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, 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, inventory positions, 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, 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 and inventory positions); 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; 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, residential 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; foreign exchange rate fluctuations; 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, as applicable.
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
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 have experienced a variety of external challenges in 2023 including inflation, raw material availability and supply chain disruptions, including from the war in Ukraine and labor challenges. Additionally, due to ongoing inventory destocking by our distribution partners, lead times returning to pre-pandemic levels for most of our products and end markets adjusting to higher interest rates, especially new residential construction, we are seeing lower order rates for many products compared with the prior year. In July 2023, Blue Chip Economic Indicators forecasted an 11.6% decrease in housing starts for the calendar year 2023 as compared to the calendar year 2022. In addition to experiencing lower production volumes at many of our facilities, 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 demand conditions to persist during the balance of our fiscal year 2023. We will continue to closely monitor the challenging market conditions discussed above and the related uncertainties and risks on our business.
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We have two reportable segments: Water Flow Solutions and Water Management Solutions. 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’ 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.
Results of Operations
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Three months ended June 30, 2023
Water Flow Solutions Water Management Solutions Corporate Total
(in millions)
Net sales $ 150.1 $ 176.5 $ — $ 326.6
Gross profit $ 33.6 $ 66.5 $ — $ 100.1
Operating expenses:
Selling, general and administrative 20.9 26.5 13.2 60.6
Strategic reorganization and other charges 0.1 1.0 2.8 3.9
Total operating expenses 21.0 27.5 16.0 64.5
Operating income (loss) $ 12.6 $ 39.0 $ (16.0) 35.6
Non-operating expenses:
Pension expense other than service 0.9
Interest expense, net 3.8
Income before income taxes 30.9
Income tax expense 6.4
Net income $ 24.5
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
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Consolidated Analysis
Net sales in the three months ended June 30, 2023 decreased $6.6 million or 2.0% to $326.6 million as compared with $333.2 million in the prior year period primarily as a result of a decrease in volume in our Water Flow Solutions segment, which was partially offset by higher pricing across most of our product lines in both our Water Flow Solutions and Water Management Solutions segments as well as an increase in volume in our Water Management Solutions segment.
Gross profit in the three months ended June 30, 2023 increased $1.8 million or 1.8% to $100.1 million from $98.3 million in the prior year period primarily as a result of higher pricing across most of our product lines. This increase was partially offset by overall lower net volume, unfavorable manufacturing performance predominately in Water Flow Solutions as well as inflation. The unfavorable manufacturing performance was due to outsourcing costs, product mix, supply chain disruption and machine downtime mainly in our foundry operations. Additionally, we incurred a $4.5 million warranty accrual charge in the prior year. Gross margin was 30.6% in the three months ended June 30, 2023 as compared with 29.5% in the prior year period.
Selling, general and administrative expenses (“SG&A”) in the three months ended June 30, 2023 decreased $0.2 million or 0.3% to $60.6 million from $60.8 million in the prior year period primarily due to a decrease in personnel expense and software licensing expense, partially offset by higher inflation and foreign exchange. SG&A as a percentage of net sales was 18.6% and 18.2% for the three months ended June 30, 2023 and June 30, 2022, respectively.
Strategic reorganization and other charges in the three months ended June 30, 2023 was $3.9 million which primarily consisted of severance and certain transaction-related expenses. Strategic reorganization and other charges for the three months ended June 30, 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 June 30, 2023 declined $0.4 million or 9.5% to $3.8 million as compared with $4.2 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:
Three months ended
June 30,
2023 2022
(in millions)
4.0% Senior Notes $ 4.5 $ 4.5
Deferred financing costs amortization 0.1 0.2
ABL Agreement 0.3 0.3
Capitalized interest (0.3) (0.7)
Other interest expense 0.1 —
Total interest expense 4.7 4.3
Interest income (0.9) (0.1)
Interest expense, net $ 3.8 $ 4.2
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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,
2023 2022
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 3.2 3.3
Tax credits (3.5) (3.0)
Global Intangible Low-Taxed Income 1.1 1.1
Foreign income tax rate differential (2.2) (1.7)
Nondeductible compensation 0.9 0.9
Basis difference in foreign investment — (0.1)
Other 0.2 (0.4)
Effective income tax rate 20.7 % 21.1 %
Segment Analysis
Water Flow Solutions
Net sales in the three months ended June 30, 2023 decreased $45.8 million or 23.4% to $150.1 million as compared with $195.9 million in the prior year period primarily as a result of lower volumes for iron gate valve and service brass products partially offset by higher pricing across most product lines and volume growth in specialty valve products.
Gross profit in the three months ended June 30, 2023 decreased $27.2 million or 44.7% to $33.6 million from $60.8 million in the prior year period. This decrease was primarily a result of lower volume, unfavorable sales mix and higher cost of sales associated with unfavorable manufacturing performance, including inefficiencies and start-up costs for the new brass foundry, and inflation, which were partially offset by higher pricing. Gross margin was 22.4% in the three months ended June 30, 2023 and 31.0% in the prior year period.
SG&A in the three months ended June 30, 2023 decreased $1.8 million to $20.9 million from $22.7 million in the prior year period primarily as a result of lower personnel expenses and software licensing expense partially offset by inflation. SG&A as a percentage of net sales was 13.9% and 11.6% in the three months ended June 30, 2023 and 2022, respectively.
Water Management Solutions
Net sales in the three months ended June 30, 2023 increased $39.2 million or 28.6% to $176.5 million as compared with $137.3 million in the prior year period primarily as a result of higher pricing across most product lines and increased volumes mainly in hydrant and water management applications products.
Gross profit in the three months ended June 30, 2023 was $66.5 million as compared with $37.5 million in the prior year period. Gross margin increased to 37.7% in the three months ended June 30, 2023 as compared with 27.3% 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 unfavorable manufacturing performance, largely due to higher costs as a result of outsourcing, as well as inflation.
SG&A in the three months ended June 30, 2023 increased $1.0 million to $26.5 million from $25.5 million in the prior year period primarily due to inflation and unfavorable foreign currency fluctuation, which was partially offset by lower personnel expenses. SG&A as a percentage of net sales was 15.0% and 18.6% in the three months ended June 30, 2023 and 2022, respectively.
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Corporate
SG&A increased $0.6 million to $13.2 million in the three months ended June 30, 2023 as compared with $12.6 million in the three months ended June 30, 2022 primarily as a result of inflation and unfavorable foreign currency fluctuation partially offset by lower personnel expenses.
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Nine Months Ended June 30, 2023 Compared to Nine Months Ended June 30, 2022
Nine months ended June 30, 2023
Water Flow Solutions Water Management Solutions Corporate Total
(in millions)
Net sales $ 472.9 $ 501.4 $ — $ 974.3
Gross profit 117.4 173.7 — $ 291.1
Operating expenses:
Selling, general and administrative 65.3 82.2 40.2 187.7
Strategic reorganization and other charges (benefits) 0.1 1.2 (0.4) 0.9
Total operating expenses 65.4 83.4 39.8 188.6
Operating income (loss) $ 52.0 $ 90.3 $ (39.8) 102.5
Non-operating expenses:
Pension expense other than service 2.8
Interest expense, net 11.4
Income before income taxes 88.3
Income tax expense 20.0
Net income $ 68.3
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
Consolidated Analysis
Net sales in the nine months ended June 30, 2023 increased $58.3 million or 6.4% to $974.3 million as compared with $916.0 million in the prior period as a result of higher pricing across most product lines and an increase in Water Management Solutions’ volume, partially offset by a decrease in volumes in our Water Flow Solutions segment.
Gross profit in the nine months ended June 30, 2023 increased $12.4 million or 4.4% to $291.1 million from $278.7 million in the prior year period primarily as a result of higher pricing across most product lines, partially offset by net overall lower
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volume, unfavorable manufacturing performance, including outsourcing costs, and inflation. Additionally, we incurred a $4.5 million warranty accrual charge in the prior year. Gross margin was 29.9% in the nine months ended June 30, 2023 as compared with 30.4% in the prior year period.
SG&A in the nine months ended June 30, 2023 increased $12.6 million or 7.2% to $187.7 million from $175.1 million in the prior year period primarily as a result of higher personnel expenses, inflation, professional fees and increased travel and entertainment expenses, partially offset by lower software licensing expense. SG&A as a percentage of net sales was 19.3% and 19.1% for the nine months ended June 30, 2023 and 2022, respectively.
Strategic reorganization and other charges in the nine months ended June 30, 2023 was $0.9 million which primarily related to severance and certain transaction-related expenses partially offset from a gain on the sale of our Aurora, Illinois facility. Strategic reorganization and other charges in the nine months ended June 30, 2022 was $3.6 million, which primarily related to the Albertville tragedy and termination benefits associated with our facility closures in Aurora, Illinois and Surrey, British Columbia, Canada.
Net interest expense in the nine months ended June 30, 2023 decreased $1.6 million or 12.3% to $11.4 million as compared with the prior year period of $13.0 million primarily as a result of increased interest income associated with higher interest rates. The components of net interest expense are provided below:
Nine months ended
June 30,
2023 2022
(in millions)
4.0% Senior Notes $ 13.5 $ 13.5
Deferred financing costs amortization 0.7 0.7
ABL Agreement 0.7 0.7
Capitalized interest (1.8) (1.9)
Other interest expense 0.4 0.3
Total interest expense 13.5 13.3
Interest income (2.1) (0.3)
Interest expense, net $ 11.4 $ 13.0
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,
2023 2022
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 3.2 3.3
Excess tax benefits related to stock-based compensation 0.2 (0.3)
Tax credits (2.8) (3.0)
Global Intangible Low-Taxed Income 1.1 1.1
Foreign income tax rate differential (2.2) (1.7)
Nondeductible compensation 0.9 0.9
Basis difference in foreign investment — (0.1)
Valuation allowances — 0.3
Other 1.3 1.2
Effective income tax rate 22.7 % 22.7 %
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Segment Analysis
Water Flow Solutions
Net sales in the nine months ended June 30, 2023 decreased $61.8 million or 11.6% to $472.9 million as compared with $534.7 million in the prior year period primarily as a result of lower sales volume of iron gate valve products partially offset by increased pricing across most product lines.
Gross profit in the nine months ended June 30, 2023 decreased $52.5 million or 30.9% to $117.4 million from $169.9 million in the prior year period. The decrease was primarily a result of lower volumes, higher cost of sales associated with unfavorable manufacturing performance, including inefficiencies and start-up costs for the new brass foundry and inflation which were partially offset by higher pricing. Gross margin was 24.8% in the nine months ended June 30, 2023 and 31.8% in the prior year period.
SG&A in the nine months ended June 30, 2023 increased $0.2 million or 0.3% to $65.3 million from $65.1 million in the prior year period primarily as a result of inflation partially offset by lower personnel expenses. SG&A as a percentage of net sales was 13.8% and 12.2% in the nine months ended June 30, 2023 and 2022, respectively.
Water Management Solutions
Net sales in the nine months ended June 30, 2023 increased $120.1 million or 31.5% to $501.4 million as compared with $381.3 million in the prior year period primarily as a result of higher pricing across most of the segment’s product lines and increased volumes, mainly in our hydrant products.
Gross profit in the nine months ended June 30, 2023 increased $64.9 million or 59.7% to $173.7 million as compared with $108.8 million in the prior year period. Gross margin increased to 34.6% in the nine months ended June 30, 2023 as compared with 28.5% 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 $8.7 million or 11.8% to $82.2 million from $73.5 million in the prior year period primarily as a result of professional fees, inflation, and increased personnel expenses. SG&A as a percentage of net sales was 16.4% and 19.3% in the nine months ended June 30, 2023 and 2022, respectively.
Corporate
SG&A increased $3.7 million or 10.1% to $40.2 million in the nine months ended June 30, 2023 as compared with $36.5 million in the nine months ended June 30, 2022 primarily as a result of inflation and higher personnel expenses.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $141.2 million at June 30, 2023 and $162.3 million of additional borrowing capacity under our ABL based on June 30, 2023 data. Undistributed earnings from our subsidiaries in Israel, Canada, and China are considered to be permanently invested outside the United States. At June 30, 2023, cash and cash equivalents included $59.7 million, $7.5 million, and $11.1 million in Israel, Canada, and China, respectively.
We declared a quarterly dividend of $0.061 per share on July 26, 2023, payable on or about August 21, 2023 to stockholders of record as of August 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 nine months ended June 30, 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 provided by operating activities was $52.5 million during the nine months ended June 30, 2023 as compared with net cash provided by operating activities of $20.5 million in the prior year period. The increase in net operating cash flow was primarily driven by improvements in working capital compared with the prior year period, including a lesser increase in Inventories and higher Receivables collections, partially offset by higher Accounts payable turnover.
Capital expenditures were $32.4 million in the nine months ended June 30, 2023 as compared with $36.7 million in the prior year period. Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry
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as compared with the prior year period. For fiscal year 2023, 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 the twelve months from the date of this filing. 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
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.
On April 5, 2023, we amended the ABL. This amendment replaced LIBOR-based loans with SOFR-based loans plus an adjustment of 10 basis points, among other immaterial modifications.
Borrowings under the ABL bear interest at a floating rate equal to SOFR plus an adjustment of 10 basis points 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 June 30, 2023, the applicable margin was 200 basis points for SOFR-based loans, and 100 basis points for base rate loans.
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. The borrowing base under the ABL 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 and are jointly and severally liable for outstanding borrowings. Our obligations under the ABL are secured by a first-priority perfected lien on all of our U.S. inventories, accounts receivable, certain cash and other related assets.
The ABL 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 and 10% of the Loan Cap as defined in the ABL. Excess availability based on June 30, 2023 data was $162.3 million, as reduced by $12.5 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% 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 $400.7 million at June 30, 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 June 30, 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. 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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Our corporate credit rating and the credit rating for our debt are presented below:
Moody’s Standard & Poor’s
June 30, September 30, June 30, September 30,
2023 2022 2023 2022
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
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.
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, 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 $30.8 million for operating leases through 2033 and $1.6 million for finance leases through 2027, and (iii) purchase obligations for raw materials and other parts of approximately $89.6 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, 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 June 30, 2023, we had $12.5 million of letters of credit and $20.4 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.
Critical Accounting Estimates
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. Actual results may differ from these estimates. We consider an accounting estimate to be critical if changes in the estimate that are reasonably likely to occur over time or the use of reasonably different estimates could have a material impact on our financial condition or results of operations. Our critical accounting estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2022 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies and estimates since September 30, 2022.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.