Advanced Drainage Systems - 10-Q quarterly report FY2023 Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2023


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

Commission file number: 001-36557

ADVANCED DRAINAGE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


Delaware			51-0105665
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

4640 Trueman Boulevard, Hilliard, Ohio 43026

(Address of Principal Executive Offices, Including Zip Code)

(614) 658-0050

(Registrant’s Telephone Number, Including Area Code)

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


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

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

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

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

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

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

As of October 25, 2023, the registrant had 77,907,836 shares of common stock outstanding, which excludes 210,182 shares of unvested restricted common stock. The shares of common stock trade on the New York Stock Exchange under the ticker symbol “WMS.”

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

Page

Condensed Consolidated Balance Sheets as of September 30, 2023 and March 31, 2023

Condensed Consolidated Statements of Operations for the three and six months ended September 30 , 2023 and 2022

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30 , 2023 and 2022

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2023 and 2022

Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity for the three and six months ended September 30, 2023 and 2022

Notes to the Condensed Consolidated Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Unregistered Sale of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

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PART I. FINANCIAL INFORMATION

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except par value)


	September 30, 2023		March 31, 2023
ASSETS
Current assets:
Cash	$	470,409	$	217,128
Receivables (less allowance for doubtful accounts of $6,678 and $8,227, respectively)	352,562		306,945
Inventories	385,090		463,994
Other current assets	23,855		29,422
Total current assets	1,231,916		1,017,489
Property, plant and equipment, net	773,993		733,059
Other assets:
Goodwill	620,165		620,193
Intangible assets, net	382,050		407,627
Other assets	129,850		122,757
Total assets	$	3,137,974	$	2,901,125
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt obligations	$	12,950	$	14,693
Current maturities of finance lease obligations	11,698		8,541
Accounts payable	223,536		210,111
Other accrued liabilities	158,784		142,400
Accrued income taxes	20,899		3,057
Total current liabilities	427,867		378,802
Long-term debt obligations (less unamortized debt issuance costs of $10,782 and $11,804, respectively)	1,264,197		1,269,391
Long-term finance lease obligations	31,729		32,272
Deferred tax liabilities	159,060		159,056
Other liabilities	72,942		66,744
Total liabilities	1,955,795		1,906,265
Commitments and contingencies (see Note 9)
Mezzanine equity:
Redeemable common stock: $0.01 par value; 8,206 and 9,429 shares outstanding, respectively	133,349		153,220
Total mezzanine equity	133,349		153,220
Stockholders’ equity:
Common stock; $0.01 par value: 1,000,000 shares authorized; 80,635 and 79,057 shares issued, respectively; 70,018 and 69,518 shares outstanding, respectively	11,663		11,647
Paid-in capital	1,173,574		1,134,864
Common stock in treasury, at cost	(1,039,717)		(920,999)
Accumulated other comprehensive loss	(29,658)		(27,580)
Retained earnings	913,551		626,215
Total ADS stockholders’ equity	1,029,413		824,147
Noncontrolling interest in subsidiaries	19,417		17,493
Total stockholders’ equity	1,048,830		841,640
Total liabilities, mezzanine equity and stockholders’ equity	$	3,137,974	$	2,901,125

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended September 30,				Six Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	780,220	$	884,209	$	1,558,266	$	1,798,395
Cost of goods sold	477,543		564,246		924,129		1,126,325
Gross profit	302,677		319,963		634,137		672,070
Operating expenses:
Selling, general and administrative	91,725		88,639		178,236		175,159
Loss (gain) on disposal of assets and costs from exit and disposal activities	123		(102)		(13,181)		201
Intangible amortization	12,792		13,841		25,594		27,518
Income from operations	198,037		217,585		443,488		469,192
Other expense:
Interest expense	21,941		18,261		43,653		29,333
Derivative (gain) loss and other (income) expense, net	(7,506)		395		(11,055)		(1,507)
Income before income taxes	183,602		198,929		410,890		441,366
Income tax expense	47,476		47,508		102,534		102,573
Equity in net income of unconsolidated affiliates	(901)		(1,956)		(2,576)		(3,066)
Net income	137,027		153,377		310,932		341,859
Less: net income attributable to noncontrolling interest	1,225		1,370		1,478		2,706
Net income attributable to ADS	$	135,802	$	152,007	$	309,454	$	339,153
Weighted average common shares outstanding:
Basic	78,606		83,466		78,756		83,306
Diluted	79,307		84,498		79,475		84,485
Net income per share:
Basic	$	1.73	$	1.82	$	3.93	$	4.07
Diluted	$	1.71	$	1.80	$	3.89	$	4.01

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)


	Three Months Ended September 30,				Six Months Ended September 30,
	2023		2022		2023		2022
Net income	$	137,027	$	153,377	$	310,932	$	341,859
Currency translation loss	(4,864)		(5,763)		(1,632)		(9,661)
Comprehensive income	132,163		147,614		309,300		332,198
Less: other comprehensive (income) loss attributable to noncontrolling interest	(605)		(277)		446		(272)
Less: net income attributable to noncontrolling interest	1,225		1,370		1,478		2,706
Total comprehensive income attributable to ADS	$	131,543	$	146,521	$	307,376	$	329,764

