Account is that separate subaccount which is maintained for each Participant to which are allocated any Employer ESOP Contributions made in Company Stock, his allocable share of released Financed Shares, his allocable share of Company Stock Forfeitures and any Company Stock attributable to earnings on such stock (such as stock dividends).
The Profit Sharing Account is that separate subaccount which is maintained for each Participant who was a participant in the Profit Sharing Plan, which account will reflect the assets transferred from his accounts in the Profit Sharing Plan, his share of Company Stock purchased with assets transferred from his accounts in the Profit Sharing Plan, and any Company Stock attributable to earnings on such stock (such as stock dividends). The Profit Sharing Account is fully vested at all times.
The ESOP Cash Account is that separate subaccount which is maintained for each Participant to which are allocated any ESOP Contributions made in cash, cash transferred from the Profit Sharing Plan, any cash dividends on Company Stock allocated and credited to his ESOP Stock Account (other than dividends that are currently distributable or that are reinvested in Company Stock), his allocable share of cash Forfeitures and any income, gains, losses, appreciation or depreciation attributable thereto.
The Stock Forfeiture Account is that separate subaccount which is maintained for each Participant who has terminated employment to which is allocated any nonvested portion of his ESOP Stock Account that is forfeited under Section 5.3.
The Cash Forfeiture Account is that separate subaccount which is maintained for each Participant who has terminated employment to which is allocated any nonvested portion of his ESOP Cash Account that is forfeited under Section 5.3.
- 6 -
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(a) |
A highly compensated active Employee means any Employee who performs services for the Employer during the determination year and who: |
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(i) |
during the look-back year received Compensation (as defined in Section 4.6) in excess of $120,000 (such dollar limitation shall be adjusted automatically in accordance with the maximum amount permitted under Code Section 414(q)); or |
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(ii) |
was a five-percent owner at any time during the look-back year or determination year; and |
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(iii) |
was a member of the top-paid group for such year. |
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(b) |
A highly compensated former Employee means any Employee who separated from service (or was deemed to have separated) prior to the determination year, performs no services for the Employer during the determination year, and was a highly compensated active Employee for either the separation year or any determination year ending on or after the Employee’s 55th birthday. |
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(c) |
For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve-month period immediately preceding the determination year. |
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(d) |
The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group and the Compensation that is considered, will be made in accordance with Code Section 414(q) and the regulations thereunder. |
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(a) |
Each hour (1) for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer or other member of the Controlled Group, if applicable, for the performance of duties during the applicable computation period; (2) for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer or other member of the Controlled Group, if applicable, (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period; and (3) for which back pay is awarded or agreed to by the Employer or other member of the Controlled Group, if applicable, without regard to mitigation of damages (provided that the same Hours of Service shall not be credited under both this item (3) and items (1) or (2) above). |
- 7 -
Notwithstanding the above, (1) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (2) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed, is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker’s compensation, unemployment compensation or disability insurance laws; and (3) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by or due from the Employer or other member of the Controlled Group, if applicable, regardless of whether such payment is made by or due from the Employer or other member of the Controlled Group, if applicable, directly or indirectly through, among others, a trust fund, or insurer, to which the Employer or other member of the Controlled Group, if applicable, contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate.
The provisions of Department of Labor regulations Sections 2530.200b-2(b) and (c) are incorporated herein by reference.
Notwithstanding the above, an Employee for whom records of his actual number of Hours of Service are not normally maintained shall be credited with ten Hours of Service for each day he would be required to be credited with at least one Hour of Service as defined herein.
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|
(b) |
Solely for the purpose of determining whether a Participant has incurred a Break in Service or a Period of Severance, Hours of Service shall be recognized for “maternity and paternity leave of absence” as specified herein. A “maternity and paternity leave of absence” means an absence from work for any period by reason of the Participant’s pregnancy, birth of the Participant’s child, placement of a child with the Participant in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefor is necessary to prevent the Participant from incurring a one-year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a “maternity or paternity leave of absence” shall be those which would normally have been credited but for such absence, or, in any case in which the Plan Administrator is unable to determine such hours normally credited, eight Hours of Service per day. The total Hours of Service required to be credited for a “maternity or paternity leave of absence” shall not exceed 501. |
- 8 -
|
1.31 |
Plan Administrator. “Plan Administrator” means the Company, which shall serve pursuant to the provisions of Article X. |
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|
(a) |
the date on which a Participant retires, dies or terminates employment (provided, however, that employment shall not be deemed to have terminated upon (i) employment by another Employer or other Controlled Group Member, or (ii) a termination of employment if the Employee is reemployed by an Employer prior to the one-year anniversary of his Severance from Service Date); or |
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|
(b) |
the first anniversary of the first day of a period in which an Employee remains absent from service (with or without pay) with the Employer for any reason other than those listed in (a) above (such as vacation, holiday, sickness, disability, leave of absence, layoff or a “maternity/paternity leave of absence,” as defined in Section 1.23(b). |
- 9 -
|
|
(a) |
Normal or Late Retirement. The Participant retires or is retired, as permitted by applicable law, from the employ of the Employers and the Controlled Group Members on or after the date on which he attains Normal Retirement Age. |
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|
(b) |
Total and Permanent Disability. The Participant’s employment is terminated by reason of his Total and Permanent Disability. |
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|
(c) |
Death. The Participant’s death. |
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|
(d) |
Resignation or Dismissal. The Participant resigns or is dismissed from the employ of the Employers and the Controlled Group Members before retirement (in accordance with paragraph (a) or (b) above). |
- 10 -
|
1.41 |
Trustee. The person or financial institution appointed by the Company to act as Trustee of the Trust pursuant to the Trust Agreement. |
|
1.42 |
Trust Fund. All cash, securities, real estate, or any other property held by the Trustee pursuant to the terms of the Trust Agreement, together with the income therefrom. |
- 11 -
ELIGIBILITY AND PARTICIPATION
|
|
(a) |
Each Employee shall become an Eligible Employee on the date that coincides with his attainment of age 18 and completion of a six-month Period of Service. Each Eligible Employee shall become a Participant in the Plan on the Valuation Date which coincides with or next follows the date on which he becomes an Eligible Employee. |
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|
(b) |
[Reserved] |
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|
(c) |
Transfers. Any ineligible Employee who ceases to be an ineligible Employee (including by reason of a transfer to the employ of a Controlled Group Member which is an Employer hereunder) shall become a Participant as follows: (i) if the Employee has completed the eligibility requirements of this Section, then he shall become a Participant on the day he becomes an Eligible Employee; and (ii) if the Employee has not completed the eligibility requirements of this Section, then he shall become a Participant on the day he becomes an Eligible Employee provided he has not separated from service prior to such date. An Eligible Employee who becomes an ineligible Employee (including by reason of a transfer to the employ of a member of the Controlled Group which is not an Employer hereunder) shall be treated as if he had terminated his employment with the Employer on the date that he becomes an ineligible Employee for purposes of sharing in further contributions under the Plan, but he shall continue to be credited with Hours of Service for vesting purposes for his service as an ineligible Employee. |
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(d) |
Notwithstanding the provisions of subsections (a) and (c), no Employee who is prohibited by Code Section 409(n) from receiving an allocation of Company Stock shall be eligible to be a Participant in the Plan. |
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(a) |
A Participant who terminates employment and who is subsequently rehired shall be eligible to again participate on his Reemployment Commencement Date. |
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(b) |
An Eligible Employee who terminates employment after meeting the eligibility requirements of Section 2.1 but before becoming a Participant and who is subsequently rehired shall be eligible to again participate on the Valuation Date following his Reemployment Commencement Date. |
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(c) |
An Employee who terminates employment before meeting the eligibility requirements of Section 2.1 and who is reemployed prior to incurring a one year Period of Severance shall have his Period of Severance counted as a Period of Service for determining his eligibility to participate. |
- 12 -
- 13 -
CONTRIBUTIONS
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(a) |
the maximum amount deductible by that Employer as an expense for Federal income tax purposes; or |
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(b) |
the maximum amount which, together with the amount of the Employer’s ESOP Contributions which are to be credited to the ESOP Accounts of Participants from a Loan Suspense Account for that Plan Year, can be credited for that year in accordance with the contribution limitation provisions of Section 4.5. |
An Employer’s ESOP Contribution under this Section 3.1 for any Plan Year shall be due on the last day of the Plan Year and, if not paid by the end of that year, shall be payable to the Trustee as soon thereafter as practicable, but not later than the time prescribed for filing the Employer’s Federal income tax return for the Employer’s fiscal year within which ends such Plan Year, including any extensions of time, without interest, provided, however, that in no event will the contribution be made later than the due date of any indebtedness under the Acquisition Loan for that Plan Year.
- 14 -
|
transferred upon default only upon and to the extent of the failure of the Plan to meet the repayment schedule of the Acquisition Loan. |
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(a) |
Financed Shares. Except as provided in Section 409(l) of the Code or Treasury Regulation Section 54.4975-7(b)(9) and (10), or as otherwise provided by applicable law, no Financed Shares acquired by the Trustee with the proceeds of an Acquisition Loan may be subject to a put, call or other option or buy-sell or similar arrangement while held by and when distributed from the Plan. |
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(b) |
Collateral. An Acquisition Loan may be secured by a collateral pledge of the Financed Shares so acquired and any other Plan assets which are a permissible security within the provisions of Treasury Regulation Section 54.4975-7(b). No other assets of the Plan or Trust may be pledged as collateral for an Acquisition Loan, and no lender shall have recourse against any other Plan assets. |
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(c) |
Loan Payment. Repayment of principal and interest on any Acquisition Loan shall be made by the Trustee from annual Employer ESOP Contributions made pursuant to Section 3.1 above and may also be made from the following sources pursuant to the provisions of Section 9.3: |
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(i) |
Cash dividends on Financed Shares, which are allocated to Participants’ ESOP Stock Accounts and earnings, if any, on such dividends; and |
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(ii) |
Cash dividends on Company Stock held in the Loan Suspense Account and earnings, if any, thereon. |
Payments shall be applied first to pay interest, and then to pay principal obligations under the Acquisition Loan.
