Group 1 - Advanced Drainage Systems (NYSE: WMS) presents a conflicting investment case with short-term challenges and a robust long-term growth narrative [1] - Recent results appear decent but are primarily driven by acquisitions [1] Group 2 - The company operates in sectors such as chemicals, homebuilders, building materials, industrials, and metals & mining [1] - The investment strategy focuses on undervalued stocks with near-term catalysts, with an investment horizon ranging from one quarter to two years [1]

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PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended June 30, 2025 [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=2&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Q1 FY2026, including balance sheets, operations, cash flows, and equity, with detailed notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20June%2030,%202025%20and%20March%2031,%202025) Presents the company's financial position, including assets, liabilities, and equity, as of June 30, 2025, and March 31, 2025 | Metric | June 30, 2025 (in thousands) | March 31, 2025 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :---------------------------- | :-------------------- | :------- | | Total Current Assets | $1,517,026 | $1,324,783 | $192,243 | 14.5% | | Total Assets | $3,909,945 | $3,690,360 | $219,585 | 6.0% | | Total Current Liabilities | $471,604 | $398,396 | $73,208 | 18.4% | | Total Liabilities | $2,131,669 | $2,054,572 | $77,097 | 3.7% | | Total Stockholders' Equity | $1,690,291 | $1,543,136 | $147,155 | 9.5% | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20for%20the%20three%20months%20ended%20June%2030,%202025%20and%202024) Details the company's revenues, expenses, and net income for the three months ended June 30, 2025, and 2024 | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Net sales | $829,880 | $815,336 | $14,544 | 1.8% | | Gross profit | $330,438 | $332,454 | $(2,016) | (0.6)% | | Income from operations | $205,746 | $226,215 | $(20,469) | (9.0)% | | Net income attributable to ADS | $143,922 | $161,402 | $(17,480) | (10.8)% | | Basic Net income per share | $1.85 | $2.08 | $(0.23) | (11.1)% | | Diluted Net income per share | $1.84 | $2.06 | $(0.22) | (10.7)% | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20for%20the%20three%20months%20ended%20June%2030,%202025%20and%202024) Reports net income and other comprehensive income components for the three months ended June 30, 2025, and 2024 | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Net income | $144,091 | $162,322 | $(18,231) | (11.2)% | | Currency translation income (loss) | $6,911 | $(3,749) | $10,660 | - | | Comprehensive income | $151,002 | $158,573 | $(7,571) | (4.8)% | | Total comprehensive income attributable to ADS | $149,497 | $159,441 | $(9,944) | (6.2)% | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20three%20months%20ended%20June%2030,%202025%20and%202024) Summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended June 30, 2025, and 2024 | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Net cash provided by operating activities | $274,977 | $183,426 | $91,551 | 49.9% | | Net cash used in investing activities | $(69,934) | $(57,217) | $(12,717) | 22.2% | | Net cash used in financing activities | $(31,132) | $(73,895) | $42,763 | (57.9)% | | Net change in cash | $175,009 | $51,522 | $123,487 | 239.7% | | Cash and restricted cash at end of period | $644,280 | $547,370 | $96,910 | 17.7% | [Condensed Consolidated Statements of Stockholders' Equity and Mezzanine Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20and%20Mezzanine%20Equity%20for%20the%20three%20months%20ended%20June%2030,%202025%20and%202024) Presents changes in stockholders' equity and mezzanine equity for the three months ended June 30, 2025, and 2024 - Total ADS stockholders' equity increased from **$1,525,436 thousand** as of April 1, 2025, to **$1,671,086 thousand** as of June 30, 2025, primarily driven by net income of **$143,922 thousand** and other comprehensive income of **$5,575 thousand**, partially offset by common stock dividends of **$14,021 thousand**[19](index=19&type=chunk) - Mezzanine equity decreased from **$92,652 thousand** to **$87,985 thousand**, mainly due to KSOP redeemable common stock conversion[19](index=19&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Provides detailed explanations of significant accounting policies, recent acquisitions, segment information, debt, and other financial disclosures [1. Background and Summary of Significant Accounting Policies](index=9&type=section&id=1.%20BACKGROUND%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Outlines the company's business, reportable segments, and key accounting policies, including seasonal sales patterns - Advanced Drainage Systems, Inc. (ADS) designs, manufactures, and markets water management solutions for stormwater and onsite septic wastewater industries, serving non-residential, residential, infrastructure, and agriculture markets[22](index=22&type=chunk) - The Company operates in three reportable segments: Pipe, Infiltrator Water Technologies, LLC ('Infiltrator'), and International, with 'Allied Products and Other' covering remaining segments[23](index=23&type=chunk) - Sales are historically higher in the first and second fiscal quarters due to favorable weather conditions accelerating construction activity[24](index=24&type=chunk) [2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities](index=9&type=section&id=2.