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Six Months Ended September 30,
	2023		2022
Cash Flows from Operating Activities
Net income	$	310,932	$	341,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	73,961		71,500
Deferred income taxes	519		(3,117)
(Gain) loss on disposal of assets and costs from exit and disposal activities	(13,181)		201
Stock-based compensation	16,234		13,733
Amortization of deferred financing charges	1,022		398
Fair market value adjustments to derivatives	(1,889)		2,183
Equity in net income of unconsolidated affiliates	(2,576)		(3,066)
Other operating activities	756		(713)
Changes in working capital:
Receivables	(43,530)		(43,680)
Inventories	79,215		15,799
Prepaid expenses and other current assets	(2,228)		(7,776)
Accounts payable, accrued expenses, and other liabilities	39,629		49,703
Net cash provided by operating activities	458,864		437,024
Cash Flows from Investing Activities
Capital expenditures	(82,625)		(75,545)
Proceeds from disposition of assets	19,979		—
Acquisition, net of cash acquired	—		(48,010)
Other investing activities	446		46
Net cash used in investing activities	(62,200)		(123,509)
Cash Flows from Financing Activities
Payments on syndicated Term Loan Facility	(3,500)		(3,500)
Proceeds from Revolving Credit Agreement	—		26,200
Payments on Revolving Credit Agreement	—		(140,500)
Proceeds from Amended Revolving Credit Agreement	—		97,000
Payments on Amended Revolving Credit Agreement	—		(97,000)
Proceeds from Senior Notes due 2030	—		500,000
Debt issuance costs	—		(11,575)
Payments on Equipment Financing	(4,458)		(7,104)
Payments on finance lease obligations	(5,452)		(3,153)
Repurchase of common stock	(101,564)		(192,602)
Cash dividends paid	(22,224)		(20,367)
Dividends paid to noncontrolling interest holder	—		(1,727)
Proceeds from exercise of stock options	2,623		4,660
Payment of withholding taxes on vesting of restricted stock units	(8,811)		(25,512)
Net cash (used in) provided by financing activities	(143,386)		124,820
Effect of exchange rate changes on cash	3		(1,103)
Net change in cash	253,281		437,232
Cash at beginning of period	217,128		20,125
Cash at end of period	$	470,409	$	457,357
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	78,300	$	101,470
Cash paid for interest	33,464		18,276
Non-cash operating, investing and financing activities:
Repurchase of common stock pending settlement	7,500		2,561
Share repurchase excise tax accrual	843		—
Acquisition of property, plant and equipment under finance lease and incurred lease obligations	9,827		6,681
Balance in accounts payable for the acquisition of property, plant and equipment	25,199		15,631

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY

(Unaudited) (In thousands)


	Common Stock			Paid -In Capital		Common Stock in Treasury				Accumulated Other Compre-hensive Loss		Retained Earnings		Total ADS Stockholders’ Equity		Non- controlling Interest in Subsidiaries		Total Stock- holders’ Equity		Redeemable Common Stock			Redeemable Convertible Preferred Stock			Total Mezzanine Equity
	Shares	Amount				Shares		Amount												Shares	Amount		Shares	Amount
Balance at July 1, 2022	76,607	$	11,623	$	1,079,701	4,221		$	(408,861)	$	(28,289)	$	335,822	$	989,996	$	17,963	$	1,007,959	11,619	$	188,828	—	$	—	$	188,828
Net income	—	—		—		—		—		—		152,007		152,007		1,370		153,377		—	—		—	—		—
Other comprehensive loss	—	—		—		—		—		(5,486)		—		(5,486)		(277)		(5,763)		—	—		—	—		—
Common stock dividends ($0.12 per share)	—	—		—		—		—		—		(10,039)		(10,039)		—		(10,039)		—	—		—	—		—
Share repurchases	—	—		—		1,093		(127,802)		—		—		(127,802)		—		(127,802)		—	—		—	—		—
Dividends paid to noncontrolling interest holder	—	—		—		—		—		—		—		—		(1,727)		(1,727)		—	—		—	—		—
KSOP redeemable common stock conversion	1,779	18		28,882		—		—		—		—		28,900		—		28,900		(1,779)	(28,900)		—	—		(28,900)
Exercise of common stock options	116	1		3,410		—		—		—		—		3,411		—		3,411		—	—		—	—		—
Restricted stock awards	17	—		—		—		(34)		—		—		(34)		—		(34)		—	—		—	—		—
Stock-based compensation expense	—	—		7,460		—		—		—		—		7,460		—		7,460		—	—		—	—		—
Balance at September 30, 2022	78,519	$	11,642	$	1,119,453	$	5,314	$	(536,697)	$	(33,775)	$	477,790	$	1,038,413	$	17,329	$	1,055,742	9,840	$	159,928	—	—		$	159,928
Balance at April 1, 2022	75,529	$	11,612	$	1,065,628	3,220		$	(318,691)	$	(24,386)	$	158,876	$	893,039	$	16,622	$	909,661	—	$	—	15,630	$	195,384	$	195,384
Net income	—	—		—		—		—		—		339,153		339,153		2,706		341,859		—	—		—	—		—
Other comprehensive loss	—	—		—		—		—		(9,389)		—		(9,389)		(272)		(9,661)		—	—		—	—		—
Common stock dividends ($0.24 per share)	—	—		—		—		—		—		(20,239)		(20,239)		—		(20,239)		—	—		—	—		—
Dividends paid to noncontrolling interest holder	—	—		—		—		—		—		—		—		(1,727)		(1,727)		—	—		—	—		—
Share repurchases	—	—		—		1,865		(195,163)		—		—		(195,163)		—		(195,163)		—	—		—	—		—
ESOP share conversion	—	—		—		—		—		—		—		—		—		—		12,022	195,384		(15,630)	(195,384)		—
KSOP redeemable common stock conversion	2,182	22		35,434		—		—		—		—		35,456		—		35,456		(2,182)	(35,456)		—	—		(35,456)
Exercise of common stock options	183	2		4,658		—		—		—		—		4,660		—		4,660		—	—		—	—		—
Restricted stock awards	98	1		—		24		(2,492)		—		—		(2,491)		—		(2,491)		—	—		—	—		—
Performance-based restricted stock units	527	5		—		205		(20,351)		—		—		(20,346)		—		(20,346)		—	—		—	—		—
Stock-based compensation expense	—	—		13,733		—		—		—		—		13,733		—		13,733		—	—		—	—		—
Balance at September 30, 2022	78,519	$	11,642	$	1,119,453	5,314		$	(536,697)	$	(33,775)	$	477,790	$	1,038,413	$	17,329	$	1,055,742	9,840	$	159,928	—	—		$	159,928

