ADVANCED DRAINAGE SYSTEMS, INC.WMS
ADVANCED DRAINAGE SYSTEMS, INC. Income Taxes Disclosure
INCOME TAXES
The components of Income before income taxes for the fiscal years ended March 31 are as follows:
| (Amounts in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| United States | $ | 571,649 | $ | 641,370 | $ | 630,895 | |||||||||||
| Foreign | 17,816 | 25,383 | 26,205 | ||||||||||||||
| Total | $ | 589,465 | $ | 666,753 | $ | 657,100 | |||||||||||
The components of Income tax expense for the fiscal years ended March 31 consisted of the following:
| (Amounts in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 112,451 | $ | 127,109 | $ | 123,392 | |||||||||||
| State and local | 25,337 | 27,028 | 29,605 | ||||||||||||||
| Foreign | 3,628 | 7,121 | 7,383 | ||||||||||||||
| Total current tax expense | 141,416 | 161,258 | 160,380 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (591) | (201) | (4,674) | ||||||||||||||
| State and local | (788) | (2,127) | (4,480) | ||||||||||||||
| Foreign | 1,026 | 68 | (637) | ||||||||||||||
| Total deferred tax expense (benefit) | (353) | (2,260) | (9,791) | ||||||||||||||
| Total Income tax expense | $ | 141,063 | $ | 158,998 | $ | 150,589 | |||||||||||
For the fiscal years ended March 31, the effective tax rate varied from the statutory Federal income tax rate as a result of the following factors:
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State and local taxes—net of federal income tax benefit | 3.1 | 3.4 | 3.3 | ||||||||||||||
| Stock-based compensation | (1.4) | (0.6) | (2.0) | ||||||||||||||
| Executive compensation | 1.3 | 0.8 | 1.2 | ||||||||||||||
| Other | (0.1) | (0.8) | (0.6) | ||||||||||||||
| Effective rate | 23.9 | % | 23.8 | % | 22.9 | % | |||||||||||
Net deferred tax assets and liabilities are included in Other assets and Deferred tax liabilities, respectively, on the Consolidated Balance Sheets. The related balances at March 31 were as follows:
| (Amounts in thousands) | 2025 | 2024 | |||||||||
| Net non-current deferred tax assets | $ | 1,249 | $ | 1,909 | |||||||
| Net non-current deferred tax liabilities | 190,416 | 156,705 | |||||||||
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31 were comprised of:
| (Amounts in thousands) | 2025 | 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Operating lease liabilities | $ | 16,666 | $ | 13,567 | |||||||
| Research and development expenses | 15,727 | 11,828 | |||||||||
| Stock-based compensation | 6,452 | 5,591 | |||||||||
| Other | 16,035 | 14,415 | |||||||||
| Total deferred tax assets | 54,880 | 45,401 | |||||||||
| Less: valuation allowance | (289) | (271) | |||||||||
| Total net deferred tax assets | 54,591 | 45,130 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Intangible assets | 96,076 | 71,444 | |||||||||
| Property, plant and equipment | 119,703 | 105,222 | |||||||||
| Operating lease assets | 16,795 | 13,323 | |||||||||
| Goodwill | 10,326 | 9,302 | |||||||||
| Other | 858 | 635 | |||||||||
| Total deferred tax liabilities | 243,758 | 199,926 | |||||||||
| Net deferred tax liabilities | $ | 189,167 | $ | 154,796 | |||||||
A reconciliation of the balance of unrecognized tax benefits for the years ended March 31 is as follows:
| (Amounts in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Balance at beginning of year | $ | 4,600 | $ | 2,451 | $ | 746 | |||||||||||
| Tax positions taken in current year | 2,882 | 1,609 | 903 | ||||||||||||||
| Decreases in tax positions for prior years | — | — | (56) | ||||||||||||||
| Increases in tax positions for prior years | 2,083 | 540 | 1,100 | ||||||||||||||
| Settlements | — | — | (115) | ||||||||||||||
| Lapse of statute of limitations | (90) | — | (134) | ||||||||||||||
| Foreign translation adjustment | — | — | 7 | ||||||||||||||
| Balance at end of year | $ | 9,475 | $ | 4,600 | $ | 2,451 | |||||||||||
Included in the balance of unrecognized tax benefits at March 31, 2025, 2024, and 2023 were $7.5 million, $3.6 million and $1.9 million, respectively, of tax benefits that if recognized would favorably affect the Company’s effective tax rate.
The short-term portion of unrecognized tax benefit of $0.4 million at March 31, 2025 is recorded in Other accrued liabilities on the Company’s Consolidated Balance Sheet. The long-term portion of unrecognized tax benefits are recorded in Other liabilities in the Company’s Consolidated Balance Sheets. These amounts include potential accrued interest and penalties of $0.4 million and $0.2 million at March 31, 2025 and 2024, respectively.
The Company believes that over the next twelve months, it is reasonably possible that $0.4 million of unrecognized tax benefits could be resolved because of audit settlements or the expiration of statues of limitations. Final settlement of these issues may result in payments that are more or less than this amount, but the Company does not believe that a resolution of these matters will have a material impact on its financial position or its results of operations.
The Company is currently open to audit under the statute of limitations by the IRS for the fiscal years ended March 31, 2022 through March 31, 2025. The majority of the Company’s state income tax returns are open to audit under the statute of limitations for the years ended March 31, 2021 through March 31, 2025. The foreign income tax returns are open to audit under the statute of limitations for the years ended March 31, 2021 through March 31, 2025.
As of March 31, 2025, the Company intends to repatriate earnings from Canada and believes that there will be no additional tax costs associated with the repatriation of such earnings other than any potential non-U.S. withholding taxes. No deferred tax liability has been recognized as of March 31, 2025. The Company has approximately $35.1 million of undistributed earnings from other foreign entities that are intended to be reinvested indefinitely with the exception of cash dividends paid by the Company’s ADS Mexicana joint venture. It is not practicable to estimate the amount of U.S. tax, which would primarily relate to withholding tax, that might be payable on the eventual remittance of such undistributed earnings.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | May 15, 2025 | Showing above |
| 2017 | May 30, 2017 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.