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(d) |
Release of Financed Shares. Financed Shares shall initially be credited to a Loan Suspense Account and shall be transferred for allocation to the ESOP Stock Accounts of Participants as payments of principal and interest are made on the Acquisition Loan by the Trustee, and any pledge of Financed Shares must provide for the release of shares so pledged on a consistent basis. |
The number of Financed Shares to be released from the Loan Suspense Account for allocation to Participants’ ESOP Stock Accounts as of each Valuation Date shall equal the number of Financed Shares held in the Loan Suspense Account immediately prior to such Valuation Date multiplied by a fraction, the numerator of which is equal to the payments of principal and interest on the Acquisition Loan for the year ending on such date, and the denominator of which is equal to the sum of the numerator plus the total projected payments of principal and interest on the Acquisition Loan over the duration of the Acquisition Loan repayment period, subject to the provisions of Section 4.6.
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(e) |
Allocation of Financed Shares. The released Financed Shares shall be allocated to Participants’ ESOP Stock Accounts in accordance with the provisions of Sections 4.5 and 9.3. |
- 15 -
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(1) |
Use of loan proceeds. The proceeds of an Acquisition Loan must be used within a reasonable time after their receipt by the Plan only for any or all of the following purposes: |
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(i) |
To acquire Company Stock. |
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(ii) |
To repay such loan. |
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(iii) |
To repay a prior Acquisition Loan. A new Acquisition Loan, the proceeds of which are so used, must satisfy the provisions of this Section 3.2(f). |
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(2) |
Liability and collateral of Plan for loan. An Acquisition Loan must be without recourse against the Plan. Furthermore, the only assets of the Plan that maybe given as collateral on an Acquisition Loan are Company Stock of two classes: those acquired with the proceeds of the loan and those that were used as collateral on a prior Acquisition Loan repaid with the proceeds of the current Acquisition Loan. No person entitled to payment under the Acquisition Loan shall have any right to assets of the Plan other than: |
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(i) |
Collateral given for the loan, |
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(ii) |
Contributions (other than contributions of Company Stock) that are made under the Plan to meet its obligations under the loan; and |
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(iii) |
Earnings attributable to such collateral and the investment of such contributions. |
The payments made with respect to an Acquisition Loan by the Plan during a Plan Year must not exceed an amount equal to the sum of such contributions and earnings received during or prior to the year less such payments in prior years. Such contributions and earnings must be accounted for separately in the books of account of the Plan until the loan is repaid.
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(3) |
Suspense Account. All assets acquired by the Plan with the proceeds of an Acquisition Loan under Code Section 4975(d)(3) must be added to and maintained in a suspense account (i.e., the Loan Suspense Account). They are to be withdrawn from the suspense account by applying Treasury Regulation Section 54.4975-7(b)(8) and (15) as if all securities in the suspense account were encumbered. Assets in such suspense accounts are assets of the Plan. Therefore, such assets are subject to Code Section 401(a)(2). |
- 16 -
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(5) |
Continuing loan provisions under Plan. |
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(i) |
Creation of protections and rights. The terms of the Plan (i.e., Article VIII) formally provide Participants with certain protections and rights with respect to the Plan assets acquired with the proceeds of an Acquisition Loan. These protections and rights are those referred to the third sentence of Treasury Regulation Section 54.4975-7(b)(4), relating to put, call, or other options and to buy-sell or similar arrangements, and in Treasury Regulation Section 54.4975-7(b)(10), (11), and (12), relating to put options. |
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(ii) |
“Nonterminable” protections and rights. The terms of the Plan also formally provide that these protections and rights are nonterminable. If the Plan holds or has distributed Company Stock acquired with the proceeds of an Acquisition Loan and either the loan is repaid or the Plan ceases to be an employee stock ownership plan, these protections and rights continue to exist under the terms of the Plan. However, the protections and rights will not fail to be nonterminable merely because they are not exercisable under Treasury Regulation Section 54.4975-7(b)(11) and (12)(ii). |
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(a) |
Employer contributions under the Plan are conditioned upon initial qualification of the Plan under Section 401(a) of the Code for that year, and, if the Plan does not so qualify, the Trustee shall, upon written request of an Employer, return to that Employer any contributions made by that Employer under the Plan conditioned upon initial qualification, reduced by the amount of any losses thereon and increased by the amount of any income thereon and increased by the amount of any income thereon, within one year after the date that qualification of the Plan is denied, but only if an application for qualification is submitted within the time prescribed by law; |
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(b) |
if a contribution or any portion thereof is made by an Employer by a mistake of fact, the Trustee shall, upon written request of that Employer, return the |
- 17 -
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contribution or such portion, reduced by the amount of any losses thereon, to that Employer within one year after the date of payment to the Trustee; |
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(c) |
the contributions of each Employer under the Plan are conditioned upon the deductibility thereof under Section 404 of the Code, and, to the extent any such deduction is disallowed, the Trustee shall, upon written request of that Employer, return the amount of the contribution (to the extent disallowed), reduced by the amount of any losses thereon, to that Employer within one year after the date the deduction is disallowed; and |
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(d) |
if, upon termination of the Plan with respect to any Employer, any amounts are held in a suspense account which are attributable to the contribution of such Employer, and such amounts may not be credited to the Accounts of Participants, such amounts will be returned to that Employer as soon as practicable after the termination of the Plan with respect to that Employer, to the extent permissible under ERISA. |
The Company may direct the Trustee to make such equitable and practical adjustments as may be necessary to correct any mistake of fact or other error, and to make any other equitable adjustments made necessary because of the existence of circumstances described in the foregoing subsections (a), (b) and (c).
- 18 -
ALLOCATIONS, ACCOUNTING AND ADJUSTMENTS
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(a) |
First, charge to the appropriate ESOP Stock Account of each Participant all distributions and payments made to him, or on his account, since the last preceding Valuation Date that have not been charged previously; |
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(b) |
Next, credit to each Participant’s ESOP Stock Account the shares of Company Stock (including the exchange of Company Stock in a Participant’s ESOP Stock Account for cash at the value determined for purposes of the distributions under Section 6.1 in other Participants’ ESOP Cash Accounts, in order for the Trustee to make a distribution to a Participant), if any, that have been purchased with amounts from his ESOP Cash Account since the last preceding Valuation Date, and adjust such accounts in accordance with the provisions of Sections 4.3 and 4.5; and |
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(c) |
Finally, allocate and credit to each Participant’s ESOP Stock Account the shares of Company Stock (representing each Employer’s ESOP Contributions made in Company Stock) and Company Stock Forfeitures (to the extent not required for restoration purposes under Section 5.4 of the Plan) that are to be allocated and credited as of that date in accordance with the provisions of Sections 4.3 and 4.5. |
- 19 -
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dividends may be paid to the Participant or reinvested in Company Stock, as described in Article IX. |
As of each Valuation Date, before the allocation of any Employer ESOP Contributions made in cash, as of such date, any appreciation, depreciation, income, gains or losses in the fair market value of the Participants’ ESOP Cash Accounts shall be allocated among and credited to the ESOP Cash Accounts of Participants, pro rata, according to the balance of each ESOP Cash Account as of the immediately preceding Valuation Date, reduced in each case by the amount of any charge to said ESOP Cash Account since the next preceding Valuation Date. In the event of a sale of Company Stock by the Trustee to a third party, any gain or loss realized by the Trustee on the sale of Company Stock will be allocated as follows:
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(a) |
in the event of a sale of Company Stock allocated to Participant’s ESOP Stock Accounts, any gain or loss realized by the Trustee on such Company Stock shall be allocated to the ESOP Cash Account of such Participant; |
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(b) |
in the event of a sale of Company Stock held in the Loan Suspense Account, pro rata, according to the balance of Participants’ ESOP Stock Accounts. |
For purposes of this Section 4.3, references to a Participant’s ESOP Stock Account shall also include his Stock Forfeiture Account, if any, and references to a Participant’s ESOP Cash Account shall also include his Cash Forfeiture Account, if any.
