Advanced Drainage Systems(WMS) - 2026 Q1 - Quarterly Report

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) 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 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 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 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 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 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] - Mezzanine equity decreased from $92,652 thousand to $87,985 thousand, mainly due to KSOP redeemable common stock conversion[19] Notes to the Condensed Consolidated Financial Statements Provides detailed explanations of significant accounting policies, recent acquisitions, segment information, debt, and other financial disclosures 1. Background and Summary of Significant Accounting Policies 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] - The Company operates in three reportable segments: Pipe, Infiltrator Water Technologies, LLC ('Infiltrator'), and International, with 'Allied Products and Other' covering remaining segments[23] - Sales are historically higher in the first and second fiscal quarters due to favorable weather conditions accelerating construction activity[24] 2. Loss on Disposal of Assets and Costs from Exit and Disposal Activities 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] | 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 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] | 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] 4. Revenue Recognition 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] | 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 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] 6. Inventories 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 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 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] - No borrowings were outstanding under the Intercompany Revolving Credit Promissory Note as of June 30, 2025, or March 31, 2025[43] - 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] 9. Debt 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] - 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] 10. Commitments and Contingencies 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] - 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] 11. Income Taxes 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] 12. Stock-Based Compensation 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][56] 13. Business Segment Information 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] | 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 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 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] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] Executive Summary 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][77] - 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] Results of Operations 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] - International sales decreased by 16.0% due to decreased volume[77] - 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][80] | 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 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] - 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] Off-Balance Sheet Arrangements 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] Critical Accounting Policies and Estimates 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Item 4. Controls and Procedures 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] - 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] 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 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - No shares of common stock were repurchased during the three months ended June 30, 2025[111] - As of June 30, 2025, approximately $147.7 million of common stock remained authorized for repurchase[111] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities - There were no defaults upon senior securities[112] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the Company[113] Item 5. Other Information 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] Item 6. Exhibits 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] 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]