前瞻性聲明受到已知和未知風險和不確定性的影響，其中許多超出我們的控制範圍。我們提醒您，前瞻性聲明並不代表未來業績的保證，我們的實際合併運營業績、財務狀況、流動性和行業發展與本10-Q表格中包含的前瞻性聲明可能存在重大差異。此外，即使我們的實際合併運營業績、財務狀況、流動性和行業發展與本10-Q表格中包含的前瞻性聲明一致，這些結果或發展也可能不代表隨後期間的結果或發展。許多重要因素可能導致實際結果與本10-Q表格中的前瞻性聲明中包含的或暗示的結果存在重大差異，包括與我們的運營和業務相關的前瞻性聲明中反映的風險和不確定性（包括在「風險因素」和「管理對財務狀況和運營結果的討論」標題下討論的風險和不確定性），以及我們向美國證券交易委員會(Securities and Exchange Commission)提出的其他備案不時描述的內容。可能導致實際結果與涉及我們的運營和業務的前瞻性聲明中所反映的結果存在差異的因素包括：
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -Advanced Drainage Systems, Inc., incorporated in Delaware, and its subsidiaries (collectively referred to as “ADS” or the “Company”) designs, manufactures and markets innovative water management solutions in the stormwater and onsite septic wastewater industries, providing superior drainage solutions for use in the construction and agriculture marketplace. ADS’s products are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications.
The Company is managed and reports results of operations in three reportable segments: Pipe, Infiltrator Water Technologies Ultimate Holdings, Inc. (“Infiltrator”) and International. The Company also reports the results of its Allied Products and all other business segments as Allied Products and Other.
Historically, sales of the Company’s products have been higher in the first and second quarters of each fiscal year due to favorable weather and longer daylight conditions accelerating construction activity during these periods. Seasonal variations in operating results may also be impacted by inclement weather conditions, such as cold or wet weather, which can delay projects.
Basis of Presentation -The Company prepares its Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Condensed Consolidated Balance Sheet as of March 31, 2024 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 2024 (“Fiscal 2024 Form 10-K”). The accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as of September 30, 2024, the results of operations for the three and six months ended September 30, 2024 and cash flows for the six months ended September 30, 2024. 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 2024 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 of which the Company is the primary beneficiary. The Company uses the equity method of accounting for equity investments where it exercises significant influence but does not hold a controlling financial interest. Such investments are recorded in Other assets in the Condensed Consolidated Balance Sheets and the related equity earnings from these investments are included in Equity in net income of unconsolidated affiliates in the Condensed Consolidated Statements of Operations. All intercompany balances and transactions have been eliminated in consolidation.
Recent Accounting Guidance
Improvements to Reportable Segment Disclosures- In November 2023, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) to amend ASC 280, Segment Reporting to enhance segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The amendments must be applied retrospectively to all periods presented in the financial statements. The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.
Improvements to Income Tax Disclosures- In December 2023, the FASB issued an ASU to amend ASC 740, Income Taxes to enhance the transparency and usefulness of income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. The amendments may be applied prospectively or retrospectively and are effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.
Disaggregation of Income Statement Expenses- In November 2024, the FASB issued new guidance requiring additional disclosure of the nature of certain expenses included in the income statement as well as disclosure of selling expenses. The requirements will be applied prospectively with the option for retrospective application. The new standard is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. The Company is currently evaluating the impact of this standard on the Consolidated Financial Statements.
2.REVENUE RECOGNITION
Revenue Disaggregation - The Company disaggregates net sales by Domestic, International and Infiltrator and further disaggregates Domestic and International by product type, consistent with its reportable segment disclosure. This disaggregation level best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Refer to “Note 11. Business Segments Information” for the Company’s disaggregation of Net sales by reportable segment.
Contract Balances - The Company recognizes a contract asset representing the Company’s right to recover products upon the receipt of returned products and a contract liability for the customer refund. The following table presents the balance of the Company’s contract asset and liability as of the periods presented:
(In thousands)
September 30, 2024
March 31, 2024
Contract asset - product returns
$
1,828
$
1,353
Refund liability
5,219
3,920
3.LEASES
Nature of the Company’s Leases - The Company has operating and finance leases for plants, yards, corporate offices, tractors, trailers and other equipment. The Company’s leases have remaining terms of less than one year to 13 years. A portion of the Company’s yard leases include an option to extend the leases for up to five years. The Company has included renewal options which are reasonably certain to be exercised in its right-of-use assets and lease liabilities.