- 20 -
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completed a Year of Service during the Plan Year and were employed by the Employer on the last day of the Plan Year, as follows: |
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(a) |
First, to the extent permitted by the contribution limitation provisions of Section 4.6, such shares shall be allocated among and credited to the ESOP Stock Accounts of such Participants, pro rata, according to the Compensation paid to them, respectively, by that Employer for that year; and |
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(b) |
Next, if after the allocation described in paragraph (a) next above, any portion of such shares remain unallocated due to the application of the limitation provisions of Section 4.6, then, to the extent permitted by Section 4.6, such shares and amount shall be allocated and reallocated among and credited to the ESOP Stock Accounts of the remaining Participants entitled to share in such Company Stock for that year, pro rata, according to the Compensation paid to them, respectively, by that Employer for that year until all amounts are allocated or the limitations of Section 4.6 are reached as to each Participant entitled to share in the allocation. |
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(c) |
If, after the allocation specified in paragraph (b) next above, due to the limitations of Section 4.6, any portion of such shares to be otherwise allocated remains unallocated, such portion shall be credited to and held in a suspense account, as described in Section 4.6, to the extent that it does not exceed the amount contributed by the Employers for that Plan Year as a result of a reasonable error in estimating Participants’ Compensation or as a result of such other circumstances as the Commissioner of Internal Revenue may determine. For purposes of the Plan, amounts credited to a suspense account for any Plan Year shall be treated as an Employer ESOP Contribution under the provisions of Section 3.1 for the subsequent Plan Year or Plan Years until all amounts so held have been credited to the ESOP Accounts of Participants. |
- 21 -
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ten years after the date of sale or the date of the allocation attributable to the final payment on the Acquisition Loan incurred with respect to the sale. |
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(e) |
Notwithstanding anything herein to the contrary, if the Plan would otherwise fail to meet the requirements of Code Sections 401(a)(26), 410(b)(1) or 410(b)(2)(A)(i) and the Treasury Regulations thereunder because Employer contributions have not been allocated to a sufficient number or percentage of Participants for a Plan Year, then the following rules shall apply: |
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(i) |
The group of Participants eligible to share in the Employer contributions and Forfeitures for the Plan Year shall be expanded to include the minimum number of Participants, who would not otherwise be eligible, as are necessary to satisfy the applicable test specified above. The specific Participants who shall become eligible under the terms of this paragraph shall be those Participants who are actively employed on the last day of the Plan Year and, when compared to similarly situated Participants, have completed the greatest number of Hours of Service in the Plan Year. |
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(ii) |
If after application of paragraph (i) above, the applicable test is still not satisfied, then the group of Participants eligible to share in the Employer Contributions and Forfeitures for the Plan Year shall be further expanded to include the minimum number of Participants who are not actively employed on the last day of the Plan Year as are necessary to satisfy the applicable test. The specific Participants who shall become eligible under the terms of this paragraph shall be those Participants, when compared to similarly situated Participants, who have completed the greatest number of Hours of Service in the Plan Year before terminating employment. |
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(iii) |
Nothing in this Section shall permit the reduction of a Participant’s accrued benefit. Therefore, any amounts that have previously been allocated to Participants shall not be reallocated to satisfy these requirements. In such event, the Employer shall make an additional contribution equal to the amount such affected Participants would have received had they been included in the allocations, even if it exceeds the amount which would be deductible under Code Section 404. Any adjustment to the allocations pursuant to this paragraph shall be considered a retroactive amendment adopted by the last day of the Plan Year. |
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(f) |
Notwithstanding any other provision of the Plan to the contrary, if any group or groups of Eligible Employees hereunder are included in a Bargaining Unit, the following rules shall apply: |
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(i) |
Amounts shall be allocated among and credited to the ESOP Stock Accounts of Employees who are members of a Bargaining Unit only in the amounts, if any, provided in the applicable collective bargaining agreement. |
- 22 -
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(ii) |
The provisions of Article XII shall not apply with respect to Participants who are members of a Bargaining Unit. |
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(a) |
For purposes of this Section, the following terms shall have the indicated meanings: |
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(i) |
The term “Annual Additions” means the amount defined in Section 415(c)(2) of the Code, except that if, during any Plan Year, no more than one-third of the Employer ESOP Contributions which are deductible under Section 404(a)(9) of the Code are allocated to the ESOP Accounts of Highly Compensated Employees during the Plan Year, then any Employer ESOP Contributions which are applied by the Trustee to pay interest on an Acquisition Loan, and any Financed Shares which are allocated as Forfeitures, shall not be included in computing Annual Additions. |
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(ii) |
The term “Compensation” means compensation as defined in Section 415(c)(3) of the Code, including the items specified in Treasury Regulation Section 1.415(c)-2(b)(1) and excluding the items specified in Treasury Regulation Section 1.415(c)-2(c); provided, however, that, effective for Plan Years beginning after December 31, 1997, the items specified in Section 415(c)(3)(D) of the Code shall be included; and provided further that in no event shall Compensation exceed the limitation in effect for any Plan Year under Section 401(a)(17) of the Code. Effective for limitation years beginning on or after July 1, 2007, payments made by the later of 2 ½ months after severance from employment or the end of the limitation year that includes the severance from employment will be Compensation if they are payments that, absent a severance from employment, would have been paid to the Participant while the Participant continued in employment with the Employer and are regular compensation for services during the Participant’s regular working hours, compensation for services outside the Participant’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar compensation. Any payments not described above are not considered Compensation if paid after severance from employment, even if they are paid within 2 ½ months following severance from employment, except for payments to an individual who does not currently perform services for the Employer by reason of qualified military service (within the meaning of Code Section 414(u)(1)) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service. |
- 23 -
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the percentage of such Participant’s Compensation paid for a limitation year as set forth in Section 415(c)(1)(B) of the Code, which for purposes of this clause (ii) shall not include any contribution for medical benefits after separation from service (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition. Notwithstanding the foregoing, in the event that a short limitation year is created due to an amendment changing the limitation year to a different 12-month consecutive period, such Annual Additions shall not exceed the dollar amount under clause (i) above multiplied by a fraction, the numerator of which is the number of months in the short limitation year and the denominator of which is 12. |
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(iv) |
The term “Employer” means the Employers and all Controlled Group Members; provided, however, that for purposes of applying the limitations of this Section, “50 percent” rather “80 percent” shall be used in determining a Controlled Group Member for purposes of Section 414(b) and Section 414(c) of the Code. |
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(b) |
Notwithstanding any other provision of the Plan to the contrary, the amount of Annual Additions that may be credited to a Participant’s ESOP Account for any limitation year shall not exceed the lesser of the Defined Contribution Maximum Permissible Amount or any other limitation contained in the Plan. If the Annual Additions to the ESOP Account of a Participant in any limitation year would otherwise exceed such amount, the excess amount shall be disposed of as follows: |
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(i) |
Corrections for excess Annual Additions will be made first under the Profit Sharing Plan. |
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(ii) |
If any amount of excess Annual Additions remains after the corrections made under the Profit Sharing Plan, the excess amount shall be reallocated among the remaining Participants’ Accounts as provided in Section 4.5; provided, however, that such reallocation shall not cause the Annual Additions to any other Participant’s Account to exceed the Defined Contribution Maximum Permissible Amount. |
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(iii) |
If such allocation causes the Annual Addition to each Participant’s Account to exceed the Defined Contribution Maximum Permissible Amount for the limitation year, then these excess amounts shall be held unallocated in a suspense account. If a suspense account is in existence at any time during a particular limitation year, other than the limitation year described in the preceding sentence, all amounts in the suspense account must be allocated or reallocated to the Participants’ ESOP Account (not to exceed the Defined Contribution Maximum Permissible Amounts) before any contributions which would constitute Annual Additions may be made to the Plan for that limitation year. |
- 24 -
- 25 -
VESTING
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5.1 |
Full Vesting. A Participant shall have a fully vested and non-forfeitable interest in his ESOP Accounts on the first to occur of the following: |
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(a) |
his sixty-fifth birthday; |
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(b) |
the date of his death; |
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(c) |
his completion of the required vesting Years of Service, pursuant to Section 5.2; |
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(d) |
upon termination of the Plan or complete discontinuance of contributions pursuant to Section 11.1 of the Plan; or |
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(e) |
the date on which he is determined to suffer from a Total and Permanent Disability. |
A Participant shall at all times be fully vested in his Profit Sharing Account.
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(a) |
Prior to April 1, 2007. Prior to April 1, 2007, a Participant shall vest in the value of that portion of his ESOP Account other than his Profit Sharing Account in accordance with the schedule set forth in the following table: |
Number ofVested
Years of ServicePercentage
Less than 3 years0%
3 years but less than 4 years20%
4 years but less than 5 years40%
5 years but less than 6 years60%
6 years but less than 7 years80%
7 years or more100%
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(b) |
Vesting Beginning April 1, 2007. This subsection (b) applies to Participants who complete an Hour of Service under the Plan in a Plan Year, beginning on or after April 1, 2007. Such a Participant shall vest in the value of that portion of his ESOP Account other than his Profit Sharing Account in accordance with the schedule set forth in the following table: |
Number ofVested
Years of ServicePercentage
Less than 2 years0%
2 years but less than 3 years20%
3 years but less than 4 years40%
4 years but less than 5 years60%
5 years but less than 6 years80%
- 26 -
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(c) |
If any amendment directly or indirectly changes the vesting schedule, a Participant with three or more Vesting Years of Service may elect to have his vested percentage computed under the vesting schedule in effect prior to the amendment by filing a written request with the Plan Administrator within 60 days after the latest of (1) the date he received notice of such amendment, (2) the date such amendment was adopted, and (3) the date such amendment became effective. |
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(a) |
No Reemployment Before Break in Service. If the Participant does not return to employment with an Employer or a Controlled Group Member prior to incurring a Break in Service, the balances in his Cash Forfeiture Account and Stock Forfeiture Account, determined as of the Valuation Date coincident with or next following the date on which he incurs a Break in Service (after all adjustments then required under the Plan have been made) will be deemed Forfeitures and will be allocated and credited in accordance with the provisions of Sections 4.3 and 4.5. |
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(b) |
Reemployment Before Break in Service. If the Participant returns to employment with an Employer or a Controlled Group Member prior to incurring a Break in Service and subsequently becomes eligible for Plan benefits in accordance with the provisions of Section 5.1, the balances in his Stock Forfeiture Account and Cash Forfeiture Account as of the next following Valuation Date (after all adjustments then required under the Plan have been made) will be distributable to or for his benefit or, in the event of his death, to or for the benefit of his Beneficiary, in accordance with the provisions of Article VI. |
The balances in his ESOP Cash Account and ESOP Stock Account, if any, after the foregoing multiplication, and the entire balance of his Profit Sharing Account, if any, will become distributable to or for his benefit or, in the event of his death, to or for the benefit of his Beneficiary, in accordance with the applicable provisions of Article VI.
- 27 -
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(a) |
Reemployment Before Five Year Break in Service. If a participant returns to employment with an Employer or a Controlled Group Member after incurring a one year Break in Service but before incurring five consecutive one year Breaks in Service, he may repay the amounts previously distributed to him, in which event the Forfeitures will be restored to his ESOP Stock Account and ESOP Cash Account as of the last day of the Plan Year in which he repays such distribution (provided he is actively employed on such last day of the Plan Year), and he will continue to increase his vested percentage in such Accounts as if he had never received a distribution. The funds for such restoration shall come first from Forfeitures allocated at the end of such Plan Year, to the extent available, and, if necessary, thereafter from additional contributions to the Plan by the Employer. If a Participant exercises his right of repayment, he must do so by the earlier to occur of the fifth anniversary of his date of reemployment or the last day of the Plan Year in which he would have incurred five consecutive one year Breaks in Service had he not been reemployed. The Participant must repay in a single lump sum to the Trustee, without interest, the amount of cash, and fair market value of other property, received from his ESOP Stock Account and ESOP Cash Account. If a Participant exercises his right of repayment, upon such Participant’s subsequent Termination Date, his Forfeiture Account will be distributable to or for his benefit or, in the event of his death, to or for the benefit of his Beneficiary, in accordance with Article VI. |
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(b) |
Reemployment After Five Year Break in Service. For purposes of determining a Participant’s nonforfeitable portion of his ESOP Accounts, including his Stock Forfeiture Account and Cash Forfeiture Account, if any, earned prior to the date he incurs at least five consecutive one year Breaks in Service, a Participant’s number of Years of Service completed after incurring such a period of Breaks in Service shall be disregarded. |
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(c) |
Zero Vested Interest. For purposes of determining a Participant’s nonforfeitable portion of his ESOP Accounts, if an Employee or Participant does not have a nonforfeitable right under the Plan to any portion of his ESOP Account balances and the number of his consecutive one year Breaks in Service equals or exceeds five, then his number of Years of Service, if any, completed prior to such a period of Breaks in Service shall be disregarded and he shall be considered as a new Employee. |
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amounts will be restored to his Account as of the last day of the Plan Year in which he returns to such employment (provided he is actively employed on such last day of the Plan Year), and he will continue to increase his vested percentage in such Account as if he had never been deemed to have received a distribution of his Account. |
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TIME AND METHOD OF PAYMENT
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|
(a) |
Profit Sharing Account: A Participant’s Profit Sharing Account shall be distributed to or for the benefit of the Participant, or, in the case of the Participant’s death, his Beneficiary, in a lump sum payment. Distribution of a Participant’s Profit Sharing Account will be made in whole shares of Company Stock, cash or a combination of both, as determined by the Participant. However, if the charter or by-laws of the Company restrict ownership of substantially all of the outstanding Company Stock to Employees and the Trust, then the distribution of a Participant’s Profit Sharing Account shall be made entirely in the form of cash, and the Participant shall not be entitled to a distribution in the form of Company Stock. In the event of a cash distribution, the Committee shall direct the Trustee on the manner in which the shares of Company Stock allocated to the Participant’s Profit Sharing Account are to be converted to cash. |
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(b) |
ESOP Stock Account: Distribution of a Participant’s ESOP Stock Account will be made to or for the benefit of the Participant, or, in the case of the Participant’s death, his Beneficiary, in a lump sum. |
The Participant shall select, with the consent of the Committee, the manner in which his vested ESOP Stock Account balance will be distributed, provided that the Committee’s consent shall be given in a uniform and nondiscriminatory manner. If a Participant does not have a nonforfeitable right to any of his ESOP Stock Account on his Termination Date, then he will be deemed to be cashed out of his ESOP Stock Account as of his Termination Date. Distribution of a Participant’s vested ESOP Stock Account will be made in whole shares of Company Stock, cash, or a combination of both, as determined by the Committee, provided, however, that the Committee shall notify the Participant of his right to demand distribution of his vested ESOP Stock Account balance entirely in whole shares of Company Stock (with the value of any fractional shares paid in cash). However, if the charter or by-laws of the Company restrict ownership of substantially all of the outstanding Company Stock to Employees and the Trust, then the distribution of a Participant’s vested ESOP Stock Account shall be made entirely in the form of cash, and the Participant is not entitled to a distribution in the form of Company Stock. In the event of a cash distribution, the Committee shall direct the Trustee on the manner in which the shares of Company Stock allocated to the Participant’s ESOP Stock Account are to be converted to cash.
