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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2022-02-04 · 158 added, 65 removed, 130 unchanged (63% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report.

This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements that address activities, events or developments that the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, the COVID-19 pandemic, go-to-market strategies, operational excellence, acceleration of new product development, end market performance, net sales performance, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation, growth strategies, restructuring efficiencies and warranty charges.

This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the federal securities laws.

All statements that address activities, events or developments that the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, environmental/sustainability plans, go-to-market strategies, operational excellence, acceleration of new product development, financial or operating performance, litigation outcomes, capital allocation and growth strategy plans, restructuring efficiencies and projected warranty charges.

Forward-looking statements are based on certain assumptions and assessments made by the Company in light of the Company’s experience and perception of historical trends, current conditions and expected future developments.

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severity of the impact of the pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the Company and the financial/capital markets, government-mandated facility closures, COVID-19 related facility closures and other manufacturing restrictions, logistical challenges and supply chain interruptions, potential litigation and claims emanating from the COVID-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world;

unexpected or greater than expected increases in costs of raw materials and purchased components;

regional, national or global political, economic, market and competitive conditions;

cyclical and changing demand in core markets such as municipal spending;

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the future impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections);

logistical challenges and supply chain disruptions related to the COVID-19 pandemic, geopolitical conditions, or other events;

an inability to realize the anticipated benefits from our operational initiatives, including our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois, plant closures, and our reorganization and related strategic realignment activities;

an inability to attract or retain a skilled and diverse workforce, increased competition related to the workforce and labor markets;

an inability to protect the Company’s information systems against service interruption, misappropriation of data or breaches of security;

failure to comply with personal data protection and privacy laws;

cyclical and changing demand in core markets such as municipal spending, construction, and natural gas distribution;

government monetary or fiscal policies;

residential and nonresidential construction, and natural gas distribution;

manufacturing and product performance;

expectations for changes in volumes, continued execution of cost productivity initiatives and improved pricing;

warranty exposures (including the adequacy of warranty reserves);

the Company’s ability to successfully resolve significant legal proceedings, claims, lawsuits or government investigations;

the impact of adverse weather conditions;

the impact of manufacturing and product performance;

the impact of wage, commodity and materials price inflation;

the impact of warranty claims;

an inability to successfully resolve significant legal proceedings or government investigations;

compliance with environmental, trade and anti-corruption laws and regulations;

climate change and legal or regulatory responses thereto;

changing regulatory, trade and tariff conditions;

failure to achieve expected cost savings, net sales expectations, profitability expectations and manufacturing efficiencies from restructuring and consolidation activities and our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois;

the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures;

an inability to achieve some or all of our Environmental, Social and Governance (“ESG”) goals ;

as well as other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recently filed Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the pandemic).

Forward-looking statements are only as of the date they are made and do not guarantee future performance.

an inability to achieve some or all of our Environmental, Social and Governance goals;

and other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recent Annual Report on Form 10-K and later filings on Form 10-Q.

Forward-looking statements do not guarantee future performance and are only as of the date they are made.

The Company undertakes no duty to update its forward-looking statements except as required by law.

Undue reliance should not be placed on any forward-looking statements.

You are advised to review any further disclosures the Company makes in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S.

You are advised to review any further disclosures the Company makes on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S.

Securities and Exchange Commission.

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We anticipate that growth in the residential construction end market will help offset anticipated challenges in the project-related portion of the municipal market.

In January 2022, Blue Chip Economic Indicators forecasted housing starts to be flat for calendar 2022 as compared with the prior year despite robust demand for housing and low inventories.

In April 2022, Blue Chip Economic Indicators forecasted housing growth of 3% for calendar 2022 as compared with the prior year on continued robust demand for housing and low inventories.

We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable manufacturing variances, labor shortages, and additional cleaning, including disinfectants and sanitation materials, for our employees and at our facilities.

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Results of Operations

Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020

Three months ended December 31, 2021

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three months ended March 31, 2022

Water Flow Solutions Water Management Solutions Corporate Total

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Net income $ 23.6

Three months ended December 31, 2020

Three months ended March 31, 2021

Water Flow Solutions Water Management Solutions Corporate Total

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19.6 21.5 13.1 54.2

Strategic reorganization and other charges 0.1 — 1.3 1.4

Strategic reorganization and other (credits) charges — (0.7) 1.5 0.8

Total operating expenses 19.6 20.8 14.6 55.0

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Consolidated Analysis

Net sales in the three months ended December 31, 2021 increased $34.9 million or 14.7% to $272.3 million as compared with $237.4 million in the prior period primarily as a result of increased shipment volumes and higher pricing across most of our product lines.

Gross profit in the three months ended December 31, 2021 increased $9.2 million to $87.6 million from $78.4 million in the prior year period, primarily as a result of increased shipment volumes and higher pricing which were partially offset by higher costs of sales associated with inflation, unfavorable manufacturing performance, labor challenges, supply chain disruptions and our restructuring activity.

Gross margin was 32.2% in the three months ended December 31, 2021 as compared with 33.0% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 2021 increased to $56.3 million from $49.2 million in the prior year period primarily as a result of the inclusion of i2O Water, higher travel and trade show expenditures, inflation, increased information technology related activities, and personnel-related costs.

SG&A as a percentage of net sales was 20.7% for both the three months ended December 31, 2021 and 2020.

Strategic reorganization and other charges in the three months ended December 31, 2021 were $2.4 million which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the previously announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada.

Strategic reorganization and other charges in the three months ended December 31, 2020 were $1.4 million and primarily related to transaction costs as well as legal and professional service expenses.

Interest expense, net declined $1.8 million in the three months ended December 31, 2021 as compared with the prior year period primarily as a result of the refinancing of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”) with the 4.0% Senior Notes.

Net sales in the three months ended March 31, 2022 increased $43.0 million or 16.1% to $310.5 million as compared with $267.5 million in the prior period primarily as a result of higher pricing across most of our product lines and increased shipment

In the prior year quarter, net sales benefited as a result of $6.0 million of additional Krausz sales from the elimination of the one-month reporting lag.

Gross profit in the three months ended March 31, 2022 increased $4.4 million to $92.8 million from $88.4 million in the prior year period, primarily as a result of higher pricing across most of our product lines, and increased shipment volumes which were partially offset by higher costs of sales associated with inflation, and unfavorable manufacturing performance.

Gross margin was 29.9% in the three months ended March 31, 2022 as compared with 33.0% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended March 31, 2022 increased to $58.0 million from $54.2 million in the prior year period primarily as a result of inflation, higher travel and trade show expenditures, investments in engineering and information technology, and the inclusion of i2O.

SG&A as a percentage of net sales was 18.7% and 20.3% for the three months ended March 31, 2022 and March 31, 2021, respectively.

Strategic reorganization and other charges in the three months ended March 31, 2022 were $0.6 million which primarily consisted of restructuring expenses including costs associated with the closures of our facilities in Aurora, Illinois, and Surrey, British Columbia, Canada.

Strategic reorganization and other charges for the three months ended March 31, 2021 were $0.8 million, which primarily consisted of termination benefits associated with the announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada, as well as legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property.

Interest expense, net declined $1.6 million in the three months ended March 31, 2022 as compared with the prior year period primarily as a result of the refinancing of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”) with the 4.0% Senior Notes on May 28, 2021.

The components of net interest expense are provided below.

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Water Flow Solutions

Net sales in the three months ended December 31, 2021 increased 20.3% to $154.9 million as compared with $128.8 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.

Gross profit in the three months ended December 31, 2021 increased 24.3% to $52.1 million from $41.9 million in the prior year period primarily as a result of higher pricing, increased shipment volumes, and favorable manufacturing performance, partially offset by higher costs associated with inflation.

Gross margin was 33.6% in the three months ended December 31, 2021 and 32.5% in the prior year period.

SG&A in the three months ended December 31, 2021 increased to $20.8 million from $18.7 million in the prior year period primarily as a result of increased travel and trade show expenditures, inflation, increased information technology related activities, and higher personnel-related expenses.

SG&A as a percentage of net sales was 13.4% and 14.5% in the three months ended December 31, 2021 and 2020, respectively.

Net sales in the three months ended March 31, 2022 increased 25.0% to $183.9 million as compared with $147.1 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.

Gross profit in the three months ended March 31, 2022 increased 15.6% to $57.0 million from $49.3 million in the prior year period primarily as a result of higher pricing and increased shipment volumes, partially offset by higher costs associated with inflation and unfavorable manufacturing performance.

Gross margin was 31.0% in the three months ended March 31, 2022 and 33.5% in the prior year period.

SG&A in the three months ended March 31, 2022 increased to $21.6 million from $19.6 million in the prior year period primarily as a result of investments in engineering and information technology, increased travel and trade show expenditures, and inflation.

SG&A as a percentage of net sales was 11.7% and 13.3% in the three months ended March 31, 2022 and 2021, respectively.

Water Management Solutions

Net sales in the three months ended December 31, 2021 increased 8.1% to $117.4 million as compared with $108.6 million in the prior year period, primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.

Gross profit in the three months ended December 31, 2021 was $35.5 million as compared with $36.5 million in the prior year period.

Gross margin declined to 30.2% in the three months ended December 31, 2021 as compared with 33.6% in the prior year period primarily as a result of higher Cost of sales associated with inflation and unfavorable manufacturing performance which was partially offset by higher pricing and increased shipment volumes.

SG&A increased to $24.0 million from $19.5 million in the prior year period primarily as a result of the inclusion of i2O Water, engineering investments, inflation, increased travel and trade show expenditures, and higher personnel-related expenses.

SG&A as a percentage of net sales was 20.4% and 18.0% in the three months ended December 31, 2021 and 2020, respectively.

SG&A increased to $11.5 million in the three months ended December 31, 2021 as compared with $11.0 million in the three months ended December 31, 2020 primarily as a result of inflation and higher personnel-related expenses.

Net sales in the three months ended March 31, 2022 increased 5.1% to $126.6 million as compared with $120.4 million in the prior year period, primarily as a result of higher pricing and increased shipment volumes across most of the segment’s product lines as well as the acquisition of i2O Water.

Net sales in the three months ended March 31, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.

Gross profit in the three months ended March 31, 2022 was $35.8 million as compared with $39.1 million in the prior year period.

Gross margin declined to 28.3% in the three months ended March 31, 2022 as compared with 32.5% in the prior year period primarily as a result of unfavorable manufacturing performance, and higher cost of sales associated with inflation, which were only partially offset by higher pricing and increased shipment volumes.

SG&A increased to $24.0 million from $21.5 million in the prior year period primarily as a result of investments in engineering and information technology, the inclusion of i2O Water, inflation, and increased travel and trade show expenditures.

SG&A as a percentage of net sales was 19.0% and 17.9% in the three months ended March 31, 2022 and 2021, respectively.

SG&A decreased to $12.4 million in the three months ended March 31, 2022 as compared with $13.1 million in the three months ended March 31, 2021 primarily as a result of decreased personnel-related expenses and outside services.

Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021

Six months ended March 31, 2022

Water Flow Solutions Water Management Solutions Corporate Total

(in millions)

Net sales $ 338.8 $ 244.0 $ — $ 582.8

Gross profit 109.1 71.3 — $ 180.4

Operating expenses:

Selling, general and administrative

42.4 48.0 23.9 114.3

Strategic reorganization and other charges — 0.1 2.9 3.0

Total operating expenses 42.4 48.1 26.8 117.3

Operating income (loss) $ 66.7 $ 23.2 $ (26.8) 63.1

Non-operating expenses:

Pension benefit other than service (2.0)

Interest expense, net 8.8

Income before income taxes 56.3

Income tax expense 13.3

Net income $ 43.0

Six months ended March 31, 2021

Water Flow Solutions Water Management Solutions Corporate Total

(in millions)

Net sales $ 275.9 $ 229.0 $ — $ 504.9

Gross profit 91.2 75.6 — $ 166.8

Operating expenses:

Selling, general and administrative

38.3 41.0 24.1 103.4

Strategic reorganization and other charges (credits) 0.1 (0.7) 2.8 2.2

Total operating expenses 38.4 40.3 26.9 105.6

Operating income (loss)

$ 52.8 $ 35.3 $ (26.9) 61.2

Pension benefit other than service (1.6)

Interest expense, net 12.2

Income before income taxes 50.6

Income tax expense 13.0

Net income $ 37.6

Consolidated Analysis

Net sales in the six months ended March 31, 2022 increased $77.9 million or 15.4% to $582.8 million as compared with $504.9 million in the prior period primarily as a result of increased shipment volumes and higher pricing across most of our product lines.

Net sales in the six months ended March 31, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.

Gross profit in the six months ended March 31, 2022 increased $13.6 million to $180.4 million from $166.8 million in the prior year period, primarily as a result of higher pricing and increased shipment volumes which were partially offset by higher costs of sales associated with inflation, unfavorable manufacturing performance including labor challenges, and supply chain disruptions.

Gross margin was 31.0% in the six months ended March 31, 2022 as compared with 33.0% in the prior year period.

SG&A in the six months ended March 31, 2022 increased to $114.3 million from $103.4 million in the prior year period primarily as a result of higher travel and trade show expenditures, inflation, investments in engineering and information technology and the inclusion of i2O Water.

SG&A as a percentage of net sales was 19.6% and 20.5% for the six months ended March 31, 2022 and 2021, respectively.

Strategic reorganization and other charges in the six months ended March 31, 2022 were $3.0 million which primarily consisted of expenses associated with the Albertville tragedy, and our ongoing restructuring activities.

Strategic reorganization and other charges in the six months ended March 31, 2021 were $2.2 million and primarily related to restructuring activities, and legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property.

Interest expense, net declined $3.4 million in the six months ended March 31, 2022 as compared with the prior year period primarily as a result of the refinancing of our 5.5% Senior Notes with the 4.0% Senior Notes on May 28, 2021.

The components of net interest expense are provided below.

Six months ended

(in millions)

5.5% Senior Notes $ — $ 12.4

4.0% Senior Notes 9.0 —

Deferred financing costs amortization 0.5 0.6

ABL Agreement 0.4 0.4

Capitalized interest (1.2) (1.1)

Other interest cost 0.3 0.2

Total interest expense 9.0 12.5

Interest income (0.2) (0.3)

Interest expense, net $ 8.8 $ 12.2

The reconciliation between the U.S.

federal statutory income tax rate and the effective income tax rate is presented below.

Six months ended

federal statutory income tax rate 21.0 % 21.0 %

Adjustments to reconcile to the effective tax rate:

State income taxes, net of federal benefit 3.6 4.2

Excess tax benefits related to stock-based compensation (0.2) (0.2)

Tax credits (1.3) (1.1)

Global Intangible Low-taxed Income 0.8 0.6

Foreign income tax rate differential (1.4) (0.3)

Valuation allowances 0.2 (0.2)

Other 0.9 1.7

Effective income tax rate 23.6 % 25.7 %

Segment Analysis

Water Flow Solutions

Net sales in the six months ended March 31, 2022 increased 22.8% to $338.8 million as compared with $275.9 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.

Gross profit in the six months ended March 31, 2022 increased 19.6% to $109.1 million from $91.2 million in the prior year period primarily as a result of higher pricing and increased shipment volumes, partially offset by higher costs associated with inflation and unfavorable manufacturing performance.

Gross margin was 32.2% in the six months ended March 31, 2022 and 33.1% in the prior year period.