4.INVENTORIES
Inventories as of the periods presented consisted of the following:
Net Income per Share - The following table presents information necessary to calculate net income per share for the periods presented, as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive:
Three Months Ended September 30,
Six Months Ended September 30,
(In thousands, except per share data)
2024
2023
2024
2023
NET INCOME PER SHARE—BASIC:
Net income available to common stockholders – Basic
$
130,382
$
135,802
$
291,784
$
309,454
Weighted average number of common shares outstanding – Basic
77,542
78,606
77,541
78,756
Net income per common share – Basic
$
1.68
$
1.73
$
3.76
$
3.93
NET INCOME PER SHARE—DILUTED:
Net income available to common stockholders – Diluted
$
130,382
$
135,802
$
291,784
$
309,454
Weighted average number of common shares outstanding – Basic
77,542
78,606
77,541
78,756
Assumed restricted stock
52
62
76
54
Assumed exercise of stock options
504
618
564
600
Assumed performance-based restricted stock units
12
21
13
65
Weighted average number of common shares outstanding – Diluted
78,110
79,307
78,194
79,475
Net income per common share – Diluted
$
1.67
$
1.71
$
3.73
$
3.89
Potentially dilutive securities excluded as anti-dilutive
7
23
11
62
6.RELATED PARTY TRANSACTIONS
ADS Mexicana - ADS conducts business in Mexico and Central America through its joint venture, ADS Mexicana, 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 6, 2022, the Company and ADS Mexicana amended the Intercompany Revolving Credit Promissory Note (the “Intercompany Note”) with a borrowing capacity of $9.5 million. The Intercompany Note matures on June 8, 2027. The Intercompany Note indemnifies the ADS Mexicana joint venture partner for 49% of any unpaid borrowings. The interest rates under the Intercompany Note are determined by certain base rates or Secured Overnight Financing Rate (“SOFR”) plus an applicable margin based on the Leverage Ratio. As of both September 30, 2024 and March 31, 2024, there were no borrowings outstanding under the Intercompany Note.
South American Joint Venture -The Tuberias Tigre - ADS Limitada joint venture (the “South American Joint Venture”) manufactures and sells HDPE corrugated pipe in certain South American markets. ADS owns 50% of the South American Joint Venture. ADS is the guarantor of 50% of the South American Joint Venture’s credit arrangement, and the debt guarantee is shared equally with the joint venture partner. The Company’s maximum potential obligation under this guarantee is $5.5 million as of September 30, 2024. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $11.0 million. The Company does not anticipate any required contributions related to the balance of this credit arrangement. As of September 30, 2024 and March 31, 2024, there was no outstanding principal balance for the South American Joint Venture’s credit facility including letters of credit.
Long-term debt as of the periods presented consisted of the following:
(In thousands)
September 30, 2024
March 31, 2024
Term Loan Facility
$
416,750
$
420,250
Senior Notes due 2027
350,000
350,000
Senior Notes due 2030
500,000
500,000
Revolving Credit Facility
—
—
Equipment Financing
8,235
10,901
Total
1,274,985
1,281,151
Less: Unamortized debt issuance costs
(8,737)
(9,759)
Less: Current maturities
(11,130)
(11,870)
Long-term debt obligations
$
1,255,118
$
1,259,522
Senior Secured Credit Facilities -In May 2022, the Company entered into a Second Amendment (the “Second Amendment”) to the Company's Base Credit Agreement with Barclays Bank PLC, as administrative agent under the Term Loan Facility and PNC Bank, National Association, as new administrative agent under the Revolving Credit Facility. Among other things, the Second Amendment (i) amended the Base Credit Agreement by increasing the Revolving Credit Facility (the “Amended Revolving Credit Facility”) from $350 million to $600 million (including an increase of the sub-limit for the swing-line sub-facility from $50 million to $60 million), (ii) extended the maturity date of the Revolving Credit Facility to May 26, 2027, (iii) revised the “applicable margin” to provide an additional step-down to 175 basis points (for Term Benchmark based loans) and 75 basis points (for base rate loans) in the event the consolidated senior secured net leverage ratio is less than 2.00 to 1.00, and (iv) reset the “incremental amount” and the investment basket in non-guarantors and joint ventures. The Second Amendment also revised the reference interest rate from LIBOR to SOFR for both the Amended Revolving Credit Facility and the Term Loan Facility. Letters of credit outstanding at September 30, 2024 and March 31, 2024 amounted to $10.5 million and $11.2 million, respectively, and reduced the availability of the Revolving Credit Facility.
Senior Notes due 2027 -OnSeptember 23, 2019, the Company issued $350.0 million aggregate principal amount of 5.0% Senior Notes due 2027 (the “2027 Notes”) pursuant to an Indenture, dated September 23, 2019 (the “2027 Indenture”), among the Company, the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as Trustee (the “Trustee”).
Senior Notes due 2030 - On June 9, 2022, the Company issued $500.0 million aggregate principal amount of 6.375% Senior Notes due 2030 (the “2030 Notes”) pursuant to an Indenture, dated June 9, 2022 (the “2030 Indenture”), among the Company, the Guarantors and the Trustee.
Equipment Financing - The assets under the Equipment Financing acquired are titled to the Company and included in Property, plant and equipment, net on the Company's Condensed Consolidated Balance Sheet. The equipment financing has an initial term of between 12 and 84 months, based on the life of the equipment, and bears a weighted average interest rate of 1.7% as of September 30, 2024. The current portion of the equipment financing is $4.1 million, and the long-term portion is $4.1 million at September 30, 2024.