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY

(Unaudited) (In thousands)


	Common Stock			Paid -In Capital			Common Stock in Treasury			Accumulated Other Compre-hensive Loss		Retained Earnings		Total ADS Stockholders’ Equity				Non- controlling Interest in Subsidiaries			Total Stock- holders’ Equity				Redeemable Common Stock			Total Mezzanine Equity
	Shares	Amount					Shares	Amount																	Shares	Amount
Balance at July 1, 2023	79,651	$	11,654	$	1,147,449		10,110	$	(977,812)	$	(25,399)	$	788,780	$	944,672			$	18,797		$	963,469			9,132	$	148,397	$	148,397
Net income	—	—		—			—	—		—		135,802		135,802				1,225			137,027				—	—		—
Other comprehensive loss	—	—		—			—	—		(4,259)		—		(4,259)				(605)			(4,864)				—	—		—
Common stock dividends ($0.14 per share)	—	—		—			—	—		—		(11,031)		(11,031)				—			(11,031)				—	—		—
Share repurchases	—	—		—			507	(61,836)		—		—		(61,836)				—			(61,836)				—	—		—
KSOP redeemable common stock conversion	926	9		15,039			—	—		—		—		15,048				—			15,048				(926)	(15,048)		(15,048)
Exercise of common stock options	35	—		1,756			—	—		—		—		1,756				—			1,756				—	—		—
Restricted stock awards	23	—		—			—	(69)		—		—		(69)				—			(69)				—	—		—
Stock-based compensation expense	—	—		9,331			—	—		—		—		9,331				—			9,331				—	—		—
Other	—	—		(1)			—	—		—		—		(1)				—			(1)				—	—		$	—
Balance at September 30, 2023	80,635	$	11,663	$	1,173,574		10,617	$	(1,039,717)	$	(29,658)	$	913,551	$	1,029,413			$	19,417		$	1,048,830			8,206	$	133,349	$	133,349
Balance at April 1, 2023	79,057	$	11,647	$	1,134,864		9,539	$	(920,999)	$	(27,580)	$	626,215	$	824,147			$	17,493		$	841,640			9,429	$	153,220	$	153,220
Net income	—	—		—			—	—		—		309,454		309,454				1,478			310,932				—	—		—
Other comprehensive income	—	—		—			—	—		(2,078)		—		(2,078)				446			(1,632)				—	—		—
Common stock dividends ($0.28 per share)	—	—		—			—	—		—		(22,118)		(22,118)				—			(22,118)				—	—		—
Share repurchases	—	—		—			981	(109,907)		—		—		(109,907)				—			(109,907)				—	—		—
KSOP redeemable common stock conversion	1,223	12		19,859			—	—		—		—		19,871				—			19,871				(1,223)	(19,871)		(19,871)
Exercise of common stock options	56	1		2,622			—	—		—		—		2,623				—			2,623				—	—		—
Restricted stock awards	99	1		—			25	(2,415)		—		—		(2,414)				—			(2,414)				—	—		—
Performance-based restricted stock units	200	2		—			72	(6,396)		—		—		(6,394)				—			(6,394)				—	—		—
Stock-based compensation expense	—	—		16,234			—	—		—		—		16,234				—			16,234				—	—		—
Other	—	—		(5)			—	—		—		—		(5)				—			(5)				—	—		—
Balance at September 30, 2023	80,635	$	11,663	$	1,173,574	—	10,617	$	(1,039,717)	$	(29,658)	$	913,551	$	1,029,413	$	—	$	19,417	—	$	1,048,830	—	—	8,206	$	133,349	$	133,349

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADVANCED DRAINAGE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Advanced Drainage Systems, Inc., 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, 2023 was derived from audited financial statements included in the Annual Report on Form 10-K for the year ended March 31, 2023 (“Fiscal 2023 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, 2023 and the results of operations for the three and six months ended September 30, 2023 and cash flows for the six months ended September 30, 2023. 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 2023 Form 10-K.

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

Recent Accounting Guidance - There have been no new accounting pronouncements issued or adopted since the filing of the Fiscal 2023 Form 10-K that have significance, or potential significance, to the Condensed Consolidated Financial Statements.

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

On April 14, 2023, the Company completed its divestiture of substantially all of the assets of Spartan Concrete, Inc. to a third party purchaser for consideration of $20.0 million. The Company recognized a gain on the sale of $14.9 million in the Condensed Consolidated Statements of Operations. Prior to the divestiture, the Company recorded the results of operations in Allied & Other.

3.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 12. Business Segments Information” for the Company’s disaggregation of Net sales by reportable segment.

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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, 2023		March 31, 2023
Contract asset - product returns	$	1,364	$	933
Refund liability	4,650		2,664

4.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 14 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.

5.INVENTORIES

Inventories as of the periods presented consisted of the following:


(In thousands)	September 30, 2023		March 31, 2023
Raw materials	$	98,267	$	108,206
Finished goods	286,823		355,788
Total inventories	$	385,090	$	463,994

6.NET INCOME PER SHARE AND STOCKHOLDERS' EQUITY

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)	2023		2022		2023		2022
NET INCOME PER SHARE—BASIC:
Net income available to common stockholders – Basic	$	135,802	$	152,007	$	309,454	$	339,153
Weighted average number of common shares outstanding – Basic	78,606		83,466		78,756		83,306
Net income per common share – Basic	$	1.73	$	1.82	$	3.93	$	4.07
NET INCOME PER SHARE—DILUTED:
Net income available to common stockholders – Diluted	$	135,802	$	152,007	$	309,454	$	339,153
Weighted average number of common shares outstanding – Basic	78,606		83,466		78,756		83,306
Assumed restricted stock	62		139		54		142
Assumed exercise of stock options	618		717		600		740
Assumed performance units	21		176		65		297
Weighted average number of common shares outstanding – Diluted	79,307		84,498		79,475		84,485
Net income per common share – Diluted	$	1.71	$	1.80	$	3.89	$	4.01
Potentially dilutive securities excluded as anti-dilutive	23		18		62		36

7.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.

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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, 2023 and March 31, 2023, 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 $11.0 million as of September 30, 2023. The maximum borrowings permitted under the South American Joint Venture’s credit facility are $22.0 million. The Company does not anticipate any required contributions related to the balance of this credit arrangement. As of September 30, 2023 and March 31, 2023, the outstanding principal balances of the South American Joint Venture’s credit facility including letters of credit were $1.4 million and $5.5 million, respectively. As of September 30, 2023, there were no U.S. dollar denominated loans. The weighted average interest rate as of September 30, 2023 was 10.9% on Chilean peso denominated loans.

8.DEBT

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


(In thousands)	September 30, 2023		March 31, 2023
Term Loan Facility	$	423,750	$	427,250
Senior Notes due 2027	350,000		350,000
Senior Notes due 2030	500,000		500,000
Revolving Credit Facility	—		—
Equipment Financing	14,179		18,638
Total	1,287,929		1,295,888
Less: Unamortized debt issuance costs	10,782		11,804
Less: Current maturities	12,950		14,693
Long-term debt obligations	$	1,264,197	$	1,269,391

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, 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, 2023 and March 31, 2023 amounted to $11.2 million and $9.7 million, respectively, and reduced the availability of the Revolving Credit Facility.

Senior Notes due 2027 – On September 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

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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 of 1.6% as of September 30, 2023. The current portion of the equipment financing is $6.0 million, and the long-term portion is $8.2 million at September 30, 2023.

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, 2023				March 31, 2023
(In thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Senior Notes due 2027	$	328,395	$	350,000	$	333,970	$	350,000
Senior Notes due 2030	480,010		500,000		496,605		500,000
Equipment Financing	13,599		14,179		17,921		18,638
Total fair value	$	822,004	$	864,179	$	848,496	$	868,638

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.

9.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, 2023. 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.

10.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, 2023 and 2022, the Company utilized an effective tax rate of 25.9% and 23.9%, respectively, to calculate its provision for income taxes. For the six months ended September 30, 2023 and 2022, the Company utilized an effective tax rate of 25.0% and 23.2%, 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, 2023 and 2022. Additionally, discrete income tax benefit related to the stock-based compensation windfall decreased the effective tax rate for the three and six months ended September 30, 2022.

11. 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

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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)	2023		2022		2023		2022
Component of income before income taxes:
Cost of goods sold	$	1,344	$	758	$	2,157	$	1,432
Selling, general and administrative expenses	7,987		6,702		14,077		12,301
Total stock-based compensation expense	$	9,331	$	7,460	$	16,234	$	13,733

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


	Three Months Ended September 30,				Six Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Stock-based compensation expense:
Stock Options	$	1,307	$	1,002	$	2,741	$	2,281
Restricted Stock	2,054		1,965		4,081		3,726
Performance-based Restricted Stock Units	5,035		4,052		7,919		6,792
Employee Stock Purchase Plan	381		—		381		—
Non-Employee Directors	554		441		1,112		934
Total stock-based compensation expense	$	9,331	$	7,460	$	16,234	$	13,733

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 three and six months ended September 30, 2023, the Company granted less than 0.1 million and 0.1 million shares, respectively, of restricted stock with a grant date fair value of $2.2 million and $13.2 million, respectively.

Performance-based Restricted Stock Units (“Performance Units”) – During the six months ended September 30, 2023, the Company granted 0.1 million performance share units at a grant date fair value of $8.7 million.

Options – During the six months ended September 30, 2023, the Company granted 0.2 million nonqualified stock options under the 2017 Incentive Plan with a grant date fair value of $7.5 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, 2023
Common stock price			$96.51
Expected stock price volatility			45.6%
Risk-free interest rate			3.8%
Weighted-average expected option life (years)			6
Dividend yield			0.58%

Employee Stock Purchase Plan (“ESPP”) - In July 2022, the Company’s shareholders 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 first offering period commenced July 1, 2023 and will end December 31, 2023.

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12.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:


	Three Months Ended
	September 30, 2023						September 30, 2022
(In thousands)	Net Sales		Intersegment Net Sales		Net Sales from External Customers		Net Sales		Intersegment Net Sales		Net Sales from External Customers
Pipe	$	430,389	$	(9,563)	$	420,826	$	500,978	$	(10,770)	$	490,208
Infiltrator	133,731		(17,553)		116,178		150,735		(22,450)		128,285
International
International - Pipe	52,405		(1,020)		51,385		56,461		(7,339)		49,122
International - Allied Products & Other	17,027		(26)		17,001		17,002		—		17,002
Total International	69,432		(1,046)		68,386		73,463		(7,339)		66,124
Allied Products & Other	183,304		(8,474)		174,830		202,200		(2,608)		199,592
Intersegment Eliminations	(36,636)		36,636		—		(43,167)		43,167		—
Total Consolidated	$	780,220	$	—	$	780,220	$	884,209	$	—	$	884,209

	Six Months Ended
	September 30, 2023						September 30, 2022
(In thousands)	Net Sales		Intersegment Net Sales		Net Sales from External Customers		Net Sales		Intersegment Net Sales		Net Sales from External Customers
Pipe	$	858,961	$	(17,707)	$	841,254	$	1,025,835	$	(20,644)	$	1,005,191
Infiltrator	275,217		(36,131)		239,086		317,025		(51,356)		265,669
International
International - Pipe	89,583		(1,548)		88,035		109,880		(13,198)		96,682
International - Allied Products & Other	32,625		(26)		32,599		35,097		—		35,097
Total International	122,208		(1,574)		120,634		144,977		(13,198)		131,779
Allied Products & Other	366,749		(9,457)		357,292		401,109		(5,353)		395,756
Intersegment Eliminations	(64,869)		64,869		—		(90,551)		90,551		—
Total Consolidated	$	1,558,266	$	—	$	1,558,266	$	1,798,395	$	—	$	1,798,395

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


	Three Months Ended September 30,				Six Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Segment Adjusted Gross Profit
Pipe	$	125,856	$	146,153	$	286,505	$	314,732
Infiltrator	73,663		71,278		147,927		147,072
International	21,339		17,630		37,368		38,114
Allied Products & Other	106,239		106,030		212,424		215,071
Intersegment Eliminations	(454)		430		(2,509)		(385)
Total	$	326,643	$	341,521	$	681,715	$	714,604
Depreciation and Amortization
Pipe	$	13,663	$	13,135	$	28,391	$	26,000
Infiltrator	5,534		5,027		10,892		9,894
International	1,236		1,283		2,474		2,654
Allied Products & Other(a)	16,288		16,477		32,204		32,952
Total	$	36,721	$	35,922	$	73,961	$	71,500
Capital Expenditures
Pipe	$	23,809	$	27,023	$	53,413	$	47,297
Infiltrator	6,042		8,514		11,496		21,046
International	1,786		1,114		2,935		2,027
Allied Products & Other(a)	8,910		2,705		14,781		5,175
Total	$	40,547	$	39,356	$	82,625	$	75,545

(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.


	Three Months Ended September 30,				Six Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Reconciliation of Segment Adjusted Gross Profit:
Total Gross Profit	$	302,677	$	319,963	$	634,137	$	672,070
Depreciation and Amortization	22,622		20,800		45,421		41,102
Stock-based compensation expense	1,344		758		2,157		1,432
Total Segment Adjusted Gross Profit	$	326,643	$	341,521	$	681,715	$	714,604

13.SUBSEQUENT EVENTS

Common Stock Dividend - During the third quarter of fiscal 2024, the Company declared a quarterly cash dividend of $0.14 per share of common stock. The dividend is payable on December 15, 2023 to stockholders of record at the close of business on December 1, 2023.

Share Repurchase Program - During the third quarter of fiscal 2024, 0.3 million shares of common stock at a cost of $38.7 million were repurchased under the Board of Directors' authorization in February 2022.

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

Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q ("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, 2024 refers to fiscal 2024, which is the period from April 1, 2023 to March 31, 2024.

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 2023 Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on May 18, 2023. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in the forward-looking statements. For more information, see the section below entitled “Forward Looking Statements.”

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 2024 Results

•Net sales decreased 11.8% to $780.2 million

•Net income decreased 10.7% to $137.0 million

•Net income per diluted share decreased 4.8% to $1.71

•Adjusted EBITDA, a non-GAAP measure, decreased 6.4% to $246.3 million

Net sales decreased $104.0 million, or 11.8%, to $780.2 million, as compared to $884.2 million in the prior year quarter. Domestic pipe sales decreased $70.6 million, or 14.1%, to $430.4 million. Domestic allied products & other sales decreased $18.9 million, or 9.3%, to $183.3 million. Infiltrator sales decreased $17.0 million, or 11.3%, to $133.7 million. The decrease in domestic net sales was primarily driven by lower demand in the U.S. construction and agriculture end markets. International sales decreased $4.0 million, or 5.5%, to $69.4 million.

Gross profit decreased $17.3 million, or 5.4%, to $302.7 million as compared to $320.0 million in the prior year. The decrease in gross profit is primarily due to the decrease in volume and unfavorable fixed cost absorption, partially offset by favorable material costs.

Adjusted EBITDA, a non-GAAP measure, decreased $17.0 million, or 6.4%, to $246.3 million, as compared to $263.2 million in the prior year. As a percentage of Net sales, Adjusted EBITDA was 31.6% as compared to 29.8% in the prior year.

Year-to-date Fiscal 2024 Results

•Net sales decreased 13.4% to $1.6 billion

•Net income decreased 9.0% to 310.9 million

•Net income per diluted share decreased 3.0% to $3.89

•Adjusted EBITDA, a non-GAAP measure, decreased 6.2% to $527.6 million

•Cash provided by operating activities increased 5.0% to $458.9 million

•Free cash flow, a non-GAAP measure, increased 4.1% to $376.2 million

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Net sales decreased $240.1 million, or 13.4%, to $1,558.3 million, as compared to $1,798.4 million in the prior period. Domestic pipe sales decreased $166.9 million, or 16.3%, to $859.0 million. Domestic allied products & other sales decreased $34.4 million, or 8.6%, to $366.7 million. Infiltrator sales decreased $41.8 million, or 13.2%, to $275.2 million. The decrease in domestic net sales was driven by lower demand in the U.S. construction and agriculture end markets. International sales decreased $22.8 million, or 15.7%, to $122.2 million.

Gross profit decreased $37.9 million, or 5.6%, to $634.1 million as compared to $672.1 million in the prior year. The decrease in gross profit is primarily due to the decrease in volume and unfavorable fixed cost absorption, partially offset by favorable material costs.

Adjusted EBITDA, a non-GAAP measure, decreased $34.7 million, or 6.2%, to $527.6 million, as compared to $562.2 million in the prior year. The decrease is primarily due to the factors mentioned above. As a percentage of net sales, Adjusted EBITDA was 33.9% as compared to 31.3% in the prior year.

Results of Operations

Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022

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)	2023				2022
Net sales	$	780,220	100.0	%	$	884,209	100.0	%
Cost of goods sold	477,543		61.2		564,246		63.8
Gross profit	302,677		38.8		319,963		36.2
Selling, general and administrative	91,725		11.8		88,639		10.0
Loss (gain) on disposal of assets and costs from exit and disposal activities	123		—		(102)		—
Intangible amortization	12,792		1.6		13,841		1.6
Income from operations	198,037		25.4		217,585		24.6
Interest expense	21,941		2.8		18,261		2.1
Derivative (gain) loss and other (income) expense, net	(7,506)		(1.0)		395		—
Income before income taxes	183,602		23.5		198,929		22.5
Income tax expense	47,476		6.1		47,508		5.4
Equity in net income of unconsolidated affiliates	(901)		(0.1)		(1,956)		(0.2)
Net income	137,027		17.6		153,377		17.3
Less: net income attributable to noncontrolling interest	1,225		0.2		1,370		0.2
Net income attributable to ADS	$	135,802	17.4	%	$	152,007	17.2	%

Net sales - The following table presents Net sales to external customers by reportable segment for the three months ended September 30, 2023 and 2022.


(Amounts in thousands)	2023		2022		$ Variance		% Variance
Pipe	$	420,826	$	490,208	$	(69,382)	(14.2)	%
Infiltrator	116,178		128,285		(12,107)		(9.4)
International	68,386		66,124		2,262		3.4
Allied Products & Other	174,830		199,592		(24,762)		(12.4)
Total Consolidated	$	780,220	$	884,209	$	(103,989)	(11.8)	%

Our consolidated Net sales for the three months ended September 30, 2023 decreased by $104.0 million, or 11.8%, compared to the same period in fiscal 2023. The decrease in Net sales was primarily driven by lower demand in the U.S. construction and agriculture end markets.

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Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the three months ended September 30, 2023 and 2022.


(Amounts in thousands)	2023		2022		$ Variance		% Variance
Pipe	$	110,193	$	132,284	$	(22,091)	(16.7)	%
Infiltrator	68,038		66,224		1,814		2.7
International	20,103		16,263		3,840		23.6
Allied Products & Other	104,797		104,762		35		—
Intersegment eliminations	(454)		430		(884)		(205.6)
Total gross profit	$	302,677	$	319,963	$	(17,286)	(5.4)	%

Our consolidated Cost of goods sold for the three months ended September 30, 2023 decreased by $86.7 million, or 15.4%, and our consolidated Gross profit decreased by $17.3 million, or 5.4%, compared to the same period in fiscal 2023. The decrease in our gross profit was primarily due to the decrease in volume and unfavorable fixed cost absorption, partially offset by favorable material costs.

Selling, general and administrative expenses


	Three Months Ended September 30,
(Amounts in thousands)	2023			2022
Selling, general and administrative expenses	$	91,725		$	88,639
% of Net sales	11.8		%	10.0		%

Selling, general and administrative expenses for three months ended September 30, 2023 increased from the same period in fiscal 2023 and as a percentage of sales, increased by 1.8%. The increase in Selling, general and administrative expenses is result of the investment in our engineering and innovation initiatives, which includes headcount, as well as the impact of inflation.

Interest expense - Interest expense increased $3.7 million in the three months ended September 30, 2023 compared to the same period in the previous fiscal year. The increase was primarily due to an increase in interest rates.

Derivative gains and other income, net - Derivative gains and other income increased by $7.9 million for the three months ended September 30, 2023 compared to the same period in the previous fiscal year primarily due to increased interest income.

Income tax expense - The following table presents the effective tax rates for the periods presented:


	Three Months Ended September 30,
	2023		2022
Effective tax rate	25.9	%	23.9	%

The change in the effective tax rate for the three months ended September 30, 2023 was primarily related to the decrease of the discrete income tax benefit related to the stock-based compensation windfall. See “Note 10. Income Taxes” for additional information.

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Comparison of the Six Months Ended September 30, 2023 to the Six Months Ended September 30, 2022

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,
	2023				2022
Consolidated Statements of Operations data:	(In thousands)
Net sales	$	1,558,266	100.0	%	$	1,798,395	100.0	%
Cost of goods sold	924,129		59.3		1,126,325		62.6
Gross profit	634,137		40.7		672,070		37.4
Selling, general and administrative	178,236		11.4		175,159		9.7
(Gain) loss on disposal of assets and costs from exit and disposal activities	(13,181)		(0.8)		201		—
Intangible amortization	25,594		1.6		27,518		1.5
Income from operations	443,488		28.5		469,192		26.1
Interest expense	43,653		2.8		29,333		1.6
Derivative (gain) loss and other (income) expense, net	(11,055)		(0.7)		(1,507)		(0.1)
Income before income taxes	410,890		26.4		441,366		24.5
Income tax expense	102,534		6.6		102,573		5.7
Equity in net income of unconsolidated affiliates	(2,576)		(0.2)		(3,066)		(0.2)
Net income	310,932		20.0		341,859		19.0
Less: net income attributable to noncontrolling interest	1,478		0.1		2,706		0.2
Net income attributable to ADS	$	309,454	19.9	%	$	339,153	18.9	%

Net sales - The following table presents Net sales to external customers by reportable segment for the six months ended September 30, 2023 and 2022.


(Amounts in thousands)	2023		2022		$ Variance		% Variance
Pipe	$	841,254	$	1,005,191	$	(163,937)	(16.3)	%
Infiltrator	239,086		265,669		(26,583)		(10.0)
International	120,634		131,779		(11,145)		(8.5)
Allied Products & Other	357,292		395,756		(38,464)		(9.7)
Total Consolidated	$	1,558,266	$	1,798,395	$	(240,129)	(13.4)	%

Our consolidated Net sales for the six months ended September 30, 2023 decreased by $240.1 million, or 13.4%, compared to the same period in fiscal 2023. The decrease in domestic net sales was primarily driven by lower demand in the U.S. construction and agriculture end markets.

Cost of goods sold and Gross profit - The following table presents gross profit by reportable segment for the six months ended September 30, 2023 and 2022.


(Amounts in thousands)	2023		2022		$ Variance		% Variance
Pipe	$	255,449	$	287,383	$	(31,934)	(11.1)	%
Infiltrator	136,905		137,093		(188)		(0.1)
International	34,894		35,372		(478)		(1.4)
Allied Products & Other	209,398		212,607		(3,209)		(1.5)
Intersegment eliminations	(2,509)		(385)		(2,124)		551.7
Total gross profit	$	634,137	$	672,070	$	(37,933)	(5.6)	%

Our consolidated Cost of goods sold for the six months ended September 30, 2023 decreased by $202.2 million, or 18.0%, and our consolidated Gross profit decreased by $37.9 million, or 5.6%, compared to the same period in fiscal 2023. The

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decrease in our gross profit was primarily due to the decrease in volume and unfavorable fixed cost absorption, partially offset by favorable material costs.

Selling, general and administrative expenses


	Six Months Ended September 30,
(Amounts in thousands)	2023			2022
Selling, general and administrative expenses	$	178,236		$	175,159
% of Net sales	11.4		%	9.7		%

Selling, general and administrative expenses for six months ended September 30, 2023 increased $3.1 million from the same period in fiscal 2023 and as a percentage of sales, increased by 1.7%. The increase in Selling, general and administrative expenses is result of the investment in our engineering and innovation initiatives, which includes headcount, as well as the impact of inflation.

(Gain) loss on disposal of assets and costs from exit and disposal activities - The gain on disposal of assets in the current year was due to the sale of Spartan Concrete.

Interest expense - Interest expense increased $14.3 million in the six months ended September 30, 2023 compared to the same period in the previous fiscal year. The increase was primarily due to increased average debt levels and increased interest rates.

Derivative gains and other income, net - Derivative gains and other income increased by $9.5 million for the six months ended September 30, 2023 compared to the same period in the previous fiscal year primarily due to increased interest income.

Income tax expense - The following table presents the effective tax rates for the six months ended September 30, 2023 and 2022.


	Six Months Ended September 30,
	2023		2022
Effective tax rate	25.0	%	23.2	%

The change in the effective tax rate for the six months ended September 30, 2023 was primarily related to the decrease of the discrete income tax benefit related to the stock-based compensation windfall. See “Note 10. 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 (loss) before interest, income taxes, depreciation and amortization, stock-based compensation expense, non-cash charges and certain other expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.

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

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

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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)	2023			2022			2023			2022
Net income	$	137,027		$	153,377		$	310,932		$	341,859
Depreciation and amortization	36,721			35,922			73,961			71,500
Interest expense	21,941			18,261			43,653			29,333
Income tax expense	47,476			47,508			102,534			102,573
EBITDA	243,165			255,068			531,080			545,265
Loss (gain) on disposal of assets and costs from exit and disposal activities	123			(102)			(13,181)			201
Stock-based compensation expense	9,331			7,460			16,234			13,733
Transaction costs(a)	52			368			2,024			2,083
Interest income	(5,137)			(1,991)			(8,626)			(2,108)
Other adjustments(b)	(1,284)			2,399			32			3,071
Adjusted EBITDA	$	246,250		$	263,202		$	527,563		$	562,245
Adjusted EBITDA Margin	31.6		%	29.8		%	33.9		%	31.3		%

(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, 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 from operating activities, the most comparable GAAP measure, for each of the periods presented:


	Six Months Ended September 30,
(Amounts in thousands)	2023		2022
Net cash provided by operating activities	$	458,864	$	437,024
Capital expenditures	(82,625)		(75,545)
Free Cash Flow	$	376,239	$	361,479

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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, 2023
Total debt (debt and finance lease obligations)	$	1,320,574
Cash	470,409
Net debt (total debt less cash)	850,165
Leverage Ratio	1.0

The following table summarizes our available liquidity for the period presented:


(Amounts in thousands)	September 30, 2023
Revolver capacity	$	600,000
Less: outstanding borrowings	—
Less: letters of credit	(11,150)
Revolver available liquidity	$	588,850

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.

Working Capital and Cash Flows

As of September 30, 2023, we had $1,059.3 million in liquidity, including $470.4 million of cash, $588.9 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 $804.0 million as of September 30, 2023, from $638.7 million as of March 31, 2023. The increase in working capital is primarily due to an increase in cash and increase in accounts receivable due to seasonality partially offset by an increase in accrued taxes due to the timing of payments and a planned decrease in inventory.