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|
Distribution of a Participant’s vested ESOP cash account balance will be made in cash. |
|
|
(a) |
Distribution of ESOP Cash Accounts and Profit Sharing Accounts. A Participant, or his Beneficiary, as applicable, shall be eligible to have the distribution of his ESOP Cash Account and Profit Sharing Account, if any, made or commenced as soon as practicable following the Participant’s election to commence benefits subject to paragraph (f) below. |
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|
(b) |
Distribution of ESOP Stock Account upon Retirement, Total and Permanent Disability or Death. Unless an earlier date is required by paragraphs (d), (e) or (f) of this Section, or unless the Participant elects a later date, if a Participant retires, is retired, or terminates employment due to Total and Permanent Disability, or if a Participant dies while in the employ of an Employer or Controlled Group Member, distribution of his Accounts will be made or commenced as soon as practicable following the Participant’s (or Beneficiary’s) election to commence benefits, subject to paragraph (f) below, but not later than the 60th day next following the close of the Plan Year during which the Participant dies, becomes Totally and Permanently Disabled, or attains Normal Retirement Age or, if later, during which his Termination Date occurs; provided that if the valuation of the Company Stock is not completed by that date, the distribution will be made within 60 days after the valuation is completed. |
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(c) |
Distribution of ESOP Stock Account upon Resignation or Dismissal. Unless an earlier date is required by paragraphs (d), (e) or (f) of this Section, if a Participant resigns or is dismissed from the employ of the Employers and Controlled Group Members for a reason other than retirement, Total and Permanent Disability or death, the Participant will be eligible to receive a distribution of his ESOP Stock Account as soon as practicable following the Participant’s election to commence benefits, subject to paragraph (f) below. |
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minimum distribution incidental benefit requirements of the proposed regulations thereunder. Therefore, in no event shall a distribution of a Participant’s ESOP Accounts commence later than the later of: |
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(i) |
the April 1 of the calendar year next following the calendar year in which the Participant attains age 70-1/2; or |
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(ii) |
the April 1 of the calendar year next following the calendar year in which the Participant’s Termination Date occurs, if the Participant is not a 5 percent owner (except for a Participant who is a 5 percent owner, as defined in Section 416(i)(1)(B) of the Code, the date determined under this paragraph (ii) shall be the April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2, without regard to the date of the Participant’s Termination Date). |
Any non-retired Participant (other than a five-percent owner) who attains age 70-1/2 on or after January 1, 1996 and prior to January 1, 2003 may elect to receive distribution of his vested ESOP Account while employed by the Employer. Such election shall be made in writing in the manner, time and form required by the Company.
Notwithstanding any other provision of the Plan to the contrary with respect to distributions under the Plan made on or after January 1, 2002, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the regulations under Section 401(a)(9) of the Code that were proposed on January 17, 2001 (the (“2001 Proposed Regulations”). This provision relating to distributions under the 2001 Proposed Regulations shall continue in effect until the last calendar year beginning before the effective date of the final regulations under Section 401(a)(9) of the Code or such other date as may be published by the Internal Revenue Service.
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(e) |
Distributions to Beneficiary upon Death. Notwithstanding the provisions of paragraphs (b) and (c) above, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Section 401(a)(9) of the Code and any regulations issued thereunder. If a Participant dies before his distribution has commenced, distribution of his ESOP Accounts to his Beneficiary shall commence not later than the earlier of: |
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(i) |
one year after the end of the Plan Year in which the Participant died, or |
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(ii) |
if the Beneficiary is the surviving spouse, the later of one year after the Participant’s death or the date the Participant would have attained age 70‑1/2, |
and shall be completed within five years after the Participant’s death.
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If a Participant dies after distribution of his interest has begun, the remaining portion of such interest will continue to be distributed as least as rapidly as under the method of distribution being used prior to the Participant’s death.
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(f) |
Small Amounts. Notwithstanding any provision to the contrary, if a Participant’s vested ESOP Accounts as of the date the Participant (or Beneficiary) is eligible to receive a distribution do not exceed $1,000, then such Participant’s ESOP Accounts shall be distributed in a lump sum as soon as practicable after such date. |
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(g) |
Zero Vested Account Balance. Notwithstanding the foregoing provisions of this Section 6.2, if the value of a Participant’s vested Account is zero upon his termination of employment with the Employer or Controlled Group Member, the Participant shall be deemed to have received a distribution of such Account in a single sum distribution on such date. |
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(a) |
Directly to such Participant or Beneficiary; or |
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(b) |
To the legal representative of such Participant or Beneficiary. |
If the recipient of a distribution cannot be located within one year after he is entitled to receive the distribution, the Plan Administrator may, in its discretion, direct that such distribution be treated as a forfeiture in accordance with Treasury Regulation Section 1.411(a)-4(b)(6). In the event such person subsequently makes a claim for such forfeited benefits, such benefits shall be reinstated. Any payment made pursuant to this Section shall be in complete discharge of the obligation under the Plan.
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such interest shall be paid in equal shares to those Beneficiaries, if any, who survive the Participant. |
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(b) |
Notwithstanding any provision in the Plan to the contrary, the designated Beneficiary of a married Participant shall be his spouse, unless the spouse consents, in writing, to the designation by the Participant of a different Beneficiary. Such spouse’s consent must acknowledge the effect of such consent and must be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Plan Administrator that the required consent cannot be obtained because there is no spouse, the spouse cannot be located, or other circumstances that may be prescribed by Treasury Regulations. The designation made by the Participant and consented to by his spouse may be revoked by the Participant in writing without the consent of the spouse at any time. Any new designation specifying a different Beneficiary must again comply with the requirements of this Section. A former spouse’s consent shall not be binding on a new spouse. Any designation by an unmarried Participant shall be rendered ineffective by any subsequent marriage. |
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(c) |
If a Participant fails to designate a Beneficiary, if such designation is for any reason illegal or ineffective, or if no Beneficiary survives the Participant, his death benefits shall be paid in accordance with the following: |
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(i) |
to his surviving spouse; |
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(ii) |
if there is no surviving spouse, to his descendants (including legally adopted children and their descendants) per stirpes; or |
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(iii) |
if there is neither surviving spouse nor surviving descendants, to the executor or other personal representative of the Participant to be distributed in accordance with the Participant’s will or applicable law. |
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(d) |
The Plan Administrator may determine the identity of the distributees and in so doing may act and rely upon any information it may deem reliable upon reasonable inquiry and upon any affidavit, certificate, or other paper believed by it to be genuine, and upon any evidence believed by it sufficient. |
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(e) |
Effect of Divorce. If a married Participant designates his spouse as Beneficiary (whether by name or designation as the spouse) and the marriage of the Participant and spouse is subsequently terminated through divorce, dissolution, annulment or otherwise, except as may be provided in a Qualified Domestic Relations Order (as defined in Section 414(p) of the Code), the designation of the spouse as Beneficiary shall be void, as if the former spouse had predeceased the Participant; and the Participant may designate another Beneficiary in accordance with the terms of the Plan (but subject to the terms of any applicable Qualified Domestic Relations Order). |
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6.6 |
Qualified Domestic Relations Order. In addition to payments made under this Article on account of a Participant’s termination of employment, payments may be made to an |
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Alternate Payee (as defined below) prior to, coincident with, or after Participant’s termination of employment if made pursuant to a Qualified Domestic Relations Order (as defined below). A distribution to an Alternate Payee may be made out of a Participant’s Accounts on a date coincident with the Participant’s “earliest retirement age,” defined as the earlier of (i) the date on which the Participant is entitled to a distribution under the Plan, or (ii) the later of (A) the date the Participant attains age 50, or (B) the earliest date on which the Participant could begin receiving benefits under the Plan if he had separated from service. In addition, this Plan specifically authorizes distributions to an Alternate Payee under a Qualified Domestic Relations Order prior to the Participant’s attainment of the earliest retirement age (as defined above and in Section 414(p) of the Code) but only if: (1) the order specifies distribution at the earlier date or permits an agreement between the Plan and the Alternate Payee authorizing an earlier distribution; and (2) the Alternate Payee consents to a distribution prior to the Participant’s earliest retirement age if the present value of the Alternate Payee benefits under the Plan exceeds $5,000 (or such higher amount permitted by Code Section 417(e)) at the time of distribution thereof. Nothing in this Section shall provide a Participant with a right to receive a distribution at a time not otherwise permitted under the Plan, nor shall it provide the Alternate Payee with a right to receive a form of payment not permitted under the Plan. The term “Qualified Domestic Relations Order” means any judgment, decree, or order (including approval of a property settlement agreement) which: |
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(a) |
relates to the provision of child support, alimony payments, or marital property rights to a spouse, child or other dependent of a Participant, |
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(b) |
is made pursuant to a State domestic relations law (including a community property law), |
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(c) |
creates or recognizes the existence of an Alternate Payee’s right to, or assigns to an Alternate Payee the right to, receive all or a portion of the benefits payable with respect to the Participant, |
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(d) |
clearly specifies the name and last known mailing address, if any, of the Participant and the name and mailing address of each Alternate Payee covered by the order, the amount and percentage of the Participant’s benefits to be paid by the Plan to each Alternate Payee, or the manner in which such amount or percentage is to be determined, the number of payments or period to which such order applies and each plan to which such order applies, and |
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(e) |
does not require the Plan to provide (i) any form or type of benefit, or any option, not otherwise provided under the Plan, (ii) increased benefits, or (iii) benefits to an Alternate Payee which are required to be paid to another payee under another order previously determined by the Trustee to be a Qualified Domestic Relations Order. |
The Committee shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. The Committee may, in its sole discretion, establish and maintain a segregated account for each Alternate Payee. The term “Alternate Payee” means any spouse, former spouse, child or
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other dependent of a Participant who is recognized by a Qualified Domestic Relations Order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to the Participant.
