What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-09 compared with 2023-08-04 · 105 added, 161 removed, 127 unchanged (68% of the section changed)

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.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related 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.

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 of Directors 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;

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, without limitation, legal, reputational, audit and financial risks resulting from previously reported cybersecurity incidents and possible future cybersecurity incidents, the effectiveness of the Company’s business continuity plans related thereto, and the Company’s ability to recover under its cybersecurity insurance policies;

logistical challenges and supply chain disruptions, geopolitical conditions, including the Israel-Hamas war, public health crises, or other events;

inventory and in-stock positions of our distributors and end customers;

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 reorganization and related strategic realignment activities;

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

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

failure to comply with personal data protection and privacy laws;

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foreign exchange rate fluctuations;

the impact of warranty claims;

the impact of warranty charges and claims, and related accommodations;

the strength of our brands and reputation;

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

2 unchanged sentences

changing regulatory, trade and tariff conditions;

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

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

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

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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% 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.

We have two reportable segments:

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Water Flow Solutions represented 50% of our fiscal 2023 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’ portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, and pressure management and control products and solutions.

Water Management Solutions represented 50% of our fiscal 2023 net sales.

Approximately 60% to 65% of our 2023 net sales were associated with the repair and replacement of municipal water infrastructure, approximately 25% to 30% were related to residential construction activity and approximately 5% to 10% of net sales were related to natural gas utilities and industrial applications.

In October 2023, the Israel-Hamas war caused a temporary shutdown of our facility in Ariel, Israel.

While we have reopened the facility, the war increases the likelihood of supply interruptions and may hinder our ability to acquire the necessary materials we need to make our products.

Supply disruptions from lack of access to materials have impacted, and continue to

impact, our ability to produce and deliver our products from our facility in Ariel, Israel.

Additionally, production has been impacted by labor availability.

As announced on October 28, 2023, we identified a cybersecurity incident impacting certain internal operations and information technology systems.

Based on the information reviewed to date, we believe the unauthorized activity has been contained.

All of our facilities are operational and have returned to normalized operations.

The cybersecurity incident consisted of unauthorized access and deployment of ransomware by a third party to a portion of our internal information infrastructure.

The incident caused temporary disruptions and limitations of access to portions of our business applications supporting aspects of our operations including shipping, receiving and payment functions.

Operational delays and investigation and remediation costs in connection with the incident adversely impacted our results for the first quarter of 2024.

We have restored the impacted applications and systems.

As reported on November 29, 2023, we identified a separate cybersecurity incident, which primarily related to a system that was at the end of its useful life and was already in the process of being replaced in the ordinary course of business.

In the first quarter of fiscal 2024, we incurred approximately $1.5 million of expenses related to the cybersecurity incidents.

We continue to analyze and remediate the impacts of the cybersecurity incidents, including making enhancements to our cybersecurity processes and analyzing the data accessed, exfiltrated or otherwise impacted in connection with the cybersecurity incidents.

Although we believe that our channel and customer inventory levels normalized during the first quarter of 2024, the external operating environment remains uncertain.

We expect to continue to face challenges emanating from the higher interest rate environment, the Israel-Hamas war, and labor inflation and availability.

From a comparable perspective, in fiscal 2023, we benefited from fulfilling an elevated backlog for certain products, which has now become more normalized at lower levels with respect to many of our product lines as we have reduced short-cycle backlog across our portfolio, particularly with regard to iron gate valves and hydrant products.

For our fiscal year 2024, we anticipate that consolidated net sales will decrease between 2 and 6 percent as compared with our fiscal year 2023.

We anticipate stable demand in the municipal repair and replacement end market despite budgetary pressures on municipalities driven by the aging water infrastructure.

Additionally, we anticipate that new residential construction activity will stabilize relative to the challenges in the preceding year where total housing starts decreased 12.9% in fiscal 2023 compared with the prior year according to Census data.

In January 2024, Blue Chip Economic Indicators forecasted a 1.5% increase in housing starts for the calendar year 2024 as compared to the calendar year 2023.

Finally, we anticipate that high interest rates will continue to impact new lot and land development, depending on the geography.

For the remainder of fiscal 2024, we anticipate that inflation will continue leading to a modest increase in manufacturing costs.

We expect external challenges to persist during the balance of our fiscal year 2024.

We will continue to monitor the market and economic conditions impacting our business and to take appropriate actions related thereto.

