Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 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; 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; 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 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 on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.
Overview
Business
We estimate approximately 55-60% of our 2021 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 30-35% were related to residential construction activity and less than 10% were related to natural gas utilities spending.
We expect the operating environment during fiscal year 2022 to be very challenging as a result of the uncertainty around the depth and duration of the pandemic which has accelerated and may continue to accelerate, inflation, labor availability and global supply chain disruptions. We anticipate healthy demand in the municipal repair and replacement market due to favorable budgets, especially at larger municipalities. While demand from the new residential construction end market has been at healthy levels during the first half of calendar 2022, especially for lot and land development activity, we anticipate that activity levels will slow for the rest of the year based on higher interest rates leading to a decrease in demand for new residential housing. In July 2022, Blue Chip Economic Indicators forecasted housing growth of 0.9% for calendar 2022 as compared with the prior year.
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. We expect to continue to incur such costs that may be significant as we continue to respond to the pandemic. All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced due to the pandemic. The last such closure was in August 2020. The pandemic also
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caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist in the near term and may worsen until the pandemic abates.
We announced a new management structure effective October 1, 2021. The new structure is designed to increase revenue growth, drive operational excellence, accelerate new product development and enhance profitability. We anticipate the reorganization will strengthen the alignment of products, solutions and services with customer needs, accelerate new product introductions and improve product life cycle management. The two newly named business units and reportable segments are Water Flow Solutions and Water Management Solutions.
Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Flow Solutions represented 56% of our fiscal 2021 net sales. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Water Management Solutions represented 44% of our fiscal 2021 net sales.
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Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Three months ended June 30, 2022
Water Flow Solutions Water Management Solutions Corporate Total
(in millions)
Net sales $ 195.9 $ 137.3 $ — $ 333.2
Gross profit 60.8 37.5 — $ 98.3
Operating expenses:
Selling, general and administrative
22.7 25.5 12.6 60.8
Strategic reorganization and other charges — — 0.6 0.6
Total operating expenses 22.7 25.5 13.2 61.4
Operating income (loss) $ 38.1 $ 12.0 $ (13.2) 36.9
Non-operating expenses:
Pension benefit other than service (0.9)
Interest expense, net 4.2
Income before income taxes 33.6
Income tax expense 7.1
Net income $ 26.5
Three months ended June 30, 2021
Water Flow Solutions Water Management Solutions Corporate Total
(in millions)
Net sales $ 177.0 $ 133.5 $ — $ 310.5
Gross profit 61.2 44.2 — $ 105.4
Operating expenses:
Selling, general and administrative
21.0 22.9 14.9 58.8
Strategic reorganization and other charges — 0.2 3.7 3.9
Total operating expenses 21.0 23.1 18.6 62.7
Operating income (loss)
$ 40.2 $ 21.1 $ (18.6) 42.7
Non-operating expenses:
Loss on early extinguishment of debt 16.7
Pension benefit other than service (0.8)
Interest expense, net 6.8
Income before income taxes 20.0
Income tax expense 5.6
Net income $ 14.4
Consolidated Analysis
Net sales in the three months ended June 30, 2022 increased $22.7 million or 7.3% to $333.2 million as compared with $310.5 million in the prior period primarily as a result of higher pricing across most of our product lines, which was partially offset by lower shipment volumes.
Gross profit in the three months ended June 30, 2022 decreased $7.1 million or 6.7% to $98.3 million from $105.4 million in the prior year period, primarily as a result of unfavorable manufacturing performance, higher costs associated with inflation, lower shipment volumes on certain products, and an increase in our warranty obligations which were partially offset by higher pricing across most of our product lines. Gross margin was 29.5% in the three months ended June 30, 2022 as compared with 33.9% in the prior year period.
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Selling, general and administrative expenses (“SG&A”) in the three months ended June 30, 2022 increased $2.0 million to $60.8 million from $58.8 million in the prior year period primarily as a result of inflation and travel and trade show expenditures, partially offset by foreign exchange gains. SG&A as a percentage of net sales was 18.2% and 18.9% for the three months ended June 30, 2022 and June 30, 2021, respectively.
Strategic reorganization and other charges in the three months ended June 30, 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 June 30, 2021 were $3.9 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada and acquisition transaction costs.
Interest expense, net declined $2.6 million in the three months ended June 30, 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 in May, 2021. The components of net interest expense are provided below.
Three months ended
June 30,
2022 2021
(in millions)
5.5% Senior Notes $ — $ 5.2
4.0% Senior Notes 4.5 1.7
Deferred financing costs amortization 0.2 0.3
ABL Agreement 0.3 0.2
Capitalized interest (0.7) (0.6)
Other interest cost — 0.1
Total interest expense 4.3 6.9
Interest income (0.1) (0.1)
Interest expense, net $ 4.2 $ 6.8
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
Three months ended
June 30,
2022 2021
U.S. federal statutory income tax rate 21.0 % 21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit 3.3 4.2
Tax credits (3.0) (1.7)
Global Intangible Low-taxed Income 1.1 0.5
Foreign income tax rate differential (1.7) (0.4)
Nondeductible compensation 0.9 0.6
Basis difference in foreign investment (0.1) 1.2
Other (0.4) 2.6
Effective income tax rate 21.1 % 28.0 %
Segment Analysis
Water Flow Solutions
Net sales in the three months ended June 30, 2022 increased $18.9 million or 10.7% to $195.9 million as compared with $177.0 million in the prior year period primarily as a result of higher pricing across most of the segment’s product lines partially offset by lower shipment volumes.
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Gross profit in the three months ended June 30, 2022 decreased $0.4 million or 0.7% to $60.8 million from $61.2 million in the prior year period primarily as a result of unfavorable manufacturing performance, and higher costs associated with inflation which were partially offset by higher pricing. Gross margin was 31.0% in the three months ended June 30, 2022 and 34.6% in the prior year period.
SG&A in the three months ended June 30, 2022 increased $1.7 million to $22.7 million from $21.0 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 11.6% and 11.9% in the three months ended June 30, 2022 and 2021, respectively.
Water Management Solutions
Net sales in the three months ended June 30, 2022 increased $3.8 million or 2.8% to $137.3 million as compared with $133.5 million in the prior year period, primarily as a result of higher pricing across most of the segment’s product lines and the acquisition of i2O Water partially offset by decreased shipment volumes.
Gross profit in the three months ended June 30, 2022 was $37.5 million as compared with $44.2 million in the prior year period. Gross margin declined to 27.3% in the three months ended June 30, 2022 as compared with 33.1% in the prior year period primarily as a result of unfavorable manufacturing performance, higher cost of sales associated with inflation and lower shipment volumes which were only partially offset by higher pricing. Additionally, we recorded a $4.5 million warranty charge.
SG&A increased $2.6 million to $25.5 million from $22.9 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 partially offset by foreign exchange gains. SG&A as a percentage of net sales was 18.6% and 17.2% in the three months ended June 30, 2022 and 2021, respectively.
Corporate
SG&A decreased $2.3 million to $12.6 million in the three months ended June 30, 2022 as compared with $14.9 million in the three months ended June 30, 2021 primarily as a result of decreased personnel-related expenses and outside services.
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Nine Months Ended June 30, 2022 Compared to Nine Months Ended June 30, 2021
Nine months ended June 30, 2022
Water Flow Solutions Water Management Solutions Corporate Total
(in millions)
Net sales $ 534.7 $ 381.3 $ — $ 916.0
Gross profit 169.9 108.8 — $ 278.7
Operating expenses:
Selling, general and administrative
65.1 73.5 36.5 175.1
Strategic reorganization and other charges — 0.2 3.4 3.6
Total operating expenses 65.1 73.7 39.9 178.7
Operating income (loss) $ 104.8 $ 35.1 $ (39.9) 100.0
Non-operating expenses:
Pension benefit other than service (2.9)
Interest expense, net 13.0
Income before income taxes 89.9
Income tax expense 20.4
Net income $ 69.5
Nine months ended June 30, 2021
Water Flow Solutions Water Management Solutions Corporate Total
(in millions)
Net sales $ 452.9 $ 362.5 $ — $ 815.4
Gross profit 152.4 119.8 — $ 272.2
Operating expenses:
Selling, general and administrative
59.3 63.9 39.0 162.2
Strategic reorganization and other charges (credits) 0.1 (0.5) 6.5 6.1
Total operating expenses 59.4 63.4 45.5 168.3
Operating income (loss)
$ 93.0 $ 56.4 $ (45.5) 103.9
Non-operating expenses:
Loss on early extinguishment of debt 16.7
Pension benefit other than service (2.4)
Interest expense, net 19.0
Income before income taxes 70.6
Income tax expense 18.6
Net income $ 52.0
Consolidated Analysis
Net sales in the nine months ended June 30, 2022 increased $100.6 million or 12.3% to $916.0 million as compared with $815.4 million in the prior period primarily as a result of higher pricing across most of our product lines and increased shipment volumes. Net sales in the nine months ended June 30, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.
Gross profit in the nine months ended June 30, 2022 increased $6.5 million to $278.7 million from $272.2 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, supply chain disruptions, and an increase in our warranty obligations. Gross margin was 30.4% in the nine months ended June 30, 2022 as compared with 33.4% in the prior year period.
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SG&A in the nine months ended June 30, 2022 increased $12.9 million to $175.1 million from $162.2 million in the prior year period primarily as a result of higher travel and trade show expenditures, higher costs associated with inflation, investments in engineering and information technology and the inclusion of i2O Water, partially offset by foreign exchange gains. SG&A as a percentage of net sales was 19.1% and 19.9% for the nine months ended June 30, 2022 and 2021, respectively.
Strategic reorganization and other charges in the nine months ended June 30, 2022 were $3.6 million which primarily consisted of expenses associated with the Albertville tragedy, and our ongoing restructuring activities. Strategic reorganization and other charges in the nine months ended June 30, 2021 were $6.1 million, which primarily related to the Albertville tragedy, and termination benefits associated with our closures 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 of a previously owned property.
Interest expense, net declined $6.0 million in the nine months ended June 30, 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.
Nine months ended
June 30,
2022 2021
(in millions)
5.5% Senior Notes $ — $ 17.6
4.0% Senior Notes 13.5 1.7
Deferred financing costs amortization 0.7 0.8
ABL Agreement 0.7 0.7
Capitalized interest (1.9) (1.8)
Other interest cost 0.3 0.3
Total interest expense 13.3 19.3
Interest income (0.3) (0.3)
Interest expense, net $ 13.0 $ 19.0
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
Nine months ended
June 30,
2022 2021
U.S. federal statutory income tax rate 21.0 % 21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit 3.3 4.2
Excess tax benefits related to stock-based compensation (0.3) (0.3)
Tax credits (3.0) (1.7)
Global Intangible Low-taxed Income 1.1 0.5
Foreign income tax rate differential (1.7) (0.4)
Nondeductible compensation 0.9 0.6
Basis difference in foreign investment (0.1) 1.2
Valuation allowances 0.3 0.7
Other 1.2 0.5
Effective income tax rate 22.7 % 26.3 %
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Segment Analysis
Water Flow Solutions
Net sales in the nine months ended June 30, 2022 increased $81.8 million or 18.1% to $534.7 million as compared with $452.9 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.
Gross profit in the nine months ended June 30, 2022 increased $17.5 million or 11.5% to $169.9 million from $152.4 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 31.8% in the nine months ended June 30, 2022 and 33.6% in the prior year period.
SG&A in the nine months ended June 30, 2022 increased $5.8 million to $65.1 million from $59.3 million in the prior year period primarily as a result of increased travel and trade show expenditures, higher costs associated with inflation, and investments in engineering and information technology. SG&A as a percentage of net sales was 12.2% and 13.1% in the nine months ended June 30, 2022 and 2021, respectively.
Water Management Solutions
Net sales in the nine months ended June 30, 2022 increased $18.8 million or 5.2% to $381.3 million as compared with $362.5 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 nine months ended June 30, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.
Gross profit in the nine months ended June 30, 2022 decreased $11.0 million or 9.2% to $108.8 million as compared with $119.8 million in the prior year period. Gross margin decreased to 28.5% in the nine months ended June 30, 2022 as compared with 33.0% in the prior year period primarily as a result of higher cost of sales associated with inflation, unfavorable manufacturing performance and a $4.5 million warranty charge which were partially offset by higher pricing and increased shipment volumes.
SG&A increased $9.6 million to $73.5 million from $63.9 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, partially offset by foreign exchange gains. SG&A as a percentage of net sales was 19.3% and 17.6% in the nine months ended June 30, 2022 and 2021, respectively.
Corporate
SG&A decreased $2.5 million to $36.5 million in the nine months ended June 30, 2022 as compared with $39.0 million in the nine months ended June 30, 2021 primarily as a result of lower personnel-related expenses partially offset by higher costs associated with inflation.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $154.9 million at June 30, 2022 and $160.7 million of additional borrowing capacity under our ABL Agreement based on June 30, 2022 data. Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States. At June 30, 2022, cash and cash equivalents included $42.1 million, $13.7 million, and $6.3 million in Israel, Canada, and China, respectively.
We declared a quarterly dividend of $0.058 per share on July 27, 2022, payable on or about August 22, 2022 to holders of record as of August 10, 2022, which will result in an estimated $9.1 million cash outlay.
We repurchased $25.0 million of our outstanding common stock during the nine months ended June 30, 2022 and had $110.0 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.
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Collections from customers were higher during the nine months ended June 30, 2022 as compared with the prior year period primarily as a result of net sales growth between the periods. Inventory purchases increased during the nine months ended June 30, 2022 as compared with the nine months ended June 30, 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 $36.7 million in the nine months ended June 30, 2022 as compared with $46.1 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 $50.0 million and $55.0 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 June 30, 2023.
We believe that additional borrowings through various financing alternatives remain available if required. 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 June 30, 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 June 30, 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 inventory, less certain reserves. Prepayments can be made at any time with no penalty.
Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventories, accounts receivable, certain cash and other related items.
The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. 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 June 30, 2022 data was $160.7 million, as reduced by $14.1 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 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. Proceeds from the 4.0% Senior Notes, along with cash on hand were used to redeem previously existing 5.5% Senior Notes. Substantially all of our U.S. 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 $392.8 million at June 30, 2022.
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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 June 30, 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
On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Notes, which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Senior Notes effective June 17, 2021 and settled with proceeds from the issuance of the 4.0% Senior Notes and cash on hand. As a result, we incurred $16.7 million in loss on extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs associated with the retirement of the 5.5% Senior Notes.
Our corporate credit rating and the credit rating for our debt are presented below. These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agencies.
Moody’s Standard & Poor’s
June 30, September 30, June 30, September 30,
2022 2021 2022 2021
Corporate credit rating Ba1 Ba1 BB BB
ABL Agreement Not rated Not rated Not rated Not rated
4.0% Senior Notes Ba1 Ba1 BB BB
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 June 30, 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 $33.5 million for operating leases through 2033 and $1.9 million for finance leases through 2026, and (iii) purchase obligations for raw materials and other parts of approximately $163.1 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 June 30, 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 June 30, 2022, we had $14.1 million of letters of credit and $33.1 million of surety bonds outstanding.
Seasonality
Our business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income historically have been lowest in the three month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
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