	Six Months Ended September 30,
(Amounts in thousands)	2023		2022
Net cash provided by operating activities	$	458,864	$	437,024
Net cash used in investing activities	(62,200)		(123,509)
Net cash (used in) provided by financing activities	(143,386)		124,820

Operating Cash Flows – Cash flows from operating activities increased $21.8 million during the six months ended September 30, 2023 primarily driven by changes in net working capital.

Investing Cash Flows - Cash flows used in investing activities during the six months ended September 30, 2023 decreased by $61.3 million compared to the same period in fiscal 2023. The decrease in cash used in investing activities was primarily due to the acquisition of Cultec, Inc. in fiscal 2023.

Capital expenditures totaled $82.6 million and $75.5 million for the six months ended September 30, 2023 and 2022, respectively. Our capital expenditures for the six months ended September 30, 2023 were used primarily to support facility expansions, equipment replacements and technology improvement initiatives.

We currently anticipate that we will make capital expenditures of approximately $200 to $225 million in fiscal year 2024, including approximately $115 million of open orders as of September 30, 2023. Such capital expenditures are expected to be financed using funds generated by operations.

Financing Cash Flows - 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.

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During the six months ended September 30, 2022, cash provided by financing activities included the issuance of $500.0 million of 2030 Notes and proceeds of $123.2 million on our revolving credit facilities. Cash used in financing activities during the six months ended September 30, 2022 included payments of $237.5 million on our revolving credit facilities, repurchase of common stock of $192.6 million, $25.5 million of shares withheld for tax purposes, and $20.4 million of dividend payments.

Cash held by Foreign Subsidiaries - As of September 30, 2023, we had $20.6 million in cash that was held by our foreign subsidiaries, including $10.0 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.

Financing Transactions - There have been no changes in our debt disclosures from those disclosed in “Liquidity and Capital Resources” in our Fiscal 2023 Form 10-K. We are in compliance with our debt covenants as of September 30, 2023.

Off-Balance Sheet Arrangements

Excluding the guarantees of 50% of certain debt of our unconsolidated South American Joint Venture as further discussed in “Note 7. Related Party Transactions” to the Condensed Consolidated Financial Statements, we do not have any other off-balance sheet arrangements. As of September 30, 2023, our South American Joint Venture had approximately $1.4 million of outstanding debt subject to our guarantees. We do not believe that this guarantee will have a current or future effect on our financial condition, results of operations, liquidity or capital resources.

Critical Accounting Policies and Estimates

There have been no changes in critical accounting policies from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2023 Form 10-K, except as disclosed in "Note 1. Background and Summary of Significant Accounting Policies.”

Forward-Looking Statements

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

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

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

•disruption or volatility in general business and economic conditions in the markets in which we operate;

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

•the risks of increasing competition in our existing and future markets;

•uncertainties surrounding the integration and realization of anticipated benefits of acquisitions;

•the effect of any claims, litigation, investigations or proceedings, including those described under “Item 1. Legal Proceedings” of this Form 10-Q;

•the effect of weather or seasonality;

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•the loss of any of our significant customers;

•the risks of doing business internationally;

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

•our ability to expand into new geographic or product markets;

•the risk associated with manufacturing processes;

•the effect of global climate change;

•cybersecurity risks;

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

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

•our ability to protect our intellectual property rights;

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

•the risks associated with our current levels of indebtedness, including borrowings under our existing credit agreement and outstanding indebtedness under our existing senior notes; and

•other risks and uncertainties, including those listed under “Item 1A. Risk Factors” in the Fiscal 2023 Form 10-K.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to various market risks, primarily related to changes in interest rates, credit, raw material supply prices and, to a lesser extent, foreign currency exchange rates. Our financial position, results of operations or cash flows may be negatively impacted in the event of adverse movements in the respective market rates or prices in each of these risk categories. Our exposure in each category is limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions. Our exposure to market risk has not materially changed from what we previously disclosed in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of our Fiscal 2023 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 $4.2 million based on our borrowings as of September 30, 2023. 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 $10.2 million, for the twelve months ended September 30, 2023.

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, 2023 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Please see “Note 9. 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 2023 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 2023 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 Sale of Equity Securities, Use of Proceeds and Issuer Purchases, of Equity Securities

In February 2022, our Board of Directors authorized a $1.0 billion common stock repurchase program. Repurchase of common stock will be made in accordance with applicable securities laws. During the three months ended September 30, 2023, the Company repurchased 0.5 million shares of common stock at a cost of $61.3 million. As of September 30, 2023, approximately $315.9 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, 2023:


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, 2023 to July 31 2023	—	$	110.00	—	$	377,184
August 1, 2023 to August 31, 2023	175	126.50		175	355,099
September 1, 2023 to September 30, 2023	332	118.04		332	315,909
Total	507	$	120.96	507	$	315,909

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6.			Exhibits

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


Exhibit Number						Exhibit Description

31.1*						Certification of President and Chief Executive Officer of Advanced Drainage Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Executive Vice President and Chief Financial Officer of Advanced Drainage Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*						Certification of Principal Executive Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*						Certification of Principal Financial Officer of Advanced Drainage Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*						Inline XBRL Taxonomy Extension Schema.
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase.
104						The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, has been formatted in Inline XBRL and contained in Exhibit 101.

* Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 2, 2023


ADVANCED DRAINAGE SYSTEMS, INC.

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

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

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

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Advanced Drainage Systems - 10-Q quarterly report FY2023 Q3

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