Results of Operations

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three months ended June 30, 2023

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

Three months ended December 31, 2023

Water Flow Solutions Water Management Solutions Corporate Total

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Interest expense, net 3.3

Other expense 1.6

Income before income taxes 16.9

1 unchanged sentence

Net income $ 14.3

Three months ended June 30, 2022

Three months ended December 31, 2022

Water Flow Solutions Water Management Solutions Corporate Total

4 unchanged sentences

Selling, general and administrative 22.4 27.0 13.5 62.9

Strategic reorganization and other charges — — 0.6 0.6

Strategic reorganization and other benefits

— — (3.7) (3.7)

Total operating expenses 22.4 27.0 9.8 59.2

7 unchanged sentences

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.

Net sales in the three months ended December 31, 2023 decreased $58.4 million or 18.6% to $256.4 million as compared with $314.8 million in the prior year period primarily as a result of a decrease in volumes in both Water Flow Solutions and Water Management Solutions, which were partially offset by higher pricing across most product lines.

Gross profit in the three months ended December 31, 2023 decreased $6.9 million or 7.4% to $86.3 million from $93.2 million in the prior year period primarily as a result of lower volumes in both Water Flow Solutions and Water Management Solutions.

This decrease was partially offset by higher pricing across most of our product lines, favorable manufacturing performance within both of our segments as well as lower manufacturing and supply chain costs.

As a result, Gross margin was 33.7% in the three months ended December 31, 2023 as compared with 29.6% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 2023 decreased $6.0 million or 9.5% to $56.9 million from $62.9 million in the prior year period primarily due to a decrease in personnel expense and sales commission expense, partially offset by foreign exchange effects and higher costs associated with inflation.

SG&A as a percentage of net sales was 22.2% and 20.0% for the three months ended December 31, 2023 and December 31, 2022, respectively.

Strategic reorganization and other charges in the three months ended December 31, 2023 was $6.6 million which primarily consisted of expenses associated with our previously announced leadership transition, approximately $1.5 million of expenses related to the cybersecurity incidents, and certain transaction-related expenses.

Strategic reorganization and other charges for 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.

Net interest expense in the three months ended December 31, 2023 declined $0.4 million or 10.8% to $3.3 million as compared with $3.7 million in the prior year period primarily due to higher interest income as a result of higher interest rates, partially offset by lower capitalized interest.

The components of net interest expense are provided below:

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Interest expense, net $ 3.3 $ 3.7

Other expense in the three months ended December 31, 2023 was $1.6 million from the release of an indemnification receivable related to an expired uncertain tax position.

There was no Other expense in the three months ended December 31, 2022.

The reconciliation between the U.S.

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State income taxes, net of federal benefit 3.0 3.4

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.

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.

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

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

(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

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)

Excess tax deficit related to stock-based compensation 0.8 0.7

Tax credits (2.7) (1.6)

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Nondeductible compensation 1.4 0.5

Basis difference in foreign investment — (0.1)

Uncertain tax positions (8.8) —

Valuation allowances 0.4 (0.2)

1 unchanged sentence

Effective income tax rate 15.4 % 23.5 %

During the three months ended December 31, 2023, we recorded $1.6 million in income tax benefits due to the release of an uncertain tax position that expired on December 31, 2023.

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.

Net sales in the three months ended December 31, 2023 decreased $24.3 million or 14.7% to $141.3 million as compared with $165.6 million in the prior year period primarily as a result of lower volumes for most product lines partially offset by higher pricing across most product lines.

Gross profit in the three months ended December 31, 2023 remained unchanged at $46.6 million as compared with the prior year period.

Gross margin was 33.0% in the three months ended December 31, 2023 and 28.1% in the prior year period.

This increase was primarily a result of higher pricing across most product lines, favorable manufacturing performance driven by overhead, material and labor efficiencies, as well as lower manufacturing and supply chain costs, which were partially offset by lower volumes across most product lines.

SG&A in the three months ended December 31, 2023 decreased $3.2 million to $19.2 million from $22.4 million in the prior year period primarily as a result of lower personnel expenses and sales commission expense partially offset by higher costs associated with inflation.

SG&A as a percentage of net sales was 13.6% and 13.5% in the three months ended December 31, 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.

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.

Net sales in the three months ended December 31, 2023 decreased $34.1 million or 22.9% to $115.1 million as compared with $149.2 million in the prior year period primarily as a result of lower volumes in certain product lines partially offset by higher pricing across most product lines and an increase in volumes in gas products.

Gross profit in the three months ended December 31, 2023 was $39.7 million as compared with $46.6 million in the prior year period.

Gross margin increased to 34.5% in the three months ended December 31, 2023 as compared with 31.2% in the prior year period primarily as a result of higher pricing across most products lines, favorable manufacturing performance driven by labor and overhead efficiencies, as well as lower manufacturing and supply chain costs, which were partially offset by lower volumes across most product lines.

SG&A in the three months ended December 31, 2023 decreased $2.4 million to $24.6 million from $27.0 million in the prior year period primarily due to lower personnel expenses, engineering fees, and sales commission expenses, which were partially offset by unfavorable foreign currency fluctuation and higher costs associated with inflation.

SG&A as a percentage of net sales was 21.4% and 18.1% in the three months ended December 31, 2023 and 2022, respectively.

SG&A decreased $0.4 million to $13.1 million in the three months ended December 31, 2023 as compared with $13.5 million in the three months ended December 31, 2022 primarily as a result of lower personnel expenses partially offset by unfavorable foreign currency fluctuations, and higher costs associated with inflation.

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.

We had cash and cash equivalents on hand of $216.7 million at December 31, 2023 and $162.4 million of additional borrowing capacity under our ABL based on December 31, 2023 data.

However, during the waiver period, as described more fully below, credit extensions were temporarily limited to $50.0 million.

At December 31, 2023, cash and cash equivalents included $78.5 million, $9.2 million, and $6.8 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.064 per share on January 25, 2024, payable on or about February 20, 2024 to stockholders of record as of February 9, 2024, which will result in an estimated $10.0 million cash outlay.

We did not repurchase any of our outstanding common stock during the three months ended December 31, 2023 under our publicly announced program and had $90.0 million remaining under 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

as compared with the prior year period.

Net cash provided by operating activities was $67.9 million during the three months ended December 31, 2023 as compared with net cash used in operating activities of $6.5 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.

These included a smaller increase in Inventories, higher Receivables collections, and lower Accounts payable turnover partially as a result of payment delays associated with the cybersecurity incidents.

Capital expenditures were $5.7 million in the three months ended December 31, 2023 as compared with $9.9 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 2024, we have provided guidance that our capital expenditures are expected to be between $45.0 million and $50.0 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.

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 needs, 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.

Our ABL is provided by a syndicate of banking institutions and consists of a revolving credit facility of $175.0 million in borrowing capacity that expires on July 29, 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.

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.

In December 2023, we obtained a waiver under our ABL (“ABL Waiver”) to provide for additional time associated with certain technical reporting requirements that were delayed as a result of the cybersecurity incident announced on October 28, 2023.

Under the ABL Waiver, the maximum aggregate amount of borrowings and other credit extensions under the ABL was limited to $50.0 million at any time outstanding until all of the required reports were delivered.

During our first fiscal quarter of 2024, we delivered the required reports and on February 6, 2024, the ABL Waiver was terminated.

Accordingly, we are no longer subject to any additional restrictions or borrowing limitations under the ABL, including the $50.0 million temporary limit on credit extensions.

Borrowings under the ABL bear interest at a floating rate equal to the Secured Overnight Financing Rate (“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 December 31, 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.

Prepayments can be made at any time without penalty.

Substantially all of our U.S.

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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 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.

Excess availability based on December 31, 2023 data was $162.4 million, as reduced by $12.4 million of outstanding letters of credit and $0.2 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% 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.

Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $413.0 million at December 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.

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

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.

Our corporate credit rating and the credit rating for our debt are presented below:

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.

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

Our corporate credit rating and the credit rating for our debt and outlook are presented below:

Moody’s Standard & Poor’s

June 30, September 30, June 30, September 30,

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

2023 2023 2023 2023

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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 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.

As of December 31, 2023, we have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include annual cash interest payments of $18.0 million in 2024 through 2029, (ii) cumulative cash obligations of $37.4 million for operating leases through 2033 and $1.1 million for finance leases through 2028, and (iii) purchase obligations for raw materials and other parts of approximately $107.4 million which we expect to incur during the next 12 months and $2.0 million beyond December 31, 2024.

Additionally, we may continue to strengthen our systems, cybersecurity training, policies, programs, response plans and other similar measures as a result of the cybersecurity incidents.

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 June 30, 2023 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

In addition, at December 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 June 30, 2023, we had $12.5 million of letters of credit and $20.4 million of surety bonds outstanding.

At December 31, 2023, we had $12.4 million of letters of credit and $13.7 million of surety bonds outstanding.

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.

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 most of Canada generally face weather conditions that restrict significant construction activity.

Critical Accounting Estimates

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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 2023 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.

There have been no changes in the Company’s determination of critical accounting estimates since September 30, 2023.

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