%20LOSS%20ON%20DISPOSAL%20OF%20ASSETS%20AND%20COSTS%20FROM%20EXIT%20AND%20DISPOSAL%20ACTIVITIES) Details expenses incurred from asset disposals and facility closure activities during the period - During the three months ended June 30, 2025, the Company recorded **$5.8 million** in expenses related to the closure of a recycling facility to optimize its network[29](index=29&type=chunk) | Expense Category | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Accelerated depreciation | $1,764 | $— | | Severance | $2,004 | $— | | Impairment of right-of-use asset | $1,267 | $— | | Other exit and disposal costs | $791 | $— | | **Total Exit and disposal activities** | **$5,826** | **$—** | | Loss on disposals of property, plant and equipment | $1,198 | $292 | | **Total Loss on disposal of assets and costs from exit and disposal activities** | **$7,024** | **$292** | [3. Acquisitions](index=10&type=section&id=3.%20ACQUISITIONS) Describes the acquisition of River Valley Pipe LLC, including consideration transferred and preliminary goodwill - On May 8, 2025, ADS acquired River Valley Pipe LLC for approximately **$19.6 million** in cash, integrating it into the Pipe reportable segment[31](index=31&type=chunk) | Acquired Asset/Liability | Initial Amount (in thousands) | | :----------------------- | :---------------------------- | | Accounts receivable | $3,101 | | Inventory | $3,027 | | Property, plant and equipment | $6,986 | | Goodwill | $4,964 | | Intangible assets | $2,970 | | Other assets | $75 | | Accounts payable | $(1,227) | | Accrued expenses | $(285) | | Other liabilities | $(35) | | **Total fair value of consideration transferred** | **$19,576** | - The acquisition resulted in preliminary goodwill of **$5.0 million**, attributable to expected operating efficiencies and deductible for income tax purposes[33](index=33&type=chunk) [4. Revenue Recognition](index=10&type=section&id=4.%20REVENUE%20RECOGNITION) Explains how net sales are disaggregated by segment and product type to analyze economic factors affecting revenue - Net sales are disaggregated by Domestic, International, and Infiltrator segments, and further by product type, to reflect how economic factors affect revenue and cash flows[37](index=37&type=chunk) | Segment | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | | International - Pipe | $34,636 | $43,927 | | International - Allied Products & Other | $15,097 | $17,679 | | **Total International** | **$49,733** | **$61,606** | [5. Leases](index=11&type=section&id=5.%20LEASES) Describes the company's operating and finance leases for various assets, including terms and renewal options - The Company holds operating and finance leases for plants, yards, corporate offices, and equipment, with terms ranging from less than one year to 12 years, including renewal options if reasonably certain to be exercised[39](index=39&type=chunk) [6. Inventories](index=11&type=section&id=6.%20INVENTORIES) Presents the breakdown of inventory by raw materials and finished goods as of June 30, 2025, and March 31, 2025 | Inventory Type | June 30, 2025 (in thousands) | March 31, 2025 (in thousands) | | :--------------- | :--------------------------- | :---------------------------- | | Raw materials | $98,693 | $105,146 | | Finished goods | $355,002 | $383,123 | | **Total inventories** | **$453,695** | **$488,269** | [7. Net Income Per Share and Stockholders' Equity](index=11&type=section&id=7.%20NET%20INCOME%20PER%20SHARE%20AND%20STOCKHOLDERS'%20EQUITY) Provides basic and diluted net income per share and weighted average shares outstanding for the reporting periods | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | | Net income per common share – Basic | $1.85 | $2.08 | | Weighted average number of common shares outstanding – Basic | 77,641 | 77,540 | | Net income per common share – Diluted | $1.84 | $2.06 | | Weighted average number of common shares outstanding – Diluted | 78,122 | 78,282 | | Potentially dilutive securities excluded as anti-dilutive | 21 | 3 | [8. Related Party Transactions](index=12&type=section&id=8.%20RELATED%20PARTY%20TRANSACTIONS) Details transactions with consolidated and unconsolidated joint ventures, including guarantees and outstanding balances - ADS consolidates its **51%-owned** joint venture, ADS Mexicana, S.A. de C.V., which operates in Mexico and Central America[42](index=42&type=chunk) - No borrowings were outstanding under the Intercompany Revolving Credit Promissory Note as of June 30, 2025, or March 31, 2025[43](index=43&type=chunk) - ADS owns **50%** of the South American Joint Venture, which manufactures and sells HDPE corrugated pipe, guaranteeing **50%** of its credit arrangement with a maximum potential obligation of **$5.5 million** as of June 30, 2025, with no outstanding principal balance[44](index=44&type=chunk) [9. Debt](index=12&type=section&id=9.%20DEBT) Outlines the company's long-term debt obligations, revolving credit facility, and fair value measurements | Debt Type | June 30, 2025 (in thousands) | March 31, 2025 (in thousands) | | :-------------------------- | :--------------------------- | :---------------------------- | | Term Loan Facility | $411,500 | $413,250 | | Senior Notes due 2027 | $350,000 | $350,000 | | Senior Notes due 2030 | $500,000 | $500,000 | | Equipment Financing | $5,064 | $5,988 | | **Total Long-term debt obligations** | **$1,250,050** | **$1,251,589** | - The Revolving Credit Facility was increased to **$600 million** in May 2022 and extended to May 26, 2027, with **$10.1 million** in letters of credit outstanding as of June 30, 2025, reducing availability[45](index=45&type=chunk) - The fair values of the 2027 Notes and 2030 Notes are determined based on quoted market data, while Equipment Financing fair value is based on comparison to similar debt rates and terms[49](index=49&type=chunk) [10. Commitments and Contingencies](index=13&type=section&id=10.%20COMMITMENTS%20AND%20CONTINGENCIES) Discusses the company's purchase commitments and legal proceedings, assessing their potential financial impact - The Company has no outstanding fixed-price and quantity purchase commitments for resin raw materials as of June 30, 2025[50](index=50&type=chunk) - ADS is involved in various legal proceedings in the ordinary course of business but does not believe they will have a material adverse impact on its financial position or results of operations[51](index=51&type=chunk) [11. Income Taxes](index=13&type=section&id=11.%20INCOME%20TAXES) Reports the effective tax rate and explains the primary drivers of changes for the reporting periods | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :---------------- | :------------------------------- | :------------------------------- | | Effective tax rate | 24.6% | 23.7% | - The increase in the effective tax rate for the three months ended June 30, 2025, was primarily due to a decrease in the discrete income tax benefit related to stock-based compensation windfall[52](index=52&type=chunk) [12. Stock-Based Compensation](index=13&type=section&id=12.%20STOCK-BASED%20COMPENSATION) Details stock-based compensation expense by category and award type, including recent grants | Expense Category | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cost of goods sold | $1,656 | $1,341 | | Selling, general and administrative expenses | $6,748 | $5,636 | | **Total stock-based compensation expense** | **$8,404** | **$6,977** | | Award Type | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Stock Options | $1,790 | $1,435 | | Restricted Stock | $3,095 | $2,234 | | Performance-based Restricted Stock Units | $2,424 | $2,224 | | Employee Stock Purchase Plan | $648 | $546 | | Non-Employee Directors | $447 | $538 | | **Total stock-based compensation expense** | **$8,404** | **$6,977** | - During the three months ended June 30, 2025, the Company granted **0.1 million** shares of restricted stock with a fair value of **$11.9 million** and **0.1 million** nonqualified stock options with a fair value of **$7.5 million**[55](index=55&type=chunk)[56](index=56&type=chunk) [13. Business Segment Information](index=14&type=section&id=13.%20BUSINESS%20SEGMENT%20INFORMATION) Provides disaggregated financial data by reportable segment, including net sales and adjusted gross profit - The Company realigned certain wastewater products to the Infiltrator segment in Q1 FY2026, including ARC Septic Chambers and specific pipe products, with prior period information recast for comparability[59](index=59&type=chunk) | Segment | Net Sales from External Customers (Q1 2025, in thousands) | Net Sales from External Customers (Q1 2024, in thousands) | $ Variance | % Variance | | :-------------------- | :---------------------------------------- | :---------------------------------------- | :--------- | :--------- | | Pipe | $415,538 | $426,388 | $(10,850) | (2.5)% | | Infiltrator | $178,353 | $147,302 | $31,051 | 21.1% | | International | $48,491 | $57,705 | $(9,214) | (16.0)% | | Allied Products & Other | $187,498 | $183,941 | $3,557 | 1.9% | | **Total Consolidated** | **$829,880** | **$815,336** | **$14,544** | **1.8%** | | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total Gross Profit | $330,438 | $332,454 | | Depreciation and Amortization | $33,512 | $27,212 | | Stock-based compensation expense | $1,656 | $1,341 | | **Total Segment Adjusted Gross Profit** | **$365,606** | **$361,007** | [14. Supplemental Disclosure of Cash Flow Information](index=16&type=section&id=14.%20SUPPLEMENTAL%20DISCLOSURE%20OF%20CASH%20FLOW%20INFORMATION) Offers additional details on cash paid for income taxes and interest, and non-cash investing activities | Item | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :------------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Cash paid for income taxes | $722 | $839 | | Cash paid for interest | $9,823 | $10,019 | | Acquisition of property, plant and equipment under finance lease | $21,248 | $27,896 | | Balance in accounts payable for the acquisition of property, plant and equipment | $24,290 | $32,885 | [15. Subsequent Events](index=17&type=section&id=15.%20SUBSEQUENT%20EVENTS) Reports significant events occurring after the quarter-end, including dividend declarations and property sales - Subsequent to quarter-end, the Company declared a quarterly cash dividend of **$0.18 per share**, payable September 15, 2025[65](index=65&type=chunk) - In July 2025, ADS sold a property held-for-sale for **$25.5 million**, resulting in a gain on disposal of assets of **$17.0 million**[65](index=65&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and results of operations for Q1 FY2026, highlighting key performance metrics, segment drivers, liquidity, and capital resources [Overview](index=18&type=section&id=Overview) Provides a high-level description of ADS as a leading manufacturer of water management solutions - ADS is a leading manufacturer of innovative water management solutions for stormwater and onsite septic wastewater, serving non-residential, residential, infrastructure, and agriculture markets[69](index=69&type=chunk) [Executive Summary](index=18&type=section&id=Executive%20Summary) Summarizes key financial performance metrics for Q1 FY2026, including net sales, net income, and Adjusted EBITDA | Metric | Q1 Fiscal 2026 (in millions) | Q1 Fiscal 2025 (in millions) | Change (in millions) | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------------------- | :------- | | Net sales | $829.9 | $815.3 | $14.6 | 1.8% | | Net income | $144.1 | $162.3 | $(18.2) | (11.2)% | | Net income per diluted share | $1.84 | $2.06 | $(0.22) | (10.7)% | | Adjusted EBITDA | $278.2 | $275.5 | $2.7 | 1.0% | - The increase in domestic Net sales was primarily driven by acquisitions, with Orenco contributing **$30.0 million** to Infiltrator sales, and growth in non-residential and residential construction markets[70](index=70&type=chunk)[77](index=77&type=chunk) - Gross profit decreased by **$2.0 million**, or **0.6%**, primarily due to unfavorable pricing, material costs, and the mix impact from the Orenco acquisition, partially offset by favorable volume and price/cost in construction and Infiltrator sales[71](index=71&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) Analyzes the company's financial performance, including net sales, cost of goods sold, gross profit, and operating income | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % of Net Sales (2025) | % of Net Sales (2024) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :-------------------- | :-------------------- | | Net sales | $829,880 | $815,336 | 100.0% | 100.0% | | Cost of goods sold | $499,442 | $482,882 | 60.2% | 59.2% | | Gross profit | $330,438 | $332,454 | 39.8% | 40.8% | | Selling, general and administrative | $103,961 | $94,052 | 12.5% | 11.5% | | Income from operations | $205,746 | $226,215 | 24.8% | 27.7% | | Net income attributable to ADS | $143,922 | $161,402 | 17.3% | 19.8% | - Domestic Pipe Net sales decreased by **2.5%** due to demand in the infrastructure end market, partially offset by improvement in the non-residential market[77](index=77&type=chunk) - International sales decreased by **16.0%** due to decreased volume[77](index=77&type=chunk) - Selling, general and administrative expenses increased by **$9.9 million** (**10.5%**) and as a percentage of Net sales, increased by **1.0%** to **12.5%**, primarily due to the operating expenses of the Orenco acquisition[72](index=72&type=chunk)[80](index=80&type=chunk) | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | | Adjusted EBITDA | $278,167 | $275,498 | | Adjusted EBITDA Margin | 33.5% | 33.8% | [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) Assesses the company's ability to meet short-term and long-term obligations, including debt, cash, and cash flow activities | Metric | June 30, 2025 (in thousands) | | :-------------------------------- | :--------------------------- | | Total debt (debt and finance lease obligations) | $1,430,243 | | Cash | $638,268 | | Net debt (total debt less cash) | $791,975 | | Leverage Ratio | 0.9 | | Metric | June 30, 2025 (in thousands) | | :-------------------- | :--------------------------- | | Revolver capacity | $600,000 | | Revolver available liquidity | $589,867 | | Cash Flow Activity | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $274,977 | $183,426 | | Net cash used in investing activities | $(69,934) | $(57,217) | | Net cash used in financing activities | $(31,132) | $(73,895) | - Free cash flow increased to **$222.4 million** for the three months ended June 30, 2025, from **$125.7 million** in the prior year, driven by increased operating cash flows[89](index=89&type=chunk) - Capital expenditures for fiscal year 2026 are anticipated to be approximately **$200 million to $225 million**, to be financed by funds generated from operations[98](index=98&type=chunk) [Off-Balance Sheet Arrangements](index=23&type=section&id=Off-Balance%20Sheet%20Arrangements) Discloses the company's off-balance sheet arrangements, specifically a guarantee for a joint venture's debt - The Company has no off-balance sheet arrangements other than a **50%** guarantee of certain debt for its unconsolidated South American Joint Venture, which had no outstanding debt subject to the guarantee as of June 30, 2025[101](index=101&type=chunk) [Critical Accounting Policies and Estimates](index=23&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Confirms no material changes to critical accounting policies from the prior fiscal year's Form 10-K - There have been no changes in critical accounting policies from those disclosed in the Fiscal 2025 Form 10-K, except as noted in 'Note 1. Background and Summary of Significant Accounting Policies'[102](index=102&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the company's exposure to market risks, including interest rates, credit, raw material prices, and foreign currency, quantifying potential interest rate impacts - A **1.0%** increase in interest rates on variable-rate debt would increase annual forecasted interest expense by approximately **$4.1 million** based on borrowings as of June 30, 2025[103](index=103&type=chunk) - If the Revolving Credit Facility were fully drawn, a **1.0%** interest rate change would alter interest expense by approximately **$10.1 million** for the twelve months ended June 30, 2025[103](index=103&type=chunk) [Item 4. Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2025[105](index=105&type=chunk) - There were no changes in the Company's internal control over financial reporting during the three months ended June 30, 2025, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[106](index=106&type=chunk) PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity sales [Item 1. Legal Proceedings](index=24&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings but does not anticipate a material adverse impact on its financial position or operations - The Company does not believe that current litigation, claims, and administrative proceedings will have a material adverse impact on its financial position or results of operations[108](index=108&type=chunk) [Item 1A. Risk Factors](index=24&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the Fiscal 2025 Form 10-K for important risk factors, supplemented by disclosures in other sections of this Form 10-Q - Important risk factors are described in the Fiscal 2025 Form 10-K and supplemented by disclosures in Item 3 (Quantitative and Qualitative Disclosures about Market Risk) and Item 1 (Legal Proceedings) of this Form 10-Q[110](index=110&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=24&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the common stock repurchase program, noting no repurchases during the quarter and the remaining authorization - The Board of Directors authorized a **$1.0 billion** common stock repurchase program in February 2022[111](index=111&type=chunk) - No shares of common stock were repurchased during the three months ended June 30, 2025[111](index=111&type=chunk) - As of June 30, 2025, approximately **$147.7 million** of common stock remained authorized for repurchase[111](index=111&type=chunk) [Item 3. Defaults Upon Senior Securities](index=24&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section confirms that there were no defaults upon senior securities - There were no defaults upon senior securities[112](index=112&type=chunk) [Item 4. Mine Safety Disclosures](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the Company[113](index=113&type=chunk) [Item 5. Other Information](index=24&type=section&id=Item%205.%20Other%20Information) This section reports no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended June 30, 2025[114](index=114&type=chunk) [Item 6. Exhibits](index=25&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - The exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2) and various Inline XBRL Taxonomy Extension documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[116](index=116&type=chunk) SIGNATURES This section provides the official signatures of the company's executive officers, certifying the report - The report is signed by D. Scott Barbour (President and Chief Executive Officer), Scott A. Cottrill (Executive Vice President, Chief Financial Officer and Secretary), and Tim A. Makowski (Vice President, Controller, and Chief Accounting Officer) on August 7, 2025[118](index=118&type=chunk)

Financial Data and Key Metrics Changes - Revenue increased by 2% to $830 million, primarily driven by the Orenco acquisition despite challenging end market demand [20][6] - Adjusted EBITDA margin was 33.5%, one of the highest in the company's history, indicating strong profitability [20][14] - Free cash flow generated was $222 million year-to-date, compared to $126 million in the prior year, driven by better working capital performance [22] Business Line Data and Key Metrics Changes - Organic sales were down slightly, but higher-margin categories like Allied Products and Infiltrator saw revenue increases [7][11] - Infiltrator experienced 21% growth, supported by strong performance in commercial applications and on-site wastewater tanks [11][12] - Domestic Allied Products sales increased by 1%, driven by demand in the multifamily residential market [11] Market Data and Key Metrics Changes - Residential market demand was variable, with multifamily construction improving while single-family housing faced challenges due to interest rates [12] - Non-residential market growth was driven by acquisitions and strong execution in commercial construction, particularly in the Midwest and Southeastern U.S. [13] - Infrastructure revenue was down compared to the prior year but was still the third highest revenue quarter in the company's history [13] Company Strategy and Development Direction - The company remains focused on driving profitable growth through market share expansion, new product introductions, and strategic acquisitions [6][19] - Investments in innovation and product development at the new engineering and technology center are prioritized to enhance capabilities [23] - The long-term outlook for the business is strong, supported by secular tailwinds in water management solutions [19] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the tepid demand environment but noted resilience in core markets [34][108] - The company is cautious about demand impacting absorption rates but remains confident in its ability to manage costs and maintain margins [46][95] - The competitive landscape remains stable, with consistent pricing and effective cost management strategies in place [72][76] Other Important Information - The company plans to spend approximately $200 million to $225 million on capital expenditures for the full year, focusing on innovation and customer service [23] - The company ended the quarter with over $1.2 billion in available liquidity, including $638 million in cash, providing flexibility for strategic investments [23] Q&A Session Summary Question: Impact of weather on project delays and comparisons to last year - Management noted that weather caused some project delays but overall demand remained stable, with no significant detrimental impact [30][32] Question: Expectations for Q2 price-cost dynamics - Price-cost is expected to remain flat for the year, with some favorable conditions anticipated in Q2 [35] Question: Changes in capital expenditure guidance - The reduction in CapEx guidance is attributed to timing rather than changes in project plans [39] Question: Organic growth in Infiltrator and outlook - Infiltrator's growth is driven by tanks gaining market share, with expectations for continued strong performance [41] Question: Margin outlook for the year - Management remains cautious about demand impacting margins but does not foresee significant changes in margin expectations [92][95] Question: Competitive landscape and inventory dynamics - Management indicated that competitive pressures have stabilized, with no significant inventory issues affecting the business [71][100] Question: Long-term vision for the product mix - The company aims to grow higher-margin product lines faster than the pipe business, maintaining a balanced product mix [102][104]

Financial Data and Key Metrics Changes - Revenue increased by 2% to $830 million, primarily driven by the Orenco acquisition despite challenging market conditions [19][5] - Adjusted EBITDA margin was 33.5%, one of the highest in the company's history, indicating strong profitability [19][13] - Free cash flow generated was $222 million year-to-date, compared to $126 million in the prior year, driven by better working capital performance [21][22] Business Line Data and Key Metrics Changes - Organic sales were slightly down, but higher-margin categories like Allied Products and Infiltrator saw revenue increases [6][10] - Infiltrator experienced a 21% growth, significantly contributing to overall performance, with double-digit organic growth in on-site wastewater tanks [10][11] - Domestic Allied Products sales increased by 1%, driven by demand in the multifamily residential market [10] Market Data and Key Metrics Changes - Residential market demand was variable, with multifamily construction improving while single-family housing faced challenges due to interest rates [11] - Non-residential market growth was supported by acquisitions and strong execution in commercial construction, particularly in the Midwest and Southeastern U.S. [12] - Infrastructure revenue was down compared to the prior year but was still the third highest in the company's history, with strong long-term demand drivers [12][13] Company Strategy and Development Direction - The company remains focused on driving profitable growth through market share expansion, new product introductions, and strategic acquisitions [5][6] - Investments in innovation and product development at the new engineering and technology center are prioritized to enhance capabilities [22] - The long-term outlook for the business is strong, supported by favorable trends in water management solutions [18][19] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the tepid demand environment but noted resilience in core markets [33][19] - The company is committed to maintaining pricing discipline and managing costs effectively despite competitive pressures [66][67] - Future cash flow generation is expected to be bolstered by the OBBBA, providing additional flexibility for investments [22][46] Other Important Information - The company has successfully reduced fixed costs by closing inefficient operations without compromising customer service [14][15] - The new engineering and technology center has enhanced the speed of product testing and commercialization [8][10] Q&A Session Summary Question: Impact of weather on project delays and prior year comparisons - Management noted that weather caused some project delays but did not significantly impact overall performance, with a balanced view of demand [29][31] Question: Expectations for Q2 price-cost dynamics - Price-cost is expected to remain flat for the year, with stable pricing and favorable material costs contributing positively [34] Question: Changes in capital expenditure guidance - The reduction in CapEx guidance is attributed to timing rather than a change in strategic projects [37][38] Question: Organic growth in Infiltrator and outlook - Infiltrator's growth is driven by tanks gaining market share, with expectations for continued strong performance in on-site wastewater [39][40] Question: Competitive landscape and demand environment - Management indicated that competition remains but emphasized the company's ability to maintain pricing and margins despite a tepid demand environment [62][66] Question: Infrastructure demand trends - Infrastructure sales were impacted by tough comparisons from previous strong projects, but underlying demand remains stable [72][73] Question: Non-residential project pipeline - The project pipeline is tracking with a tepid environment, but the company is successfully gaining market share in key states [76][78] Question: Long-term vision for product mix - The company aims to grow higher-margin products faster than the pipe business, maintaining a balanced product mix [92][93]

Financial Performance - Q1 Fiscal 2026 revenue shows mixed results, with ADS Legacy sales decreasing by 2% from $668 million to $652 million, while Infiltrator sales increased by 21% from $147 million to $178 million[9] - Adjusted EBITDA margin slightly decreased by 30 bps, from 33.8% in Q1 FY25 to 33.5% in Q1 FY26[11] - Consolidated Adjusted EBITDA increased from $275 million in FY 2025 to $278 million in FY 2026[20] - Consolidated Free Cash Flow increased from $126 million in FY 2025 to $222 million in FY 2026[20] Business Operations and Strategy - The company completed the River Valley Pipe acquisition in Q1 FY26 and launched Arcadia™ Hydrodynamic Separator technology[14, 16] - Capital expenditures are expected to remain elevated in Fiscal 2026 due to investments in growth, recycling capacity, productivity, and automation[16] - The company's diversified product mix is shifting towards higher margin categories, with Allied Products accounting for 56.2% of revenue and Water Management Solutions contributing 53.6% to Adjusted Gross Margin[26] Market Outlook - The company anticipates net sales between $2.825 billion and $2.975 billion for Fiscal Year 2026, representing a change of -3% to +2% year-over-year[22] - Adjusted EBITDA is projected to be between $850 million and $910 million for Fiscal Year 2026, indicating a change of -4% to +2% year-over-year[22] - Adjusted EBITDA margin is expected to be between 30.1% and 30.6% for Fiscal Year 2026, reflecting a change of -50 bps to flat[22]

Company Performance - Advanced Drainage Systems reported quarterly earnings of $1.95 per share, exceeding the Zacks Consensus Estimate of $1.78 per share, but down from $2.06 per share a year ago [1] - The earnings surprise for this quarter was +9.55%, while the previous quarter saw a surprise of -5.5% with actual earnings of $1.03 compared to an expected $1.09 [2] - The company posted revenues of $829.88 million for the quarter ended June 2025, surpassing the Zacks Consensus Estimate by 1.14% and up from $815.34 million year-over-year [3] Market Performance - Advanced Drainage shares have declined approximately 1.5% since the beginning of the year, contrasting with the S&P 500's gain of 7.9% [4] - The current consensus EPS estimate for the upcoming quarter is $1.76 on revenues of $808.05 million, and for the current fiscal year, it is $5.88 on revenues of $2.92 billion [8] Industry Outlook - The Building Products - Miscellaneous industry, to which Advanced Drainage belongs, is currently ranked in the bottom 37% of over 250 Zacks industries, indicating potential challenges ahead [9] - The performance of Advanced Drainage's stock may be influenced by the overall outlook for the industry, as research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by more than 2 to 1 [9]