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. The following table presents the carrying and fair value of the Company’s 2027 Notes, 2030 Notes and Equipment Financing for the periods presented:
September 30, 2024
March 31, 2024
(In thousands)
Fair Value
Carrying Value
Fair Value
Carrying Value
Senior Notes due 2027
$
346,388
$
350,000
$
339,780
$
350,000
Senior Notes due 2030
510,905
500,000
502,890
500,000
Equipment Financing
8,113
8,235
10,475
10,901
Total fair value
$
865,406
$
858,235
$
853,145
$
860,901
The fair values of the 2027 Notes and 2030 Notes were determined based on quoted market data for the Company’s 2027 Notes and 2030 Notes, respectively. The fair value of the Equipment Financing was determined based on a comparison of the interest rate and terms of such borrowings to the rates and terms of similar debt available for the
period. The categorization of the framework used to evaluate the 2027 Notes, 2030 Notes and Equipment Financing are considered Level 2. The Company believes the carrying amount of the remaining long-term debt, including the Term Loan Facility and Revolving Credit Facility, is not materially different from its fair value as the interest rates and terms of the borrowings are similar to currently available borrowings.
8.COMMITMENTS AND CONTINGENCIES
Purchase Commitments -The Company has historically secured supplies of resin raw material by agreeing to purchase quantities during a future given period at a fixed price. These purchase contracts typically ranged from 1 to 12 months and occur in the ordinary course of business. The Company does not have any outstanding purchase commitments with fixed price and quantity as of September 30, 2024. The Company also enters into equipment purchase contracts with manufacturers.
Litigation and Other Proceedings -The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and 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.
9.INCOME TAXES
The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related tax rates in jurisdictions where it operates and other one-time charges, as well as the occurrence of discrete events. For the three months ended September 30, 2024 and 2023, the Company utilized an effective tax rate of 23.9% and 25.9%, respectively, to calculate its provision for income taxes. For the six months ended September 30, 2024 and 2023, the Company utilized an effective tax rate of 23.8% and 25.0%, respectively, to calculate its provision for income taxes. State and local income taxes increased the effective rate for the three and six months ended September 30, 2024 and 2023.
10.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, performance-based restricted stock units and restricted stock. The Company recognized stock-based compensation expense in the following line items of the Condensed Consolidated Statements of Operations for the periods presented:
Three Months Ended September 30,
Six Months Ended September 30,
(In thousands)
2024
2023
2024
2023
Component of income before income taxes:
Cost of goods sold
$
1,455
$
1,344
$
2,796
$
2,157
Selling, general and administrative expenses
5,528
7,987
11,164
14,077
Total stock-based compensation expense
$
6,983
$
9,331
$
13,960
$
16,234
The following table summarizes stock-based compensation expense by award type for the periods presented:
2017 Omnibus Incentive Plan -The 2017 Incentive Plan provides for the issuance of a maximum of 5.0 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 six months ended September 30, 2024, the Company granted 0.1 million shares of restricted stock with a grant date fair value of $13.9 million.
Performance-based Restricted Stock Units (“Performance Units”) - During the six months ended September 30, 2024, the Company granted 0.1 million performance units at a grant date fair value of $11.6 million.
Options -During the six months ended September 30, 2024, the Company granted 0.1 million nonqualified stock options under the 2017 Incentive Plan with a grant date fair value of $7.9 million. The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The following table summarizes the assumptions used to estimate the fair value of stock-options during the period presented:
Six Months Ended September 30, 2024
Common stock price
$177.38
Expected stock price volatility
45.5%
Risk-free interest rate
4.5%
Weighted-average expected option life (years)
6
Dividend yield
0.36%
Employee Stock Purchase Plan (“ESPP”) - In July 2022, the Company’s stockholders approved the Advanced Drainage Systems, Inc. Employee Stock Purchase Plan, which provides for a maximum of 0.4 million shares of the Company’s common stock. Eligible employees may purchase the Company's common stock at 85% of the lower of the fair market value of the Company's common stock on the first day or the last day of the offering period. The offering periods are six months in duration beginning either January 1 or July 1 and ending June 30 and December 31.
11.BUSINESS SEGMENTS INFORMATION
The Company operates its business in three distinct reportable segments: “Pipe”, “International” and “Infiltrator.” “Allied Products & Other” represents the Company’s Allied Products and all other business segments. The Chief Operating Decision Maker (the “CODM”) evaluates segment reporting based on Net Sales and Segment Adjusted Gross Profit. The Company calculated Segment Adjusted Gross Profit as Net sales less Costs of goods sold, depreciation and amortization, stock-based compensation and non-cash charges. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources.