SG&A in the six months ended March 31, 2022 increased to $42.4 million from $38.3 million in the prior year period primarily as a result of increased travel and trade show expenditures, inflation, and investments in engineering and information technology.

SG&A as a percentage of net sales was 12.5% and 13.9% in the six months ended March 31, 2022 and 2021, respectively.

Water Management Solutions

Net sales in the six months ended March 31, 2022 increased 6.6% to $244.0 million as compared with $229.0 million in the prior year period, primarily as a result of higher pricing across most of the segment’s product lines and increased shipment volumes.

Net sales in the six months ended March 31, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.

Gross profit in the six months ended March 31, 2022 was $71.3 million as compared with $75.6 million in the prior year period.

Gross margin decreased to 29.2% in the six months ended March 31, 2022 as compared with 33.0% in the prior year period primarily as a result of higher cost of sales associated with inflation and unfavorable manufacturing performance which were partially offset by higher pricing and increased shipment volumes.

SG&A increased to $48.0 million from $41.0 million in the prior year period primarily as a result of investments in engineering, the inclusion of i2O Water, inflation, and increased travel and trade show expenditures.

SG&A as a percentage of net sales was 19.7% and 17.9% in the six months ended March 31, 2022 and 2021, respectively.

SG&A decreased to $23.9 million in the six months ended March 31, 2022 as compared with $24.1 million in the six months ended March 31, 2021 primarily as a result of lower personnel-related expenses partially offset by inflation.

Liquidity and Capital Resources

We had cash, and cash equivalents on hand of $207.3 million at December 31, 2021 and $133.8 million of additional borrowing capacity under our ABL Agreement based on December 31, 2021 data.

We had cash and cash equivalents on hand of $164.1 million at March 31, 2022 and $160.1 million of additional borrowing capacity under our ABL Agreement based on March 31, 2022 data.

Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States.

At December 31, 2021, cash and cash equivalents included $40.6 million, $24.3 million, and $2.9 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.058 per share on January 27, 2022, payable on February 21, 2022 to holders of record as of February 10, 2022, which will result in an estimated $9.2 million cash outlay.

We repurchased $20.0 million of our outstanding common stock during the three months ended December 31, 2021 and had $115.0 million remaining of our share repurchase authorization.

At March 31, 2022, cash and cash equivalents included $43.1 million, $11.3 million, and $4.6 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.058 per share on April 22, 2022, payable on or about May 20, 2022 to holders of record as of May 10, 2022, which will result in an estimated $9.2 million cash outlay.

We repurchased $20.0 million of our outstanding common stock during the six months ended March 31, 2022 and had $115.0 million remaining of our share repurchase authorization.

The ABL Agreement and 4.0% Senior Notes contain customary representations and warranties, covenants and provisions governing an event of default.

The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.

Collections from customers were higher during the three months ended December 31, 2021 as compared with the prior year period primarily as a result of net sales growth between the periods.

Inventory purchases increased during the three months ended December 31, 2021 as compared with the three months ended December 31, 2020 as a result of inflation, increased sales volume and supply change management.

Other current liabilities and other noncurrent liabilities decreased as a result of employee incentive payouts and the repayment of the CARES Act employer payroll tax deferral.

Capital expenditures were $11.0 million in the three months ended December 31, 2021 as compared with $15.6 million in the prior year period.

Capital expenditures decreased as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period.

Collections from customers were higher during the six months ended March 31, 2022 as compared with the prior year period primarily as a result of net sales growth between the periods.

Inventory purchases increased during the six months ended March 31, 2022 as compared with the six months ended March 31, 2021 as a result of inflation, increased sales volume and supply change management.

Other current liabilities and other noncurrent liabilities decreased as a result of employee incentive payouts, income tax payments, the repayment of the CARES Act employer payroll tax deferral and the payment of customer rebates.

Capital expenditures were $26.0 million in the six months ended March 31, 2022 as compared with $31.1 million in the prior year period.

Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period.

For fiscal year 2022, we have provided guidance that our capital expenditures are expected to be between $70.0 million and $75.0 million.

We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through December 31, 2022.

We believe that additional borrowings through various financing alternatives remain available if required.

financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues in the future.

The future effects of the pandemic cannot be predicted with certainty and may increase our borrowing costs and other costs of capital or otherwise adversely affect our financial condition and liquidity, and we cannot guarantee that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues in the future.

ABL Agreement

At December 31, 2021, the ABL Agreement consisted of a $175.0 million revolving credit facility which includes up to $25.0 million through swing line loans and may have up to $60.0 million of letters of credit.

At March 31, 2022, the ABL Agreement consisted of a $175.0 million revolving credit facility which includes up to $25.0 million of swing line loans and may have up to $60.0 million of letters of credit.

The ABL Agreement permits us to increase the size of the credit facility by an additional $150.0 million in certain circumstances subject to adequate borrowing base availability.

Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR, plus an applicable margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus an applicable margin ranging from 100 to 125 basis points.

At December 31, 2021, the applicable rate was LIBOR plus 200 basis points.

At March 31, 2022, the applicable margin for LIBOR was 200 basis points and for base rate loans was 100 basis points.

The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances.

The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventories or (ii) 85% of the net orderly liquidation value of eligible inventories, less certain reserves.

Prepayments can be made at any time with no penalty.

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Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million or 10% of the Loan Cap as defined in the ABL Agreement.

Excess availability based on December 31, 2021 data was $133.8 million, as reduced by $15.0 million of outstanding letters of credit and $1.4 million of accrued fees and expenses.

Excess availability based on March 31, 2022 data was $160.1 million, as reduced by $14.7 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.

4.0% Senior Unsecured Notes

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature in December 2029 and bear interest at 4.0%, paid semi-annually in June and December.

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December.

We capitalized $5.5 million of financing costs, which are being amortized over the term of the 4.0% Senior Notes using the effective interest method.

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subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL Agreement.

Based on quoted market prices, the outstanding 4.0% Senior Notes had a fair value of $456.9 million at December 31, 2021.

Based on quoted market prices the outstanding 4.0% Senior Notes had a fair value of $426.0 million at March 31, 2022.

An indenture governing the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens.

There are no financial maintenance covenants associated with the Indenture.

We believe we were in compliance with these covenants at December 31, 2021.

We may redeem some or all of the 4.0% Senior Notes at any time or from time to time prior to June 15, 2024 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 2024 at specified redemption prices (as set forth in the Indenture).

Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time or from time to time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture).

Upon a change in control (as defined in the Indenture), we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.

We believe we were in compliance with these covenants at March 31, 2022.

As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices.

Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices.

Upon a change in control, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.

5.5% Senior Unsecured Notes

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Moody’s Standard & Poor’s

December 31, September 30, December 31, September 30,

March 31, September 30, March 31, September 30,

2022 2021 2022 2021

3 unchanged sentences

Outlook Stable Stable Stable Stable

Material Cash Requirements

We enter into a variety of contractual obligations as part of our normal operations in addition to capital expenditures.

As of March 31, 2022, we have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include cash interest payments of $18.9 million in 2022 and $18.0 million annually thereafter through 2029, (ii) cash obligations of $35.7 million for operating leases through 2033 and $2.2 million for finance leases through 2026, and (iii) purchase obligations for raw materials and other parts of approximately $148.2 million which we expect to incur during the next 12 months.

We expect to fund these cash requirements from cash on hand and cash generated from operations.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In addition, at December 31, 2021 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

In addition, at March 31, 2022 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

Therefore, we were not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.

We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations.

At December 31, 2021, we had $15.0 million of letters of credit and $32.5 million of surety bonds outstanding.

At March 31, 2022, we had $14.7 million of letters of credit and $34.0 million of surety bonds outstanding.

Our business is seasonal as a result of the impact of cold weather conditions.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis