What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-03 · 151 added, 72 removed, 139 unchanged (62% of the section changed)

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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.

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, expectations, commitments, trend descriptions and the ability to capitalize on trends, value creation, Board and committee composition plans, long-term strategies and the execution or acceleration thereof, operational improvements, the benefits of capital investments, financial or operating performance including improving sales growth and driving increased margins, capital allocation and growth strategy plans, the Company’s product portfolio positioning and the demand for the Company’s products.

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 continued impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including the collection of receivables);

logistical challenges and supply chain disruptions, geopol itical 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, Illino is, plant closures, an d our reorganization and related strategic realignment activities;

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, without limitation, 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, 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;

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the impact of wage, commodity and materials price inflation;

foreign exchange rate fluctuations;

the impact of warranty claims;

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Securities and Exchange Commission.

Approximately 60% to 65% of our 2022 net sales were associated with repair and replacement directly related to municipal water infrastructure spending, approximately 25% to 30% 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 2023 to be very challenging as a result of the ongoing inflationary pressures, labor challenges and potential recession.

Approximately 60% to 65% of our 2022 net sales were associated with repair and replacement directly related to municipal water infrastructure spending, approximately 25% to 30% of net sales were related to residential construction activity and less than 10% of net sales were related to natural gas utilities spending.

We expect the operating environment during fiscal year 2023 to be very challenging as a result of the ongoing inflationary pressures, labor challenges and the slowdown in residential construction.

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 was at healthy levels during the fiscal year 2022, especially for lot and land development activity, we anticipate that activity levels will slow in 2023 based on higher interest rates leading to a decrease in demand for new residential housing.

In January 2023, Blue Chip Economic Indicators for ecasted a 17.3% dec rease in housing starts for the calendar year 2023 as compared to the calendar year 2022.

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

We expect to continue to incur such costs that may be significant as we continue to respond to the pandemic.

In addition to the pandemic, the war in Ukraine has caused supply chain disruptions that have resulted in higher costs to manufacture our products and in our capital expenditures.

We expect these conditions to persist in the near term.

While demand from the new residential construction end market was at healthy levels during our fiscal year 2022, especially for lot and land development activity, we anticipate that activity levels will slow in 2023 based on higher interest rates leading to a decrease in demand for new residential housing.

In April 2023, Blue Chip Economic Indicators forecasted a 17.4% decrease in housing starts for the calendar year 2023 as compared to the calendar year 2022.

We continue to experience inflation and supply chain disruptions, including from the war in Ukraine and the pandemic, which have impacted the availability of some raw materials for our manufacturing facilities and our suppliers.

In addition, we continue to incur additional costs at our facilities associated with unfavorable manufacturing performance and labor which have contributed to higher costs to manufacture our products and in our capital expenditures.

We expect challenging conditions to persist during our fiscal year 2023.

We will continue to closely monitor the impact of the war in Ukraine, COVID-19 and the challenging market conditions discussed above and the related uncertainties and risks on our business.

We have two reportable segments:

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’ portfolio includes iron gate valves, specialty valves and service brass products.

Water Flow Solutions represented 57% of our fiscal 2022 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’ portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products and services.

Water Management Solutions represented 43% of our fiscal 2022 net sales.

In January 2023, the International Association of Machinists and Aerospace Workers (“IAM”) in our Chattanooga, Tennessee facility, which consists of approximately 100 members, went on strike for five regularly scheduled workdays.

The effect of this event was immaterial to our operations.

A new collective bargaining agreement was successfully negotiated and signed with the IAM in our Chattanooga, Tennessee facility in January, 2023.

The agreement expires on January 14, 2027.

Results of Operations

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

Three months ended December 31, 2022

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Three months ended March 31, 2023

Water Flow Solutions Water Management Solutions Corporate Total

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22.0 28.7 13.5 64.2

Strategic reorganization and other benefits — — (3.7) (3.7)

Strategic reorganization and other charges — 0.2 0.5 0.7

Total operating expenses 22.0 28.9 14.0 64.9

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Net income $ 21.3

Three months ended December 31, 2021

Three months ended March 31, 2022

Water Flow Solutions Water Management Solutions Corporate Total

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Consolidated Analysis

Net sales in the three months ended December 31, 2022 increased $42.5 million or 15.6% to $314.8 million as compared with $272.3 million in the prior year period primarily as a result of higher pricing across most of our product lines in both segments, which was partially offset by lower volumes on certain products.

Gross profit in the three months ended December 31, 2022 increased $5.6 million or 6.4% to $93.2 million from $87.6 million in the prior year period, primarily as a result of higher pricing across most of our product lines, which was partially offset by higher cost of sales and lower volumes on certain products.

The higher cost of sales was primarily a result of unfavorable manufacturing performance and inflation.

Unfavorable manufacturing performance was a result of outsourcing,

machine downtime, supply chain disruptions and labor productivity mainly in our foundry operations.

Gross margin was 29.6% in the three months ended December 31, 2022 as compared with 32.2% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 2022 increased $6.6 million or 11.7% to $62.9 million from $56.3 million in the prior year period primarily due to higher personnel costs and sales commissions, investments in technology, inflation and increased travel and trade show expenditures, partially offset by foreign exchange gains.

SG&A as a percentage of net sales was 20.0% and 20.7% for the three months ended December 31, 2022 and December 31, 2021, respectively.

Strategic reorganization and other charges in the three months ended December 31, 2022 was a benefit of $3.7 million which primarily consisted of a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility, which was partially offset by certain transaction-related expenses.

Strategic reorganization and other charges for 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 closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada.

Net interest expense in the three months ended December 31, 2022 declined $0.6 million or 14.0% to $3.7 million as compared with $4.3 million in the prior year period primarily due to higher interest income received as a result of rising interest rates.

Net sales in the three months ended March 31, 2023 increased $22.4 million or 7.2% to $332.9 million as compared with $310.5 million in the prior year period primarily as a result of higher pricing across most of our product lines and increased volumes in our Water Management Solutions segment, which was partially offset by lower volumes in certain products in the Water Flow Solutions segment.

Gross profit in the three months ended March 31, 2023 increased $5.0 million or 5.4% to $97.8 million from $92.8 million in the prior year period primarily as a result of higher pricing across most of our product lines, which was partially offset by higher cost of sales and lower volumes in certain products.

The higher cost of sales was primarily a result of inflation and unfavorable manufacturing performance due to outsourcing costs, product mix, supply chain disruptions and machine downtime mainly in our foundry operations.

Gross margin was 29.4% in the three months ended March 31, 2023 as compared with 29.9% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended March 31, 2023 increased $6.2 million or 10.7% to $64.2 million from $58.0 million in the prior year period primarily due to inflation, deferred compensation expense, consulting and legal fees and increased travel and trade show expenditures.

SG&A as a percentage of net sales was 19.3% and 18.7% for the three months ended March 31, 2023 and March 31, 2022, respectively.

Strategic reorganization and other charges in the three months ended March 31, 2023 was $0.7 million which primarily consisted of severance and certain transaction-related expenses.

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

Net interest expense in the three months ended March 31, 2023 declined $0.6 million or 13.3% to $3.9 million as compared with $4.5 million in the prior year period primarily due to higher interest income as a result of higher interest rates.

The components of net interest expense are provided below.

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State income taxes, net of federal benefit 3.4 3.6

Tax credits (1.5) (1.3)

Global Intangible Low-taxed Income 0.8 0.8

Foreign income tax rate differential (1.6) (1.4)

Nondeductible compensation 0.6 —

Valuation allowances — (0.3)

Other 1.2 0.7

Effective income tax rate 23.9 % 23.1 %

Segment Analysis

Water Flow Solutions

Net sales in the three months ended March 31, 2023 decreased $26.7 million or 14.5% to $157.2 million as compared with $183.9 million in the prior year period primarily as a result of lower volumes for iron gate and service brass products partially offset by higher pricing across most of the segment’s product lines.

Gross profit in the three months ended March 31, 2023 decreased $19.8 million or 34.7% to $37.2 million from $57.0 million in the prior year period primarily as a result of lower volumes and higher cost of sales associated with unfavorable manufacturing performance and inflation, which were partially offset by higher pricing.

Gross margin was 23.7% in the three months ended March 31, 2023 and 31.0% in the prior year period.

SG&A in the three months ended March 31, 2023 increased $0.4 million to $22.0 million from $21.6 million in the prior year period primarily as a result of inflation.

SG&A as a percentage of net sales was 14.0% and 11.7% in the three months ended March 31, 2023 and 2022, respectively.

Water Management Solutions

Net sales in the three months ended March 31, 2023 increased $49.1 million or 38.8% to $175.7 million as compared with $126.6 million in the prior year period primarily as a result of higher volumes, mainly in hydrant and water application products, and increased pricing across most of the segment’s product lines.