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(a) |
Effective prior to April 1, 2002, if a Participant attains age 55 and has 10 years of participation in this Plan (so that he is a “Qualified Participant”), the Committee shall offer such Participant a distribution in cash of the value (determined as of the Valuation Date coinciding with or next following the Participant’s election to diversify) of at least 25% of the number of shares of Company Stock credited to his ESOP Stock Account and Profit Sharing Account in the first five years of his Qualified Election Period (as defined below), and 50% of the number of shares of Company Stock credited to his ESOP Stock Account and Profit Sharing Account in the last year of the Qualified Election Period in accordance with the provisions of this Section. For purposes of the shares held in his Profit Sharing Account, but not shares held in the ESOP Stock Account, years of participation in the Profit Sharing Plan prior to the Effective Date will count toward the required 10 years of participation. The Participant must elect to receive such a distribution within 90 days after the end of each of the six Plan Years during the Qualified Election Period (the “Diversification Election Period”), and the distribution will be made within 90 days after each election made by Participant during the Diversification Election Period. The “Qualified Election Period” means the six Plan Years beginning with the Plan Year during which a Participant becomes a Qualified Participant. The amount which may be distributed to a Participant during the Qualified Election Period shall be determined by multiplying the number of shares of Company Stock credited to the Participant’s ESOP Stock Account and Profit Sharing Account (including shares of Company Stock the value of which has been previously distributed pursuant to this Section) by 25% or, with respect to a Participant’s final election, 50%, reduced by the amount of any prior distributions received by such Participant pursuant to this Section. Notwithstanding the foregoing, if the fair market value of the Company Stock allocated to the ESOP Stock Account and Profit Sharing Account of a Qualified Participant is $500 or less as of the Valuation Date immediately preceding the first day of any Diversification Election Period, then such Qualified Participant shall not be entitled to an election under this Section for that Diversification Election Period. |
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ESOP Stock Account, years of participation in the Profit Sharing Plan prior to the April 1, 1993 Effective Date of the Plan will count toward the required seven (7) years of participation to become a Qualified Participant. The Participant must elect to diversify such Company Stock within ninety (90) days after the end of each of the Plan Years during the Qualified Election Period (the “Diversification Election Period”), and within ninety (90) days after each Diversification Election Period the Qualified Participant’s diversified amount will be invested in one or more of at least three non-Company Stock investment fund options under the Plan in the proportions elected by the Qualified Participant. The “Qualified Election Period” means the greater of (i) eleven (11) Plan Years beginning with the Plan Year during which a Participant becomes a Qualified Participant, or (ii) the number of Plan Years beginning with the Plan Year during which a Participant becomes a Qualified Participant and ending on the Qualified Participant’s Severance from Service Date. The amount which may be diversified by a Participant during the Qualified Election Period shall be determined by multiplying the number of shares of Company Stock credited to the Participant’s ESOP Stock Account and Profit Sharing Account (including shares of Company Stock the value of which has been previously distributed and/or diversified pursuant to this Section 6.7) by twenty-five percent (25%) with respect to a Qualified Participant’s first five (5) years of the Qualified Election Period or, with respect to a Qualified Participant’s sixth (6th) and subsequent years of the Qualified Election Period, fifty percent (50%), reduced by the amount of any prior distributions received by such Participant pursuant to this Section 6.7 and by any amount previously diversified at the Participant’s election pursuant to this Section 6.7. Notwithstanding the foregoing, if the fair market value of the Company Stock allocated to the ESOP Stock Account and Profit Sharing Account of a Qualified Participant is Five Hundred Dollars ($500) or less as of the Accounting Date immediately preceding the first day of any Diversification Election Period, then such Qualified Participant shall not be entitled to an election under this Section 6.7 for that Diversification Election Period. |
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(c) |
Effective November 1, 2007, at the election of the Plan Administrator, a Qualified Participant’s diversified amount will be: |
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(i) |
Invested, in accordance with subsection (b) above, in one or more of at least three non-Company Stock investment fund options under the Plan in the proportions elected by the Qualified Participant; |
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(ii) |
Transferred, in a direct plan-to-plan transfer, to the Profit Sharing Plan, to be invested, in accordance with subsection (b) above, in one or more of at least three non-Company Stock investment fund options under the Profit Sharing Plan in the proportions elected by the Qualified Participant; or |
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(iii) |
Distributed to the Qualified Participant in accordance with subsection (a) above. |
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At the election of the Plan Administrator, amounts previously invested in accordance with paragraph (i) above may be transferred to the Profit Sharing Plan in accordance with paragraph (ii) at any time.
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(a) |
Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee’s election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. |
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(b) |
The following are definitions for purposes of this Section: |
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(i) |
Eligible Rollover Distribution. An “Eligible Rollover Distribution” is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: (i) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s designated beneficiary, or for a specified period of ten years or more; (ii) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; (iii) the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); (iv) any distribution of elective deferrals on account of hardship on or after January 1, 1999; (v) any distribution on account of hardship on or after January 1, 2002; and (vi) any other distribution which the Secretary of the Treasury (or his delegate) provides in regulations or rulings of general applicability may be excluded from the direct rollover rules under Section 401(a)(31) of the Code. A portion of a distribution that is received on or after January 1, 2002, shall not fail to be an Eligible Rollover Distribution merely because the portion consists of after-tax contributions that are not includable in gross income; provided, however, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code that agrees to account separately for amounts so transferred, including separately accounting for the portion of such distribution that is includable in gross income and the portion of such distribution that is not so includable. In addition to the foregoing, effective as of January 1, 2009, an Eligible Rollover Distribution includes a distribution to a Beneficiary who is not the surviving spouse of the Participant, provided that: |
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(A) |
the Beneficiary would be considered a beneficiary of the Participant in accordance with Code Section 401(a)(9)(E), |
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(B) |
for this purpose, an Eligible Retirement Plan only includes an individual retirement account or annuity described in Code Section 408(a) or (b), and |
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(C) |
all other requirements of Code Section 402(c)(11) are met. |
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(ii) |
Eligible Retirement Plan. An “Eligible Retirement Plan” is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Participant’s Eligible Rollover Distribution. In addition, for distributions on or after January 1, 2002, “Eligible Retirement Plan” also means an annuity contract described in Code Section 403(b) or an individual retirement account or individual retirement annuity described in Code Section 408(a) or (b). In the case of an Eligible Rollover Distribution prior to January 1, 2002, to a Beneficiary who is a Participant’s surviving spouse, an Eligible Retirement Plan means only an individual retirement account or individual retirement annuity. Effective for distributions on or after January 1, 2008, an Eligible Retirement Plan includes a Roth IRA described in Code Section 408A. |
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(iii) |
Distributee. A “Distributee” includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving spouse and the Employee’s or former Employee’s spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. |
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(iv) |
Direct Rollover. A “Direct Rollover” is a payment by the Plan to the Eligible Retirement Plan specified by the Participant. |
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(c) |
Automatic Rollover of Small Benefits. In the event of a mandatory distribution greater than $1,000 in accordance with the terms of Section 6.2, if a Participant does not elect to have such distribution paid directly to an Eligible Retirement Plan specified by the Participant in a Direct Rollover or to receive the distribution directly in accordance with the terms of this Section, then the Plan Administrator will pay the distribution in a Direct Rollover to an individual retirement plan designated by the Plan Administrator. |
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(a) |
Definitions. The following definitions apply for purposes of this Section. |
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(i) |
Designated beneficiary: The individual who is designated as the beneficiary under Section 1.4 of the Plan and is the designated beneficiary under Section 401(a)(9) of the Code and Section 1.401(a)(9)-1, Q&A-4, of the Treasury Regulations. |
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(iii) |
Life expectancy: Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury Regulations. |
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(iv) |
Participant’s account balance: The ESOP Account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the ESOP Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year. |
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(v) |
Required beginning date: The date specified in Section 6.2(d) of the Plan. |
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(b) |
General Rules. |
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(i) |
Effective Date. The provisions of this Section will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year. |
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(ii) |
Precedence. The requirements of this Section will take precedence over any inconsistent provisions of the Plan. |
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(iii) |
Requirements of Treasury Regulations Incorporated. All distributions required under this Section will be determined and made in accordance with the Treasury Regulations under Section 401(a)(9) of the Internal Revenue Code. |
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(i) |
Required Beginning Date. The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s required beginning date. |
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(ii) |
Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows: |
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(A) |
If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, then, except as provided in subsection (f), distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70½, if later. |
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(B) |
If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, then, except as provided in subsection (f), distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died. |
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(C) |
If there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death. |
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(D) |
If the Participant’s surviving spouse is the Participant’s sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this paragraph (ii), other than subparagraph (A), will apply as if the surviving spouse were the Participant. |
For purposes of this paragraph (ii) and subsection (e), unless subparagraph (c)(ii)(D) applies, distributions are considered to begin on the Participant’s required beginning date. If subparagraph (c)(ii)(D) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under subparagraph (c)(ii)(A). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s required beginning date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under subparagraph (c)(ii)(A)), the date distributions are considered to begin is the date distributions actually commence.
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(iii) |
Forms of Distribution. Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single |
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sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with subsections (d) and (e) of this Section. If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury Regulations. |
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(d) |
Required Minimum Distributions During Participant’s Lifetime. |
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(i) |
Amount of Required Minimum Distribution for Each Distribution Calendar Year. During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of: |
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(A) |
the quotient obtained by dividing the Participant’s account balance by the distribution period in the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s age as of the Participant’s birthday in the distribution calendar year; or |
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(B) |
if the Participant’s sole designated beneficiary for the distribution calendar year is the Participant’s spouse, the quotient obtained by dividing the Participant’s account balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the distribution calendar year. |
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(ii) |
Lifetime Required Minimum Distributions Continue Through Year of Participant’s Death. Required minimum distributions will be determined under this subsection (d) beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant’s date of death. |
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(e) |
Required Minimum Distributions After Participant’s Death. |
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(i) |
Death on or After Date Distributions Begin. |
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(A) |
Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant’s designated beneficiary, determined as follows: |
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(1) |
The Participant’s remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year. |
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(2) |
If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For distribution calendar years after the year of the surviving spouse’s death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year. |
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(3) |
If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, the designated beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year. |
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(B) |
No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the Participant’s remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year. |
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(ii) |
Death Before Date Distributions Begin. |
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(A) |
Participant Survived by Designated Beneficiary. Except as provided in subsection (f), if the Participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the remaining life expectancy of the Participant’s designated beneficiary, determined as provided in paragraph (e)(i). |
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completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death. |
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(C) |
Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under subparagraph (c)(ii)(A), this paragraph (e)(ii) will apply as if the surviving spouse were the Participant. |
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(f) |
Modifications. |
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(i) |
Election to Apply Five-Year Rule to Distributions to Designated Beneficiaries. If the Participant dies before distributions begin and there is a designated beneficiary, distribution to the designated beneficiary is not required to begin by the date specified in paragraph (c)(ii) of this Section, but the Participant’s entire interest will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participant’s death. If the Participant’s surviving spouse is the Participant’s sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to either the Participant or the surviving spouse begin, this election will apply as if the surviving spouse were the Participant. This election will apply to all distributions. |
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(ii) |
Election to Allow Participants or Beneficiaries to Elect 5-Year Rule. Participants or beneficiaries may elect on an individual basis whether the five-year rule or the life expectancy rule in paragraphs (c)(ii) and (e)(ii) of this Section applies to distributions after the death of a Participant who has a designated beneficiary. The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under paragraph (c)(ii) of this Section, or by September 30 of the calendar year which contains the fifth anniversary of the Participant’s (or, if applicable, surviving spouse’s) death. If neither the Participant nor beneficiary makes an election under this paragraph, distributions will be made in accordance with paragraphs (c)(ii) and (e)(ii) of this Section and, if applicable, the elections in paragraph (i) above. |
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(iii) |
Election to Allow Designated Beneficiary Receiving Distributions Under 5-Year Rule to Elect Life Expectancy Distributions. A designated beneficiary who is receiving payments under the five-year rule may make a new election to receive payments under the life expectancy rule until December 31, 2003, provided that all amounts that would have been required to be distributed under the life expectancy rule for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003 or the end of the five-year period. |
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VOTING AND TENDERING OF COMPANY STOCK
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7.1 |
Voting. Except as provided below, all Company Stock held in the Trust shall be voted by the Trustee at the written direction of the Committee: |
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(a) |
During such time period as the Company has a registration-type class of securities, each Participant or, if applicable, the Participant’s Beneficiary shall be entitled to direct the Trustee as to the exercise of any shareholder voting rights attributable to shares of Company Stock then allocated to his or her ESOP Accounts, but only to the extent required by Section 409(e)(2) of the Code and the regulations thereunder. |
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(b) |
If the provisions of paragraph (a) above are inapplicable, with respect to any corporate matter which involves the voting of Company Stock with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all of the assets of a trade or business, or such other transactions which may be prescribed by regulation, each Participant may be entitled to direct the Trustee as to the exercise of any voting rights attributable to shares of Company Stock then allocated to his ESOP Stock Account and Profit Sharing Account, but only to the extent required by Sections 401(a)(22) and 409(e)(3) of the Code and the regulations thereunder. |
|
|
(c) |
If the provisions of paragraphs (a) and (b) above are inapplicable, with respect to any tender or exchange offer for, or a request or invitation for tenders or exchanges of, Company Stock made to the Trustee, the Trustee shall request from each Participant instructions as to the tendering or exchanging of shares of Company Stock then allocated to his ESOP Stock Account and Profit Sharing Account. For the avoidance of doubt, any redemption, repurchase or exchange of, or offer to redeem, repurchase, or exchange, Company Stock by the Company that is an Approved Company Repurchase shall not be, and shall not be interpreted to be, a tender or exchange offer for, or a request or invitation for tender or exchange of, Company Stock for purposes of this Section 7.1(c). “Approved Company Repurchase” means a redemption, repurchase or exchange of Company Stock in the Trust Fund by the Company in one or more transactions where the transaction is approved (or with respect to a series of transactions are approved) by at least seventy five percent (75%) of the members of the Board of Directors. This Section 7.1(c) may be amended only by an amendment approved by at least seventy five percent (75%) of the members of the Board of Directors. |
If a Participant is entitled to so direct the Trustee pursuant to paragraphs (a), (b), or (c) above, all allocated Company Stock as to which such instructions have been received (which may include an instruction to abstain) shall be voted or tendered or exchanged in accordance with such instructions. The Trustee shall vote any unallocated Company Stock in the Trust Fund, or any allocated Company Stock in the Trust Fund as to which no voting instructions have been received, in such manner as the Trustee is directed in writing by the Committee; however, in the event of either a corporate matter described in paragraph (b)
- 46 -
above or a tender offer or exchange offer for (or a request or invitation for tenders or exchanges of) shares of Company Stock described in paragraph (c) above, the Trustee shall vote or tender or exchange any (i) unallocated Company Stock and, (ii) allocated Company Stock as to which no Participant instructions were received, in the same proportion as the allocated Company Stock for which instructions have been received is voted or tendered or exchanged.
- 47 -
RIGHTS, RESTRICTIONS AND OPTIONS ON COMPANY STOCK
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(a) |
the transfer upon the death of a Participant or Beneficiary of any shares of Company Stock to his legal representatives, heirs and legatees, provided however, that any proposed sale or other disposition of any such shares by any legal representative, heir or legatee shall remain subject to the Right of First Refusal; |
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(b) |
the transfer by a Participant or Beneficiary in accordance with the Put Option pursuant to Section 8.2 below; or |
|
|
(c) |
the transfer while the Company Stock is listed on a national securities exchange registered under Section 6 of the Securities Exchange Act of 1934, or quoted on a system sponsored by a national securities association registered under Section 15A(b) of the Securities Exchange Act of 1934. |
- 48 -
|
may be, the payment for Company Stock sold pursuant to a Put Option shall be made, as determined in the discretion of the Company or the Trustee, as the case may be, in the following forms: |
|
|
(a) |
if the Company Stock was distributed as part of a total distribution (that is, a distribution within one taxable balance of the credit of his ESOP Accounts), then payment will be made with a promissory note which provides for substantially equal annual installments commencing within 30 days from the date of the exercise of the Put Option and over a period not exceeding 5 years, with interest payable at a reasonable rate (as determined by the Company) on any unpaid installment balance, with adequate security provided, and without penalty for any prepayment of such installments; or |
|
|
(b) |
in a lump sum no later than 30 days after such Participant exercises the Put Option. |
At the direction of the Committee the Trustee on behalf of the Trust may offer to purchase any shares of Company Stock (which are not sold pursuant to a Put Option) from any former Participant or Beneficiary at any time in the future, at their then fair market value.
- 49 -
DIVIDENDS
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(a) |
To the extent permitted by applicable law, any cash dividends paid with respect to Financed Shares which are allocated to the Participants’ ESOP Stock Accounts may (as required by applicable Acquisition Loan documentation or, if not required, as determined in the sole discretion of, and as directed by, the Committee) be used to repay the principal balance of an outstanding Acquisition Loan or interest thereon in whole or in part as provided in Section 3.2(c). Financed Shares released from the Loan Suspense Account as a result of such Acquisition Loan payment, with a fair market value at least equal to the cash dividends paid with respect to the Company Stock allocated to the Participants’ ESOP Stock Accounts, shall be allocated, as of the Dividend Declaration Date, among and credited to the ESOP Stock Accounts of such Participants, pro rata, according to the number of shares of Company Stock held in such ESOP Stock Accounts on the Dividend Declaration Date. |
- 50 -
|
|
ESOP Stock Accounts of all Participants employed on such Valuation Date, pro rata, according to each Participant’s Compensation. |
|
|
(c) |
Effective for Plan Years commencing April 1, 2019, and ending on March 31, 2023 (the repayment due date of the outstanding Acquisition Loan), any Special Dividend paid with respect to Financed Shares held in the Loan Suspense Account shall be used to repay the principal balance of the then outstanding Acquisition Loan as provided in Section 3.2(c). To the extent the amount of any such Special Dividend exceeds the principal balance of the then outstanding Acquisition Loan, such excess portion of the Special Dividend shall be used to repay the interest of the then outstanding Acquisition Loan, and any excess portion after the payment of such interest shall be allocated among and credited to ESOP Cash Accounts of the Participants as provided in Section 9.1. Any Financed Shares released from the Loan Suspense Account by reason of a Special Dividend paid with respect to Company Stock held in the Loan Suspense Account shall be allocated, as of the Valuation Date, among and credited to the ESOP Stock Accounts of all Participants employed on the Valuation Date, pro rata, according to each Participant’s Compensation. |
|
9.4 |
Article IX Priority. For the avoidance of doubt, this Article IX, not Section 4.5, governs the payment and allocation of cash dividends |
- 51 -
ADMINISTRATION OF PLAN
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(a) |
To adopt such rules of procedure and regulations as, in its opinion, may be necessary for the proper and efficient administration of the Plan and as are consistent with the provisions of the Plan; |
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(b) |
To enforce the Plan in accordance with its terms and with such applicable rules and regulations as may be adopted by the Committee; |
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(c) |
To determine all questions arising under the Plan, including the power to determine the rights or eligibility of Employees or Participants and their Beneficiaries and their respective benefits, and to remedy ambiguities, inconsistencies or omissions; |
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(d) |
To give such directions to the Trustee with respect to the Trust Fund as may be provided in the Trust Agreement, including disbursements (except for the ordinary expenses of administration of the Trust Fund or the reimbursement of reasonable expenses at the direction of the Company, as provided herein) and the depositaries which have been designated by the Board, which must be an incorporated Federally insured bank or trust company; and to direct the Trustee, in the discretion of the Committee, to invest assets of the Plan in assets other than Company Stock. |
|
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(e) |
To maintain and keep adequate books, records and other data as shall be necessary to administer the Plan, except those that are maintained by the Company or by the Trustee, and to meet the disclosure and reporting requirements of ERISA; |
|
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(f) |
To direct all payments of benefits under the Plan; |
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(g) |
To establish an investment policy and objective for the Plan; |
- 52 -
|
|
(h) |
To elect a chairman and to appoint a secretary who shall keep minutes of the proceedings and have custody of all records and documents pertaining to administration of the Plan; |
|
|
(i) |
To be agent for the service of legal process on behalf of the Plan; |
|
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(j) |
To authorize one or more of its members to execute any documents on behalf of the Committee, in which event the Committee shall notify the Trustee in writing of such action; |
|
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(k) |
To engage the services of an investment manager or managers as defined in Section 3(38) of ERISA (“Investment Manager”), each of whom will have the full power and authority to manage, acquire or dispose (or direct the Trustee with respect to the acquisition or disposition) of any Plan asset(s) under the control of such Investment Manager. The Investment Manager shall have the power to invest Plan assets as provided in a written agreement between the Committee and the Investment Manager (which agreement may be acknowledged by the Trustee) which may include such securities or such other property, real or personal, as the Investment Manager shall deem advisable, including but not limited to, capital, common and preferred stocks; corporate and governmental obligations, secured or unsecured; mortgages, leaseholds, fees and other interests in realty; oil, gas, or mineral properties, rights, royalties, payments or other interest(s) in such property; contracts, conditional sale agreements, choses in action, trust and participation certificates, or other evidences of ownership, part ownership, full interest or part interest. |
|
|
(l) |
To perform any other acts necessary or appropriate to the administration of the Plan and the discharge of its duties. |
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(m) |
To interpret the provisions of the Plan. |
The Committee shall have no power in any way to modify, alter, add to or subtract from, any provisions of the Plan. The certificate of the chairman or the secretary of the Committee that the Committee has taken or authorized any action shall be conclusive in favor of any person relying on the certificate. The Employers shall pay, or the Company shall cause to be paid from the Trust Fund, expenses incurred by the Committee in the administration of the Plan and Trust.
- 53 -
|
action required by this Plan or the Trust to be taken by an Investment Manager. In exercising its authority to control and manage the operation and administration of the Plan, the Committee may employ agents and counsel (who may also be employed by or represent any Employer) and to delegate to them such powers as the Committee deems desirable. Any such delegation or appointment shall be in writing and shall reflect the unanimous action of the Committee members then acting. The writing contemplated by the foregoing sentence shall fully describe the advice to be rendered or the functions and duties to be performed by the delegate. The Employers shall pay, or the Company shall cause to be paid from the Trust Fund, the compensation of such agents and counsel. |
|
|
(a) |
for the exclusive purpose of providing benefits to Participants and other persons entitled to benefits under the Plan; |
|
|
(b) |
with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and |
|
|
(c) |
in accordance with the documents and instruments governing the Plan insofar as they are consistent with ERISA. |
- 54 -
Each Participant or Beneficiary claiming a benefit under the Plan must complete and file such application forms with the Committee. One Committee member shall be designated to review all applications for benefits. He shall notify the claimant in writing of his decision within 90 days (45 days for a claim for disability) of his receipt of the application. If special circumstances require any extension of time for processing the claim, the claimant will be notified in writing of the extension prior to the expiration of the initial 90 day period. The extension of time will not exceed 90 days (30 days for a claim for disability benefits, with a second extension of 30 days if necessary). The extension notice shall indicate the date by which the Committee expects to render the benefit determination. In the case of any extension for a claim for disability benefits, the notice of extension shall specifically explain the standards on which entitlement to a benefit is based, the unresolved
- 55 -
issues that prevent a decision on the claim, and the additional information needed to resolve those issues, and the applicant shall be afforded at least 45 days within which to provide the specified information.
The reviewing member of the Committee shall make all determinations on behalf of the Committee as to the right of any person to a benefit. Any denial by the reviewing Committee member of a claim for benefits by a Participant or Beneficiary shall be stated in writing and mailed to the Participant or Beneficiary. This claims denial shall be written in a manner calculated to be understood by the claimant and shall include the following:
|
|
(a) |
the specific reason or reasons for any denial of benefits; |
|
|
(b) |
the specific Plan provisions on which any denial is based; |
|
|
(c) |
a description of any further material or information which is necessary for the claimant to perfect his claim and an explanation of why the material or information is needed; |
|
|
(d) |
an explanation of the Plan’s formal claim review procedure, including a statement of claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review; and |
|
|
(e) |
With respect to a claim for disability benefits, the notice shall also set forth the following information: |
|
|
(i) |
A discussion of the decision, including an explanation of the basis for disagreeing with or not following: |
|
|
(A) |
The views presented by the applicant to the Committee of health care professionals treating the applicant and vocational professionals who evaluated the applicant; |
|
|
(B) |
The views of medical or vocational experts whose advice was obtained on behalf of the Committee in connection with the denial, without regard to whether the advice was relied upon in making the denial; and |
|
|
(C) |
A disability determination regarding the applicant presented by the applicant to the Committee made by the Social Security Administration; |
|
|
(ii) |
If the denial is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of this Plan to the applicant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request; |
- 56 -
|
|
(iv) |
A statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the applicant’s claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by reference to Section 2560.503-1(m)(8) of the Department of Labor Regulations; and |
|
|
(v) |
The notice shall be provided in a culturally and linguistically appropriate manner (as described in Section 2560.503-1(o) of the Department of Labor Regulations). |
If the claimant does not respond to the denial, posted by first class mail to the address of record of the Committee/Plan Administrator, within 60 days (180 days for a claim for disability benefits filed) after receipt of the written notice of denial, the claimant shall be considered satisfied in all respects.
|
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(a) |
to request in writing that the Committee review the denial; |
|
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(b) |
to review pertinent documents and request copies of them, free of charge; |
|
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(c) |
to submit issues and comments in writing to which the Committee shall respond; and |
|
|
(d) |
to request a hearing with the Committee. |
In addition, with respect to a claim for disability benefits, the review will meet all of the following requirements:
|
|
(a) |
the review will not afford deference to the initial denial by the Committee; |
|
|
(b) |
the review will be conducted by a person who is neither the individual who made the initial denial that is the subject of the appeal, nor the subordinate of such individual; |
|
|
(c) |
in deciding an appeal of any initial denial that is based in whole or in part on a medical judgment, including determinations with regard to whether a particular |
- 57 -
|
|
treatment, drug, or other item is experimental, investigational, or not medically necessary or appropriate, the person shall consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment. The health care professional engaged for purposes of a consultation shall be an individual who is neither an individual who was consulted in connection with the initial denial that is the subject of the appeal, nor the subordinate of any such individual; |
|
|
(d) |
provide for the identification of medical or vocational experts whose advice was obtained on behalf of the Committee in connection with an applicant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; and |
|
|
(e) |
the review will also: |
|
|
(i) |
Provide that before the Committee can issue an adverse benefit determination on review of a disability claim, the Committee shall provide the applicant, free of charge, with any new or additional evidence considered, relied upon, or generated by the Committee, insurer, or other person making the benefit determination (or at the direction of the Committee, insurer or such other person) in connection with the claim; such evidence must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided to give the applicant a reasonable opportunity to respond prior to that date; and |
|
|
(ii) |
Provide that, before the Committee can issue an adverse benefit determination on review of a disability claim based on a new or additional rationale, the Committee shall provide the applicant, free of charge, with the rationale; the rationale must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided to give the applicant a reasonable opportunity to respond prior to that date. |
The decision on review shall be made within 60 days (45 days for a claim based on disability) of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days (90 days for a claim based on disability) after receipt of a request for review. If such an extension of time is required, written notice of the extension shall be furnished to the applicant before the end of the original period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the applicant, and shall include specific references to the provisions of the Plan on which such denial is based. If the decision on review is not furnished within the time specified above, the claim shall be deemed denied on review.
- 58 -
If the applicant’s appeal of the denial of the applicant’s benefits claim is denied in whole or in part, the Committee shall provide a written notice to the applicant, using language calculated to be understood by the applicant, setting forth:
|
|
(a) |
The specific reasons for such denial of the appeal; |
|
|
(b) |
Specific reference to pertinent provisions of this Plan on which such denial of the appeal is based; |
|
|
(c) |
A statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the applicant’s benefits claim (and a document, record or other information shall be considered “relevant” to the benefits claims as provided in Section 2560.503-1(m)(8) of the Department of Labor Regulations); |
|
|
(d) |
A statement describing the applicant’s right to bring an action under Section 502(a) of ERISA; |
|
|
(e) |
With respect to claims based on disability, the notice shall also set forth the following: |
|
|
(i) |
A discussion of the decision, including an explanation of the basis for disagreeing with or not following: |
|
|
(A) |
The views presented by the applicant to the Committee of health care professionals treating the applicant and vocational professionals who evaluated the applicant; |
|
|
(B) |
The views of medical or vocational experts whose advice was obtained on behalf of the Committee in connection with an applicant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; and |
|
|
(C) |
A disability determination regarding the applicant presented by the applicant to the Committee made by the Social Security Administration; |
|
|
(ii) |
If the adverse benefit determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of this Plan to the applicant’s medical circumstances, or a statement that such explanation will be provided free of change upon request; |
|
|
(iii) |
Either the specific internal rules, guidelines, protocols, standards or other similar criteria of this Plan relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria of this Plan do not exist; and |
- 59 -
|
|
(iv) |
The notice shall be provided in a culturally and linguistically appropriate manner (as described in Section 2560.503-1(o) of the Department of Labor Regulations). |
Any action brought to enforce any claim or to obtain any benefit under this Plan must be brought forth within three (3) years from the date of the final claim appeal denial. Any action brought to enforce any claim or to obtain any benefit under this Plan must be litigated in Franklin County state court in Ohio or the United States District Court for the Southern District of Ohio and no other.
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AMENDMENT AND TERMINATION
|
|
(a) |
It is the expectation of the Employer that it will continue the Plan and the payment of contributions hereunder indefinitely, but the continuation of the Plan is not assumed as a contractual obligation of the Employer; and the right is reserved by the Employer at any time to permanently discontinue its contributions hereunder. In the event that the Plan is terminated in whole or in part or if contributions by the Employer are completely discontinued, the interest of all affected Participants shall be fully vested and non-forfeitable. |
|
|
(b) |
This Plan may be terminated by the Board of Directors of the Company at any time when its judgment, business, financial or other good causes make such termination necessary. Such termination shall become effective upon the execution and delivery by the Company to the Trustee of a written instrument signed on its behalf by its President or any officer and stating the fact of such termination. |
|
|
(c) |
Upon termination of the Plan, further payment of the Employer contributions to the Trust shall cease. The Trustees shall notify each Participant of the termination of the Plan. Each Participant shall be entitled to receive the entire amount of his Account balances and the Trustee shall make payment to each Participant of such amount in cash or in assets of the Trust Fund, as the Trustee shall determine. |
|
|
(d) |
For purposes of this Section, each Employer may unilaterally decide to terminate its participation in the Plan without forcing the termination of any other Employer’s participation in the Plan, unless the Company terminates the Plan in its entirety pursuant to subsection (b) of this Section. The unilateral decision of an Employer to terminate its participation in the Plan shall be treated as a termination of only those Participants (and their ESOP Accounts) who are employed by said Employer. |
|
|
(a) |
the duties and liabilities of the Trustee cannot be substantially changed without his consent; and |
|
|
(b) |
no amendment shall reduce a Participant’s benefits to less than the amount such Participant would be entitled to receive if such Participant had resigned from the employ of all of the Employers and Controlled Group Members on the date of the amendment. |
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|
would receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately prior to the merger, consolidation or transfer (if the Plan had then terminated). |
- 62 -
TOP-HEAVY PROVISIONS
|
|
(a) |
The term “Compensation” means compensation as defined in Section 415(c)(3) of the Code, including the items specified in Treasury Regulation Section 1.415-2(d)(2)(i) and excluding the items specified in Treasury Regulation Section 1.415-2(d)(3); provided, however, that, effective for Plan Years beginning after December 31, 1997, the items specified in Section 415(c)(3)(D) of the Code shall be included; and provided further, that in no event shall Compensation exceed the limitation in effect for any Plan Year under Section 401(a)(17) of the Code. |
|
|
(b) |
The term “Determination Date” with respect to any Plan Year means the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of the first Plan Year). |
|
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(c) |
The term “Key Employee” means any Employee or former Employee (including any deceased Employee) who is a key employee pursuant to the provisions of Section 416(i)(1) of the Code and any Beneficiary of such Employee or former Employee. |
|
|
(d) |
The term “Non-Key Employee” means any Employee who is not a Key Employee. |
|
|
(e) |
The term “Permissive Aggregation Group” means those plans included in the Employer’s Required Aggregation Group in conjunction with any other plan or plans of the Employer, so long as the entire group of plans would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code. |
|
|
(f) |
The term “Required Aggregation Group” shall include (i) all plans of the Employer in which a Key Employee is a participant, and (ii) all other plans of Employer which enable a plan described in clause (i) hereof to meet the requirements of Sections 401(a)(4) or 410 of the Code. |
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|
|
(i) of this Section with “90 percent” substituted for “60 percent” each place where “60 percent” appears in such definition. |
|
|
(h) |
The term “Super Top-Heavy Plan” with respect to a particular Plan Year means a plan that, as of the Determination Date, would qualify as a Top-Heavy Plan under the definition in subsection (j) of this Section with “90 percent” substituted for “60 percent” each place where “60 percent” appears in such definition. A plan is also a “Super Top-Heavy Plan” if it is part of a Super Top-Heavy Plan Group. |
|
|
(i) |
The term “Top-Heavy Plan Group” with respect to a particular Plan Year means a Required or a Permissive Aggregation Group if the sum, as of the Determination Date, of the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such group and the aggregate of the account balances of Key Employees under all defined contribution plans included in such group exceeds 60 percent of a similar sum determined for all Employees covered by the plans included in such group. |
|
|
(j) |
The term “Top-Heavy Plan” with respect to a particular Plan Year means (i) in the case of a defined contribution plan, a plan for which, as of the Determination Date, the aggregate of the accounts (within the meaning of Section 416(g) of the Code and the regulations thereunder) of Key Employees exceeds 60 percent of the aggregate of the accounts of all Participants under the plan, with the accounts valued as of the relevant Valuation Date, (ii), in the case of a defined benefit plan, a plan for which, as of the Determination Date, the present value of the cumulative accrued benefits payable under the plan (within the meaning of Section 416(g) of the Code and the regulations thereunder) to Key Employees exceeds 60 percent of the present value of the cumulative accrued benefits under the plan for all Employees, with present value of accrued benefits to be determined in accordance with the actuarial assumptions specified in such defined benefit plan, and (iii) a plan that is part of a Top-Heavy Plan Group. Notwithstanding the foregoing provisions of this subsection, however, a plan shall be deemed not to be a Top-Heavy Plan if it is part of a Required or Permissive Aggregation Group that is not a Top-Heavy Plan Group. |
|
|
(k) |
The term “Valuation Date” means the most recent date on or immediately preceding the Determination Date on which accounts are valued under Article IV. |
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|
the Plan enables a defined benefit plan included in such group to meet the requirements of Section 401(a)(4) or 410 of the Code, the minimum allocation of Employer contributions to the ESOP Account of each non-Key Employee shall be 3 percent of the Compensation of such Non-Key Employee. Any minimum allocation to the ESOP Account of a Participant required by this Section shall be made without regard to any Social Security contribution made by the Employer on behalf of the Participant. Notwithstanding the minimum top-heavy allocation requirements of this Section, in the event that the Plan is a Top-Heavy Plan, each Non-Key Employee hereunder who is also covered under a top-heavy defined benefit plan maintained by the Employer will receive the top-heavy benefits provided for under such defined benefit plan in lieu of the minimum top-heavy allocation under the Plan. |
Years of ServiceVested Percentage
Less than 2 years0%
2 years but less than 3 years20%
3 years but less than 4 years40%
4 years but less than 5 years60%
5 years but less than 6 years80%
6 years or more100%
The vesting schedule described in the immediately preceding sentence shall cease to be applicable when the Plan ceases to be a Top-Heavy Plan, provided that the percentage of an Employee’s ESOP Account that becomes non-forfeitable pursuant thereto before the Plan ceases to be a Top-Heavy Plan shall remain non-forfeitable, and the change in the vesting schedule which occurs when the Plan ceases to be a Top-Heavy Plan shall be subject to the provisions of Section 5.2.
|
|
(a) |
In applying this Article, any Employer required to be combined under Section 414(b), (c), or (m) of the Code shall be treated as a single Employer, and the qualified plans maintained by such single Employer shall be taken into account. |
- 65 -
|
|
satisfies Section 12.3; and the minimum benefit required for a Non-Key Employee in the Plan under Section 12.3 will be reduced or eliminated, in accordance with the requirements of Section 416 of the Code and the Treasury Regulations thereunder, if a minimum contribution or benefit is made or accrued in whole or in part in respect to such other plan(s). |
- 66 -
MISCELLANEOUS
|
|
(a) |
Any member of the Controlled Group or any affiliate of the Company may, with the consent of the Company, adopt the Plan and thereby become an Employer hereunder by executing an instrument evidencing such adoption on the order of its board of directors and filing a copy thereof with the Company and the Trustee, and such instrument shall (subject to such terms and conditions as the Company may require) become incorporated in the Plan by reference. |
|
|
(b) |
Any instrument of adoption pursuant to subsection (a) of this Section shall: |
|
|
(i) |
specify the effective date of the adoption of the Plan by the Employer; |
|
|
(ii) |
set forth the class or classes of Employees of the Employer eligible to participate in the Plan; |
|
|
(iii) |
specify what service is to be credited for prior service with the adopting Employer; and |
|
|
(iv) |
evidence the Employer’s intent to be bound by all provisions of the Plan and its related Trust Agreement as amended from time to time. |
|
|
(c) |
The Company at any time in its discretion may determine that an Employer shall no longer participate in the Plan and may direct that such Employer withdraw from the Plan. Any Employer may similarly elect to terminate its participation in the Plan at any time. |
- 67 -
|
13.5 |
Benefits Payable by Trust. All benefits payable under the Plan shall be paid or provided for solely from the Trust, and the Employer assumes no liability or responsibility therefor. |
- 68 -
|
|
benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had the Participant resumed and then terminated employment on account of death. |
|
|
(b) |
Differential Wage Payments. For Plan Years beginning on or after January 1, 2009, (i) an individual receiving a differential wage payment, as defined in Code Section 3401(h)(2), shall be treated as an Employee of the Employer making the payment, and (ii) the differential wage payment shall be treated as Compensation. |
- 69 -
ARTICLE XIV
INDEPENDENT FIDUCIARY
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EXECUTION
IN WITNESS WHEREOF the Plan, as amended and restated, is executed, subject to Board of Directors approval, effective as of the April 1, 2015 Effective Date, but on the actual dates below.
ADVANCED DRAINAGE SYSTEMS, INC.
By
Title:
Date:
ADS STRUCTURES, INC.
By
Title:
Date:
ADVANCED DRAINAGE OF OHIO, INC.
By
Title:
Date:
ADS VENTURES, INC.
By
Title:
Date:
SPARTAN CONCRETE, INC.
By
Title:
Date:
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, D. Scott Barbour, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q (this “Report”) of the registrant, Advanced Drainage Systems, Inc.; |
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2. |
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; |
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3. |
Based on my knowledge, the financial statements and other financial information included in this Report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and |
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d. |
Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 1, 2019
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By: |
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/s/ D. Scott Barbour |
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D. Scott Barbour |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Scott A. Cottrill, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q (this “Report”) of the registrant, Advanced Drainage Systems, Inc.; |
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2. |
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; |
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3. |
Based on my knowledge, the financial statements and other financial information included in this Report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and |
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d. |
Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 1, 2019
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By: |
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/s/ Scott A. Cottrill |
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Scott A. Cottrill |
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Executive Vice President,
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(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as the principal executive officer of Advanced Drainage Systems, Inc. (the “Company”), that, to the best of his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.
August 1, 2019
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/s/ D. Scott Barbour |
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D. Scott Barbour |
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Chief Executive Officer |
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(Principal Executive Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as the principal financial officer of Advanced Drainage Systems, Inc. (the “Company”), that, to the best of his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.
August 1, 2019
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/s/ Scott A. Cottrill |
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Scott A. Cottrill |
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Chief Financial Officer |
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(Principal Financial Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.