[First Quarter Fiscal 2026 Financial Results](index=1&type=section&id=First%20Quarter%20Fiscal%202026%20Financial%20Results) This section provides an overview of the company's strong Q1 FY2026 performance, detailed financial results, balance sheet, and fiscal year 2026 outlook [Performance Overview](index=1&type=section&id=Performance%20Overview) ADS reported strong Q1 FY2026 results with a **33.5% Adjusted EBITDA margin**, driven by strategic investments and acquisitions despite macroeconomic headwinds - The company achieved a strong **Adjusted EBITDA margin of 33.5%** despite macroeconomic headwinds including wet weather delaying projects and elevated interest rates[2](index=2&type=chunk) - Strategic initiatives in the quarter included the formal launch of the Arcadia stormwater separator, scaling advanced treatment solutions at the newly acquired Orenco, and acquiring River Valley Pipe to strengthen geographic presence[2](index=2&type=chunk) - Management believes the company is well-positioned for long-term growth due to strong fundamentals and growing awareness of the value of stormwater and onsite wastewater management, which drives market conversion and demand[2](index=2&type=chunk) [Detailed Financial Performance](index=1&type=section&id=Detailed%20Financial%20Performance) Q1 FY2026 net sales grew **1.8% to $829.9 million**, driven by Infiltrator segment growth, while net income and diluted EPS declined Q1 Fiscal 2026 Key Financial Metrics | Metric | Q1 FY2026 | YoY Change | | :--- | :--- | :--- | | Net Sales | $829.9 million | +1.8% | | Net Income | $144.1 million | -11.2% | | Net Income per Diluted Share | $1.84 | -10.7% | | Adjusted EBITDA (Non-GAAP) | $278.2 million | +1.0% | | Adjusted EPS (Non-GAAP) | $1.95 | -5.3% | Q1 Fiscal 2026 Net Sales Breakdown by Segment (YoY) | Segment | Q1 FY2026 Sales (million USD) | YoY Change | | :--- | :--- | :--- | | Domestic Pipe | $415.5 | -2.5% | | Domestic Allied Products & Other | $187.5 | +1.9% | | Infiltrator | $178.4 | +21.1% | | International | $48.5 | -16.0% | - Gross profit decreased by **0.6% to $330.4 million**, primarily due to unfavorable fixed cost absorption and the mix impact from the Orenco acquisition[4](index=4&type=chunk) - Selling, general and administrative (SG&A) expenses rose **10.5% to $104.0 million**, largely driven by the acquisition of Orenco[5](index=5&type=chunk) [Balance Sheet and Liquidity](index=2&type=section&id=Balance%20Sheet%20and%20Liquidity) The company significantly improved liquidity, reducing net debt to **$792.0 million** and increasing operating cash flow to **$275.0 million** Key Balance Sheet and Cash Flow Metrics (as of June 30, 2025) | Metric | Value (million USD) | Change from Prior Period | | :--- | :--- | :--- | | Net Cash from Operating Activities | $275.0 | +$91.6 million (YoY) | | Free Cash Flow (Non-GAAP) | $222.4 | +$96.7 million (YoY) | | Net Debt | $792.0 | -$170.4 million (from Mar 31, 2025) | | Total Liquidity | $1,228.1 | N/A | | Leverage Ratio | 0.9x Adj. EBITDA | N/A | - The company did not repurchase any shares of its common stock in the three months ended June 30, 2025. Approximately **$147.7 million remains available** under the existing share repurchase authorization[10](index=10&type=chunk) [Fiscal 2026 Outlook](index=2&type=section&id=Fiscal%202026%20Outlook) The company reaffirmed its FY2026 guidance, projecting net sales between **$2.825 billion and $2.975 billion** and Adjusted EBITDA of **$850 million to $910 million** Fiscal Year 2026 Guidance | Metric | Expected Range | | :--- | :--- | | Net Sales | $2.825 billion - $2.975 billion | | Adjusted EBITDA | $850 million - $910 million | | Capital Expenditures | $200 million - $225 million | [Financial Statements and Reconciliations](index=4&type=section&id=Financial%20Statements%20and%20Reconciliations) This section presents the consolidated financial statements and detailed reconciliations for key non-GAAP financial measures [Consolidated Financial Statements](index=4&type=section&id=Consolidated%20Financial%20Statements) This section presents unaudited consolidated statements of income, balance sheets, and cash flows for Q1 FY2026, showing revenue growth but lower net income [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Q1 FY2026 net sales increased to **$829.9 million**, but income from operations and net income declined due to higher costs Consolidated Income Statement Highlights (Three Months Ended June 30, in thousands USD) | (In thousands, except per share data) | 2025 | 2024 | | :--- | :--- | :--- | | Net sales | $829,880 | $815,336 | | Gross profit | $330,438 | $332,454 | | Income from operations | $205,746 | $226,215 | | Net income attributable to ADS | $143,922 | $161,402 | | Diluted net income per share | $1.84 | $2.06 | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$3.91 billion** as of June 30, 2025, driven by a significant rise in cash and stockholders' equity Consolidated Balance Sheet Highlights (in thousands USD) | Account | June 30, 2025 | March 31, 2025 | | :--- | :--- | :--- | | Cash | $638,268 | $463,319 | | Total Current Assets | $1,517,026 | $1,324,783 | | Total Assets | $3,909,945 | $3,690,360 | | Total Liabilities | $2,131,669 | $2,054,572 | | Total Stockholders' Equity | $1,690,291 | $1,543,136 | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to **$275.0 million** in Q1 FY2026, resulting in a **$175.0 million** net cash increase Consolidated Cash Flow Highlights (Three Months Ended June 30, in thousands USD) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $274,977 | $183,426 | | Net cash used in investing activities | $(69,934) | $(57,217) | | Net cash used in financing activities | $(31,132) | $(73,895) | | Net change in cash | $175,009 | $51,522 | [Segment Results](index=7&type=section&id=Segment%20Results) In Q1 FY2026, Infiltrator segment sales grew significantly to **$178.4 million**, while Pipe and International sales declined Net Sales from External Customers by Segment (Three Months Ended June 30, in thousands USD) | Segment | 2025 | 2024 | | :--- | :--- | :--- | | Pipe | $415,538 | $426,388 | | Infiltrator | $178,353 | $147,302 | | Total International | $48,491 | $57,705 | | Allied Products & Other | $187,498 | $183,941 | | **Total Consolidated** | **$829,880** | **$815,336** | - In Q1 FY2026, the company realigned certain wastewater products from the Pipe and Allied Products & Other segments to the Infiltrator segment. Prior period segment information has been recast to conform to the new presentation[25](index=25&type=chunk) [Non-GAAP Reconciliations](index=7&type=section&id=Non-GAAP%20Reconciliations) This section provides detailed reconciliations of non-GAAP financial measures, including Adjusted Gross Profit, EBITDA, Free Cash Flow, and Adjusted EPS [Reconciliation of Adjusted Gross Profit](index=8&type=section&id=Reconciliation%20of%20Adjusted%20Gross%20Profit) Total Segment Adjusted Gross Profit for Q1 FY2026 increased to **$365.6 million**, resulting in a GAAP Gross Profit of **$330.4 million** Reconciliation of Adjusted Gross Profit (Three Months Ended June 30, in thousands USD) | Description | 2025 | 2024 | | :--- | :--- | :--- | | Total Segment Adjusted Gross Profit | $365,606 | $361,007 | | Depreciation and amortization | (33,512) | (27,212) | | Stock-based compensation expense | (1,656) | (1,341) | | **Total Gross Profit (GAAP)** | **$330,438** | **$332,454** | [Reconciliation of Adjusted EBITDA](index=8&type=section&id=Reconciliation%20of%20Adjusted%20EBITDA) Adjusted EBITDA for Q1 FY2026 was **$278.2 million**, reconciled from GAAP Net Income by adding back non-operating and non-cash expenses Reconciliation of Net Income to Adjusted EBITDA (Three Months Ended June 30, in thousands USD) | Description | 2025 | 2024 | | :--- | :--- | :--- | | Net income | $144,091 | $162,322 | | Depreciation and amortization | 50,228 | 41,098 | | Interest expense | 23,029 | 22,824 | | Income tax expense | 46,674 | 49,886 | | **EBITDA** | **$264,022** | **$276,130** | | Other Adjustments | 14,145 | (4,632) | | **Adjusted EBITDA** | **$278,167** | **$275,498** | [Reconciliation of Free Cash Flow](index=8&type=section&id=Reconciliation%20of%20Free%20Cash%20Flow) Free Cash Flow significantly improved to **$222.4 million** in Q1 FY2026, derived from operating cash flow less capital expenditures Reconciliation of Free Cash Flow (Three Months Ended June 30, in thousands USD) | Description | 2025 | 2024 | | :--- | :--- | :--- | | Net cash flow from operating activities | $274,977 | $183,426 | | Capital expenditures | (52,598) | (57,715) | | **Free cash flow** | **$222,379** | **$125,711** | [Reconciliation of Adjusted Earnings per Share](index=10&type=section&id=Reconciliation%20of%20Adjusted%20Earnings%20per%20Share) Adjusted Earnings per Share for Q1 FY2026 was **$1.95**, reflecting adjustments for restructuring, realignment, and transaction costs Reconciliation of Diluted EPS to Adjusted EPS (Three Months Ended June 30, USD) | Description | 2025 | 2024 | | :--- | :--- | :--- | | Diluted Earnings Per Share (GAAP) | $1.84 | $2.06 | | Restructuring and realignment expense | 0.13 | — | | Transaction costs | 0.01 | — | | Income tax impact of adjustments | (0.03) | — | | **Adjusted Earnings per Share** | **$1.95** | **$2.06** |

Core Insights - Heidelberg Materials AG Unsponsored ADR (HDLMY) and Advanced Drainage Systems (WMS) are both attractive options for value investors, but a closer examination is necessary to determine which stock is more appealing [1] Valuation Metrics - Both HDLMY and WMS currently hold a Zacks Rank of 2 (Buy), indicating positive earnings estimate revisions and improving earnings outlooks for both companies [3] - HDLMY has a forward P/E ratio of 15.23, while WMS has a forward P/E of 20.23, suggesting that HDLMY may be undervalued compared to WMS [5] - The PEG ratio for HDLMY is 1.18, while WMS has a PEG ratio of 1.72, indicating that HDLMY offers better value when considering expected EPS growth [5] - HDLMY's P/B ratio is 2.07, compared to WMS's P/B of 5.98, further supporting the notion that HDLMY is the more attractive value option [6] - Based on these valuation metrics, HDLMY holds a Value grade of B, while WMS has a Value grade of C, reinforcing the conclusion that HDLMY is the superior value option at this time [6]

Core Insights - PULPO WMS has launched an advanced integration with Microsoft Dynamics 365 Business Central, developed in partnership with Aident, enhancing warehouse management capabilities for users of Business Central [1][3][4] Group 1: Integration Details - The integration combines PULPO's mobile-first WMS technology with Aident's expertise in Microsoft Dynamics 365 Business Central implementations, providing a comprehensive warehouse management system [3][4] - This integration allows for seamless data flow between Business Central and PULPO WMS, automating inbound and outbound workflows, achieving real-time inventory visibility, and synchronizing master data [5][11] Group 2: Strategic Partnership - Aident's extensive project experience across various sectors has enabled the development of this integration to meet the complex warehouse management needs of international businesses [4][9] - The partnership ensures successful deployment and optimization of the integrated system, supported by Aident's consulting and project management services [7][9] Group 3: Company Profiles - PULPO WMS is designed for fast-growing e-commerce merchants, 3PL providers, and brands with in-house fulfillment, operating in 25 countries [8] - Aident specializes in the introduction, adaptation, and optimization of ERP solutions for businesses, focusing on developing industry-specific functionalities for Microsoft Dynamics 365 Business Central [9]