Gross profit in the three months ended March 31, 2023 was $60.6 million as compared with $35.8 million in the prior year period.

Gross margin increased to 34.5% in the three months ended March 31, 2023 as compared with 28.3% in the prior year period primarily as a result of higher pricing and increased volumes, which were partially offset by higher cost of sales associated with inflation and unfavorable manufacturing performance.

SG&A in the three months ended March 31, 2023 increased $4.7 million to $28.7 million from $24.0 million in the prior year period primarily due to higher personnel costs, professional fees and investments in engineering related to new product development.

SG&A as a percentage of net sales was 16.3% and 19.0% in the three months ended March 31, 2023 and 2022, respectively.

SG&A increased $1.1 million to $13.5 million in the three months ended March 31, 2023 as compared with $12.4 million in the three months ended March 31, 2022 primarily as a result of deferred compensation expense and inflation.

Six Months Ended March 31, 2023 Compared to Six Months Ended March 31, 2022

Six months ended March 31, 2023

Water Flow Solutions Water Management Solutions Corporate Total

(in millions)

Net sales $ 322.8 $ 324.9 $ — $ 647.7

Gross profit 83.8 107.2 — $ 191.0

Operating expenses:

Selling, general and administrative

44.4 55.7 27.0 127.1

Strategic reorganization and other charges (benefits) — 0.2 (3.2) (3.0)

Total operating expenses 44.4 55.9 23.8 124.1

Operating income (loss) $ 39.4 $ 51.3 $ (23.8) 66.9

Non-operating expenses:

Pension expense other than service 1.9

Interest expense, net 7.6

Income before income taxes 57.4

Income tax expense 13.6

Net income $ 43.8

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

Consolidated Analysis

Net sales in the six months ended March 31, 2023 increased $64.9 million or 11.1% to $647.7 million as compared with $582.8 million in the prior period primarily as a result of higher pricing across most of our product lines partially offset by lower volumes in certain products in the Water Flow Solutions segment.

Gross profit in the six months ended March 31, 2023 increased $10.6 million or 5.9% to $191.0 million from $180.4 million in the prior year period primarily as a result of higher pricing, which was partially offset by unfavorable manufacturing performance, including outsourcing costs, supply chain disruptions, inflation and lower volumes in certain products.

Gross margin was 29.5% in the six months ended March 31, 2023 as compared with 31.0% in the prior year period.

SG&A in the six months ended March 31, 2023 increased $12.8 million or 11.2% to $127.1 million from $114.3 million in the prior year period primarily as a result of professional fees, inflation, increased travel and entertainment expenses and personnel expenses.

SG&A as a percentage of net sales was 19.6% in each of the six months ended March 31, 2023 and 2022.

Strategic reorganization and other charges in the six months ended March 31, 2023 was a benefit of $3.0 million which primarily related to a gain from the sale of our Aurora, Illinois facility partially offset by transaction expenses.

Strategic reorganization and other charges in the six months ended March 31, 2022 was $3.0 million, which primarily related to the Albertville tragedy and restructuring activities.

Net interest expense in the six months ended March 31, 2023 decreased $1.2 million or 13.6% to $7.6 million as compared with the prior year period of $8.8 million primarily as a result of increased interest income associated with higher interest rates.

The components of net interest expense are provided below.

Six months ended

(in millions)

4.0% Senior Notes $ 9.0 $ 9.0

Deferred financing costs amortization 0.6 0.5

ABL Agreement 0.4 0.4

Capitalized interest (1.5) (1.2)

Other interest cost 0.3 0.3

Total interest expense 8.8 9.0

Interest income (1.2) (0.2)

Interest expense, net $ 7.6 $ 8.8

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 3.4 3.6

Excess tax benefits related to stock-based compensation 0.3 (0.2)

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Water Flow Solutions

Net sales in the three months ended December 31, 2022 increased $10.7 million or 6.9% to $165.6 million as compared with $154.9 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 volumes.

Gross profit in the three months ended December 31, 2022 decreased $5.5 million or 10.6% to $46.6 million from $52.1 million in the prior year period primarily as a result of lower volumes and higher cost of sales associated with unfavorable manufacturing performance, and inflation which were partially offset by higher pricing.

Gross margin was 28.1% in the three months ended December 31, 2022 and 33.6% in the prior year period.

SG&A in the three months ended December 31, 2022 increased $1.6 million to $22.4 million from $20.8 million in the prior year period primarily due to higher personnel costs and sales commissions, investments in technology , inflation and increased travel and trade show expenditures .

SG&A as a percentage of net sales was 13.5% and 13.4% in the three months ended December 31, 2022 and 2021, respectively.

Net sales in the six months ended March 31, 2023 decreased $16.0 million or 4.7% to $322.8 million as compared with $338.8 million in the prior year period primarily as a result of lower sales volume across several of the segment’s product lines partially offset by increased pricing across most product lines.

Gross profit in the six months ended March 31, 2023 decreased $25.3 million or 23.2% to $83.8 million from $109.1 million in the prior year period primarily as a result of lower volumes and higher cost of sales associated with unfavorable manufacturing performance and inflation which were partially offset by higher pricing.

Gross margin was 26.0% in the six months ended March 31, 2023 and 32.2% in the prior year period.

SG&A in the six months ended March 31, 2023 increased $2.0 million or 4.7% to $44.4 million from $42.4 million in the prior year period primarily as a result of legal and consulting fees and higher costs associated with inflation.

SG&A as a percentage of net sales was 13.8% and 12.5% in the six months ended March 31, 2023 and 2022, respectively.

Water Management Solutions

Net sales in the three months ended December 31, 2022 increased $31.8 million or 27.1% to $149.2 million as compared with $117.4 million in the prior year period, primarily as a result of higher pricing across most of the segment’s product lines as well as increased volumes.

Gross profit in the three months ended December 31, 2022 was $46.6 million as compared with $35.5 million in the prior year period.

Gross margin increased to 31.2% in the three months ended December 31, 2022 as compared with 30.2% in the prior year period primarily as a result of higher pricing and increased volumes, partially offset by unfavorable manufacturing performance and inflation.

SG&A in the three months ended December 31, 2022 increased $3.0 million to $27.0 million from $24.0 million in the prior year period primarily due to higher personnel costs and sales commissions, and outside services, partially offset by foreign exchange gains.

SG&A as a percentage of net sales was 18.1% and 20.4% in the three months ended December 31, 2022 and 2021, respectively.

SG&A increased $2.0 million to $13.5 million in the three months ended December 31, 2022 as compared with $11.5 million in the three months ended December 31, 2021 primarily as a result of increased personnel costs and inflation.

Net sales in the six months ended March 31, 2023 increased $80.9 million or 33.2% to $324.9 million as compared with $244.0 million in the prior year period primarily as a result of higher pricing across most of the segment’s product lines and increased volumes.

Gross profit in the six months ended March 31, 2023 increased $35.9 million or 50.4% to $107.2 million as compared with $71.3 million in the prior year period.

Gross margin increased to 33.0% in the six months ended March 31, 2023 as compared with 29.2% in the prior year period primarily as a result of higher pricing and higher volumes partially offset by unfavorable manufacturing performance and inflation.

SG&A increased $7.7 million or 16.0% to $55.7 million from $48.0 million in the prior year period primarily as a result of legal and consulting fees, personnel expenses, inflation, investments in engineering and increased travel and trade show expenditures.

SG&A as a percentage of net sales was 17.1% and 19.7% in the six months ended March 31, 2023 and 2022, respectively.

SG&A increased $3.1 million or 13.0% to $27.0 million in the six months ended March 31, 2023 as compared with $23.9 million in the six months ended March 31, 2022 primarily as a result of higher personnel expenses, inflation and consulting fees.

Liquidity and Capital Resources

We had cash and cash equivalents on hand of $125.6 million at December 31, 2022 and $162.4 million of additional borrowing capacity under our ABL Agreement based on December 31, 2022 data.

We had cash and cash equivalents on hand of $89.2 million at March 31, 2023 and $162.5 million of additional borrowing capacity under our ABL based on March 31, 2023 data.

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

At December 31, 2022, cash and cash equivalents inc luded $48.3 million, $7.2 million, and $10.7 million in Is rael, Canada, and China, respectively.

We declared a quarterly dividend of $0.061 per share on January 25, 2023, payable on or about February 21, 2023 to holders of record as of February 10, 2023, which will result in an estimated $9.5 million cash outlay.

We did not repurchase any of our outstanding common stock during the three months ended December 31, 2022 and had $100.0 million remaining of our share repurchase authorization.

At March 31, 2023, cash and cash equivalents included $46.4 million, $1.5 million, and $9.4 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.061 per share on April 25, 2023, payable on or about May 22, 2023 to holders of record as of May 10, 2023, which will result in an estimated $9.5 million cash outlay.