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:
The following sets forth certain financial information attributable to the reportable segments for the periods presented:
Three Months Ended September 30,
Six Months Ended September 30,
(In thousands)
2024
2023
2024
2023
Segment Adjusted Gross Profit
Pipe
$
115,422
$
125,856
$
257,659
$
286,505
Infiltrator
86,135
73,663
172,550
147,927
International
17,445
21,339
37,108
37,368
Allied Products & Other
107,324
106,239
221,191
212,424
Intersegment Eliminations
(394)
(454)
(1,569)
(2,509)
Total
$
325,932
$
326,643
$
686,939
$
681,715
Depreciation and Amortization
Pipe
$
21,033
$
13,663
$
38,998
$
28,391
Infiltrator
6,164
5,534
12,359
10,892
International
1,556
1,236
2,921
2,474
Allied Products & Other(a)
16,054
16,288
31,627
32,204
Total
$
44,807
$
36,721
$
85,905
$
73,961
Capital Expenditures
Pipe
$
39,910
$
23,809
$
75,398
$
53,413
Infiltrator
1,915
6,042
5,519
11,496
International
2,126
1,786
3,317
2,935
Allied Products & Other(a)
10,516
8,910
27,948
14,781
Total
$
54,467
$
40,547
$
112,182
$
82,625
(a)Includes depreciation, amortization and capital expenditures not allocated to a reportable segment. The amortization expense of Infiltrator intangible assets is included in Allied Products & Other.
12.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the six months ended September 30 were as follows:
(In thousands)
2024
2023
Supplemental disclosures of cash flow information - cash paid:
Cash paid for income taxes
$
83,740
$
78,300
Cash paid for interest
45,192
33,464
Supplemental disclosures of noncash investing and financing activities:
Repurchase of common stock pending settlement
—
7,500
Share repurchase excise tax accrual
83
843
ESPP Share Issuance
2,964
—
Acquisition of property, plant and equipment under finance lease
48,468
9,827
Balance in accounts payable for the acquisition of property, plant and equipment
28,354
25,199
13.SUBSEQUENT EVENTS
Acquisition of Orenco - On October 1, 2024, the Company’s wholly-owned subsidiary, Infiltrator, completed the acquisition of Orenco Systems, Inc. (“Orenco”), a leading manufacturer of advanced onsite septic wastewater treatment products serving residential and non-residential end markets. The preliminary fair value of consideration transferred was approximately $250 million and funded from cash on hand. Orenco will be included in the Infiltrator reportable segment. The Company will account for the transaction as a business combination in the third quarter of fiscal 2025.
Common Stock Dividend- Subsequent to the end of the quarter, the Company declared a quarterly cash dividend of $0.16 per share of common stock. The dividend is payable on December 13, 2024, to stockholders of record at the close of business on November 29, 2024.
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 (“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. We consolidate our joint ventures for purposes of GAAP, except for our South American Joint Venture.
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, 2025 refers to fiscal 2025, which is the period from April 1, 2024 to March 31, 2025.
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 Form 10-Q and with the audited Consolidated Financial Statements included in our Fiscal 2024 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 16, 2024. 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 entitled “Forward Looking Statements.”
Overview
ADS is the leading manufacturer of innovative water management solutions in the stormwater and onsite septic wastewater industries, providing superior drainage solutions for use in the construction and agriculture marketplaces. Our innovative products, for which we hold many patents, are used across a broad range of end markets and applications, including non-residential, infrastructure and agriculture applications. We have established a leading position in many of these end markets by leveraging our national sales and distribution platform, industry-acclaimed engineering support, overall product breadth and scale plus manufacturing excellence.
Executive Summary
Second Quarter Fiscal 2025 Results
•Net sales increased 0.3% to $782.6 million
•Net income decreased 4.3% to $131.2 million
•Net income per diluted share decreased 2.3% to $1.67
•Adjusted EBITDA, a non-GAAP measure, decreased 0.3% to $245.6 million
Net sales increased $2.4 million, or 0.3%, to $782.6 million, as compared to $780.2 million in the prior year quarter. Domestic pipe sales decreased $5.2 million, or 1.3%, to $410.5 million. Domestic allied products & other sales increased $4.9 million, or 2.7%, to $187.1 million. Infiltrator sales increased $12.3 million, or 10.6%, to $128.5 million. The overall increase in domestic net sales was primarily driven by demand in the residential and infrastructure end markets. International sales decreased $9.6 million, or 14.5%, to $56.6 million.
Gross profit decreased $8.7 million, or 2.9%, to $293.9 million as compared to $302.7 million in the prior year. The decrease in gross profit is primarily driven by unfavorable pricing and material cost, partially offset by favorable manufacturing costs.
Selling, general and administrative expenses increased $2.4 million, or 2.6% to $94.1 million, as compared to $91.7 million. As a percentage of net sales, selling, general and administrative expenses were largely flat at 12.0% as compared to 11.8% in the prior year.
Adjusted EBITDA, a non-GAAP measure, decreased $0.7 million, or 0.3%, to $245.6 million, as compared to $246.3 million in the prior year. As a percentage of Net sales, Adjusted EBITDA was 31.4% as compared to 31.6% in the prior year.
Year-to-date Fiscal 2025 Results
•Net sales increased 2.5% to $1,597.9 million
•Net income decreased 5.6% to $293.5 million
•Net income per diluted share decreased 4.1% to $3.73
•Adjusted EBITDA, a non-GAAP measure, decreased 1.2% to $521.0 million
Net sales increased $39.7 million, or 2.5%, to $1,597.9 million, as compared to $1,558.3 million in the prior year. Domestic pipe sales increased $5.4 million, or 0.6%, to $841.9 million. Domestic allied products & other sales increased $18.8 million, or 5.2%, to $383.1 million. Infiltrator sales increased $19.6 million, or 8.2%, to $258.7 million. The overall increase in domestic net sales was primarily driven by demand in the residential and infrastructure end markets. International sales decreased $4.1 million, or 3.5%, to $114.3 million.
Gross profit decreased $7.7 million, or 1.2%, to $626.4 million as compared to $634.1 million in the prior year. The decrease in gross profit is primarily driven by unfavorable pricing and material cost, partially offset by favorable manufacturing costs.
Selling, general and administrative expenses increased $9.9 million, or 5.6% to $188.2 million, as compared to $178.2 million. As a percentage of net sales, selling, general and administrative expenses were largely flat at 11.8% as compared to 11.4% in the prior year.
Adjusted EBITDA, a non-GAAP measure, decreased $6.5 million, or 1.2%, to $521.0 million, as compared to $527.6 million in the prior year. As a percentage of Net sales, Adjusted EBITDA was 32.6% as compared to 33.9% in the prior year.
Results of Operations
Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023
The following table summarizes our operating results as a percentage of Net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.
Consolidated Statements of Operations data:
For the Three Months Ended September 30,
(In thousands)
2024
2023
Net sales
$
782,610
100.0
%
$
780,220
100.0
%
Cost of goods sold
488,669
62.4
477,543
61.2
Gross profit
293,941
37.6
302,677
38.8
Selling, general and administrative
94,132
12.0
91,725
11.8
Loss on disposal of assets and costs from exit and disposal activities
617
0.1
123
—
Intangible amortization
11,816
1.5
12,792
1.6
Income from operations
187,376
23.9
198,037
25.4
Interest expense
23,156
3.0
21,941
2.8
Interest income and other, net
(6,956)
(0.9)
(7,506)
(1.0)
Income before income taxes
171,176
21.9
183,602
23.5
Income tax expense
40,920
5.2
47,476
6.1
Equity in net income of unconsolidated affiliates
(918)
(0.1)
(901)
(0.1)
Net income
131,174
16.8
137,027
17.6
Less: net income attributable to noncontrolling interest
792
0.1
1,225
0.2
Net income attributable to ADS
$
130,382
16.7
%
$
135,802
17.4
%
Net sales - The following table presents Net sales to external customers by reportable segment for the three months ended September 30, 2024 and 2023.
(Amounts in thousands)
2024
2023
$ Variance
% Variance
Pipe
$
410,488
$
415,713
$
(5,225)
(1.3)
%
Infiltrator
128,492
116,178
12,314
10.6
International
56,553
66,134
(9,581)
(14.5)
Allied Products & Other
187,077
182,195
4,882
2.7
Total Consolidated
$
782,610
$
780,220
$
2,390
0.3
%
Our consolidated Net sales for the three months ended September 30, 2024 increased by $2.4 million, or 0.3%, compared to the same period in fiscal 2024. The overall increase in domestic net sales was primarily driven by demand in the residential and infrastructure end markets. Net sales for Infiltrator were also driven by improved price/mix, while the
volume growth in Domestic Pipe was offset by unfavorable price/mix impact. For the international segment, the decrease was driven by decreased volume as well as unfavorable price/mix.
Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the three months ended September 30, 2024 and 2023.
(Amounts in thousands)
2024
2023
$ Variance
% Variance
Pipe
$
93,093
$
110,193
$
(17,100)
(15.5)
%
Infiltrator
79,846
68,038
11,808
17.4
International
15,871
20,103
(4,232)
(21.1)
Allied Products & Other
105,525
104,797
728
0.7
Intersegment eliminations
(394)
(454)
60
(13.2)
Total gross profit
$
293,941
$
302,677
$
(8,736)
(2.9)
%
Our consolidated Cost of goods sold for the three months ended September 30, 2024 increased by $11.1 million, or 2.3%, and our consolidated Gross profit decreased by $8.7 million, or 2.9%, compared to the same period in fiscal 2024. The decrease in gross profit for Domestic Pipe is primarily driven by unfavorable pricing and material cost, partially offset by favorable manufacturing costs and volume. The increase in gross profit for Infiltrator was driven by volume and improved material cost.
Selling, general and administrative expenses
Three Months Ended September 30,
(Amounts in thousands)
2024
2023
Selling, general and administrative expenses
$
94,132
$
91,725
% of Net sales
12.0
%
11.8
%
Selling, general and administrative expenses for the three months ended September 30, 2024 increased $2.4 million from the same period in fiscal 2024 and as a percentage of net sales, increased by 0.2%.
Interest expense - Interest expense increased $1.2 million in the three months ended September 30, 2024 compared to the same period in the previous fiscal year. The increase was primarily due to an increase in interest rates.
Income tax expense - The following table presents the effective tax rates for the periods presented:
Three Months Ended September 30,
2024
2023
Effective tax rate
23.9
%
25.9
%
The change in the effective tax rate for the three months ended September 30, 2024 was primarily related to the decrease in state and local income taxes and the additional tax benefit recorded to adjust prior quarter income tax expense to the annual effective tax rate. See “Note 9. Income Taxes” for additional information.
Comparison of the Six Months Ended September 30, 2024 to the Six Months Ended September 30, 2023
The following table summarizes our operating results as a percentage of net sales that have been derived from our Condensed Consolidated Financial Statements for the periods presented. We believe this presentation is useful to investors in comparing historical results.
For the Six Months Ended September 30,
2024
2023
Consolidated Statements of Operations data:
(In thousands)
Net sales
$
1,597,946
100.0
%
$
1,558,266
100.0
%
Cost of goods sold
971,551
60.8
924,129
59.3
Gross profit
626,395
39.2
634,137
40.7
Selling, general and administrative
188,184
11.8
178,236
11.4
Loss (gain) on disposal of assets and costs from exit and disposal activities
909
0.1
(13,181)
(0.8)
Intangible amortization
23,711
1.5
25,594
1.6
Income from operations
413,591
25.9
443,488
28.5
Interest expense
45,980
2.9
43,653
2.8
Interest income and other, net
(14,072)
(0.9)
(11,055)
(0.7)
Income before income taxes
381,683
23.9
410,890
26.4
Income tax expense
90,806
5.7
102,534
6.6
Equity in net income of unconsolidated affiliates
(2,619)
(0.2)
(2,576)
(0.2)
Net income
293,496
18.4
310,932
20.0
Less: net income attributable to noncontrolling interest
1,712
0.1
1,478
0.1
Net income attributable to ADS
$
291,784
18.3
%
$
309,454
19.9
%
Net sales - The following table presents Net sales to external customers by reportable segment for the six months ended September 30, 2024 and 2023.
(Amounts in thousands)
2024
2023
$ Variance
% Variance
Pipe
$
841,913
$
836,526
$
5,387
0.6
%
Infiltrator
258,710
239,086
19,624
8.2
International
114,258
118,383
(4,125)
(3.5)
Allied Products & Other
383,065
364,271
18,794
5.2
Total Consolidated
$
1,597,946
$
1,558,266
$
39,680
2.5
%
Our consolidated Net sales for the six months ended September 30, 2024 increased by $39.7 million, or 2.5%, compared to the same period in fiscal 2024. The overall increase in domestic net sales was primarily driven by demand in the residential and infrastructure end markets. Net sales for Infiltrator were also driven by improved price/mix, while the volume growth in Domestic Pipe was partially offset by unfavorable price/mix impact. For the international segment, the decrease was driven by unfavorable price/mix.
Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the six months ended September 30, 2024 and 2023.
Our consolidated Cost of goods sold for the six months ended September 30, 2024 increased by $47.4 million, or 5.1%, and our consolidated Gross profit decreased by $7.7 million, or 1.2%, compared to the same period in fiscal 2024. The decrease in gross profit for Domestic Pipe is primarily driven by unfavorable pricing and material cost, partially offset by favorable manufacturing costs. The increase in gross profit for Infiltrator was driven by favorable pricing and improved material cost.
Selling, general and administrative expenses
Six Months Ended September 30,
(Amounts in thousands)
2024
2023
Selling, general and administrative expenses
$
188,184
$
178,236
% of Net sales
11.8
%
11.4
%
Selling, general and administrative expenses for six months ended September 30, 2024 increased $9.9 million from the same period in fiscal 2024 and as a percentage of net sales, increased by 0.4%. This increase is primarily due to higher commissions from the increase in volume, as well as continued investments in talent to support strategic areas such as engineering and product development.
Loss (gain) on disposal of assets and costs from exit and disposal activities - The gain on disposal in fiscal 2024 was due to the sale of Spartan Concrete, Inc.
Interest expense - Interest expense increased $2.3 million in the six months ended September 30, 2024 compared to the same period in the previous fiscal year. The increase was primarily due to increased interest rates.
Interest income and other, net - Interest income and other, net increased by $3.0 million for the six months ended September 30, 2024 compared to the same period in the previous fiscal year primarily due to increased cash.
Income tax expense - The following table presents the effective tax rates for the six months ended September 30, 2024 and 2023.
Six Months Ended September 30,
2024
2023
Effective tax rate
23.8
%
25.0
%
The change in the effective tax rate for the six months ended September 30, 2024 was primarily related to the decrease in state and local income taxes and the increase of the discrete income tax benefit related to the stock-based compensation windfall. See “Note 9. Income Taxes” for additional information.
Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, have been presented in this Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP and should not be considered as alternatives to net income as measures of financial performance or cash flows from operations or any other performance measure derived in accordance with GAAP. We calculate Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.
Adjusted EBITDA and Adjusted EBITDA Margin are included in this Form 10-Q because they are key metrics used by management and our board of directors to assess our consolidated financial performance. These non-GAAP financial measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use these non-GAAP financial measures to supplement GAAP measures of performance to evaluate the effectiveness of our consolidated business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We use Adjusted EBITDA Margin to evaluate our ability to generate profitable sales.
Adjusted EBITDA and Adjusted EBITDA Margin contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs, cash expenditures to replace assets being depreciated and amortized and interest expense, or the cash requirements necessary to service interest on principal payments on our indebtedness. In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as stock-based compensation expense, derivative fair value adjustments, and foreign currency transaction losses. Management compensates for these limitations by relying on our GAAP results and using non-GAAP measures on a supplemental basis.
The following table presents a reconciliation of Adjusted EBITDA to Net income, the most comparable GAAP measure, for each of the periods presented.
Three Months Ended September 30,
Six Months Ended September 30,
(In thousands)
2024
2023
2024
2023
Net income
$
131,174
$
137,027
$
293,496
$
310,932
Depreciation and amortization
44,807
36,721
85,905
73,961
Interest expense
23,156
21,941
45,980
43,653
Income tax expense
40,920
47,476
90,806
102,534
EBITDA
240,057
243,165
516,187
531,080
Loss (gain) on disposal of assets and costs from exit and disposal activities
617
123
909
(13,181)
Stock-based compensation expense
6,983
9,331
13,960
16,234
Transaction costs(a)
2,685
52
2,695
2,024
Interest income
(7,368)
(5,137)
(13,933)
(8,626)
Other adjustments(b)
2,576
(1,284)
1,230
32
Adjusted EBITDA
$
245,550
$
246,250
$
521,048
$
527,563
Adjusted EBITDA Margin
31.4
%
31.6
%
32.6
%
33.9
%
(a)Represents expenses recorded related to legal, accounting and other professional fees incurred in connection with business or asset acquisitions and dispositions.
(b)Includes derivative fair value adjustments, foreign currency transaction (gains) losses, legal settlements, the proportionate share of interest, income taxes, depreciation and amortization related to the South American Joint Venture, which is accounted for under the equity method of accounting and executive retirement expense.
Liquidity and Capital Resources
Historically, we have funded our operations through internally generated cash flow supplemented by debt financings, equity issuance and finance and operating leases. These sources have been sufficient historically to fund our primary liquidity requirements, including working capital, capital expenditures, debt service and dividend payments for our common stock. From time to time, we may explore additional financing methods and other means to raise capital. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.
Free Cash Flow - Free cash flow is a non-GAAP financial measure that comprises cash flow from operations less capital expenditures and is used by management and our Board of Directors to assess our ability to generate cash. Accordingly, free cash flow has been presented 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 provided by operating activities, the most comparable GAAP measure, for each of the periods presented:
The following table presents key liquidity metrics utilized by management including the leverage ratio which is calculated as net debt divided by the trailing twelve months Adjusted EBITDA:
(Amounts in thousands)
September 30, 2024
Total debt (debt and finance lease obligations)
$
1,382,753
Cash
613,020
Net debt (total debt less cash)
769,733
Leverage Ratio
0.8
The following table summarizes our available liquidity for the period presented:
(Amounts in thousands)
September 30, 2024
Revolver capacity
$
600,000
Less: outstanding borrowings
—
Less: letters of credit
(10,450)
Revolver available liquidity
$
589,550
In addition to the available liquidity above, we have the ability to borrow up to $1.3 billion under our Senior Secured Credit Facility, subject to leverage ratio restrictions.
As of September 30, 2024, we had $23.5 million in cash that was held by our foreign subsidiaries, including $14.7 million held by our Canadian subsidiaries. We continue to evaluate our strategy regarding foreign cash, but our earnings in foreign subsidiaries still remain indefinitely reinvested, except for Canada. We plan to repatriate earnings from Canada and believe that there will be no additional tax costs associated with the repatriation of such earnings other than any potential non-U.S. withholding taxes.
Working Capital and Cash Flows
As of September 30, 2024, we had $1,202.6 million in liquidity, including $613.0 million of cash and $589.6 million in borrowings available under our Revolving Credit Agreement, net of outstanding letters of credit. We believe that our cash on hand, together with the availability of borrowings under our Credit Agreement and other financing arrangements and cash generated from operations, will be sufficient to meet our working capital requirements, anticipated capital expenditures, and scheduled principal and interest payments on our indebtedness for at least the next twelve months.
Working Capital - Working capital increased to $1,024.6 million as of September 30, 2024, from $860.3 million as of March 31, 2024. The increase in working capital is primarily due to an increase in cash, accounts receivable and inventory due to seasonality offset by changes in accounts payable due to the timing of payments.
Six Months Ended September 30,
(Amounts in thousands)
2024
2023
Net cash provided by operating activities
$
350,326
$
458,864
Net cash used in investing activities
(111,542)
(62,200)
Net cash used in financing activities
(114,640)
(143,386)
Operating Cash Flows - Cash flows from operating activities decreased $108.5 million during the six months ended September 30, 2024 primarily driven by investment in inventory.
Investing Cash Flows - Cash flows used in investing activities during the six months ended September 30, 2024 increased by $49.3 million compared to the same period in fiscal 2024. The increase in cash used in investing activities was primarily due to increased capital expenditures in fiscal 2025 and the sale of Spartan Concrete in fiscal 2024.
Capital expenditures totaled $112.2 million and $82.6 million for the six months ended September 30, 2024 and 2023, respectively. Our capital expenditures for the six months ended September 30, 2024 were used primarily to support facility expansions, equipment replacements and technology improvement initiatives. We also acquired $48.5 million of property, plant and equipment under finance leases, which includes transportation equipment to update our fleet of trucks and trailers.
We currently anticipate that we will make capital expenditures of approximately $250 million in fiscal year 2025, including approximately $120 million of open orders as of September 30, 2024. Such capital expenditures are expected to be financed using funds generated by operations.
Financing Cash Flows - During the six months ended September 30, 2024, cash used in financing activities included the repurchase of common stock of $69.9 million, $24.9 million of dividend payments, $11.8 million of payments of finance lease obligations and $10.6 million for shares withheld for tax purposes.
During the six months ended September 30, 2023, cash used in financing activities included the repurchase of common stock of $101.6 million, $22.2 million of dividend payments, and $8.8 million for shares withheld for tax purposes.
Financing Transactions -There have been no changes in our debt disclosures from those disclosed in “Liquidity and Capital Resources” in our Fiscal 2024 Form 10-K. We are in compliance with our debt covenants as of September 30, 2024.
Off-Balance Sheet Arrangements
Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 6. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of September 30, 2024, our South American Joint Venture had no outstanding debt subject to our guarantees. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
Critical Accounting Policies and Estimates
There have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2024 Form 10-K, except as disclosed in “Note 1. Background and Summary of Significant Accounting Policies.”
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 Fiscal 2024 Form 10-K except as disclosed below.
Interest Rate Risk - We are subject to interest rate risk associated with our bank debt. A 1.0% increase in interest rates on our variable-rate debt would increase our annual forecasted interest expense by approximately $4.1 million based on our borrowings as of September 30, 2024. Assuming the Revolving Credit Facility is fully drawn, each 1.0% increase or decrease in the applicable interest rate would change our interest expense by approximately $10.1 million, for the twelve months ended September 30, 2024.
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 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.
Based on the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting - There were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the three months ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions including acquisitions and divestitures. The Company does not believe that such litigation, claims, and administrative proceedings will have a material adverse impact on the Company’s financial position or results of operations.
Please see “Note 8. Commitments and Contingencies,” of the Condensed Consolidated Financial Statements of this Form 10-Q for more information regarding legal proceedings.
Item 1A. Risk Factors
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in “Part I, Item 1A — Risk Factors” of our Fiscal 2024 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 2024 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 Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2022, our Board of Directors authorized a $1.0 billion common stock repurchase program. Repurchases of common stock will be made in accordance with applicable securities laws. During the three months ended September 30, 2024, the Company repurchased 0.1 million shares of common stock at a cost of $19.9 million. As of September 30, 2024, approximately $147.7 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.
The following table provides information with respect to repurchases of our common stock by us and our “affiliated purchasers” (as defined by Rule 10b-18(a)(3) under the Exchange Act) during the three months ended September 30, 2024:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
(amounts in thousands, except per share data)
July 1, 2024 to July 31, 2024
110
$
165.51
110
$
149,403
August 1, 2024 to August 31, 2024
10
166.07
10
147,742
September 1, 2024 to September 30, 2024
—
—
—
147,742
Total
120
$
165.56
120
$
147,742
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended September 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as such terms are defined in Item 408(a) of Regulation S-K.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, has been formatted in Inline XBRL and contained in Exhibit 101.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2024
ADVANCED DRAINAGE SYSTEMS, INC.
By:
/s/ D. Scott Barbour
D. Scott Barbour
President and Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Scott A. Cottrill
Scott A. Cottrill
Executive Vice President, Chief Financial Officer and Secretary
(Principal Financial Officer)
By:
/s/ Tim A. Makowski
Tim A. Makowski
Vice President, Controller, and Chief Accounting Officer