We did not repurchase any of our outstanding common stock during the six months ended March 31, 2023 and had $100.0 million remaining of our share repurchase authorization.

The ABL 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.

Net cash used in operating activities was $6.5 million d uring the three months ended December 31, 2022 as compared with net cash provided by operating activities of $19.8 million in the prior year period.

Inventory purchases increased during the three months ended December 31, 2022 as compared with the three months ended December 31, 2021 as a result of supply chain management and inflation.

Additionally, the decline in cash as a result of operating activities during the comparable periods included:

a deferred tax increase of $4.5 million, a pension expense increase of $1.8 million, and a $1.2 million increase in inventory reserves.

Other current liabilities and other noncurrent liabilities decreased primarily as a result of the timing of payroll payments, the repayment of the CARES Act employer payroll tax deferral, interest payments, and the payment of restructuring expenses.

Capital expenditures were $9.9 million in the three months ended December 31, 2022 as compared with $11.0 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 2023, we have provided guidance that our capital expenditures are expected to be between $70.0 million and $80.0 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, 2023.

Net cash used in operating activities was $22.2 million during the six months ended March 31, 2023 as compared with net cash provided by operating activities of $0.8 million in the prior year period.

The decrease in net operating cash flow was primarily a result of higher Accounts payable turnover offset by higher collections of Receivables.

Capital expenditures were $20.5 million in the six months ended March 31, 2023 as compared with $26.0 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 2023, we have provided guidance that our capital expenditures are expected to be between $60.0 million and $70.0 m illion.

However, our ability to make these payments will depend largely on our future operating performance, which may be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

ABL Agreement

As of December 31, 2022, our ABL is provided by a consortium of banking institutions and consists of a revolving credit facility for up to $175.0 million in borrowings that expires on July 28, 2025.

Included in the ABL is the ability to borrow up to $25.0 million of swing line loans and up to $60.0 million of letters of credit.

Our ABL is provided by a syndicate of banking institutions and consists of a revolving credit facility for up to $175.0 million in borrowings that expires on July 28, 2025.

The ABL permits us to borrow up to $25.0 million of swing line loans and up to $60.0 million of letters of credit.

The ABL 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 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, plus an applicable margin range from 100 to 125 basis points.

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

As of March 31, 2023, borrowings under the ABL bore 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, plus an applicable margin range from 100 to 125 basis points.

At March 31, 2023, the applicable margin was 200 basis points for LIBOR-based loans, and 100 basis points for base rate loans.

On April 5, 2023, we amended our ABL to replace LIBOR-based loans with SOFR-based loans plus a 10 basis point adjustment, among other immaterial modifications.

The applicable margin on borrowings remained unchanged following the amendment to the ABL.

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

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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 and 10% of the Loan Cap as defined in the ABL.

Excess availability based on December 31, 2022 data wa s $162.4 million, as reduced by $12.4 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.

Excess availability based on March 31, 2023 data was $162.5 million, as reduced by $12.4 million of outstanding letters of credit and $0.1 million of accrued fees and expenses.

4.0% Senior Unsecured Notes

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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.

Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to redeem previously existing 5.5% Unsecured Senior Notes.

Substantially all of our U.S.

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

Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $395.8 million at December 31, 2022.

An indenture securing 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.

Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $407.9 million at March 31, 2023.

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, 2022.

We believe we were in compliance with these covenants at March 31, 2023.

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.

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.

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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,

2023 2022 2023 2022

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

As of December 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 $18.0 million in 2023 annually through 2029, (ii) cash obligation s of $31.4 million for operating leases through 2033 and $1.4 million for finance leases through 2026, and (iii) purchase obligations for raw materials and other parts of approximat ely $154.0 million which we expect to incur during the next 12 months.

As of March 31, 2023, 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 $18.0 million in 2023 annually through 2029, (ii) cash obligations of $32.4 million for operating leases through 2033 and $1.7 million for finance leases through 2027, and (iii) purchase obligations for raw materials and other parts of approximately $109.9 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.

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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, 2022 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

In addition, at March 31, 2023 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, 2022, we had $12.4 million of letters of credit and $32.5 million of surety bonds outstanding.

At March 31, 2023, we had $12.4 million of letters of credit and $20.1 million of surety bonds outstanding.

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

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Critical Accounting Estimates

The preparation of financial statements in accordance with accounting GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

These estimates are based upon experience and on various other assumptions we believe to be reasonable under the circumstances.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis