Mueller Water Products, Inc. 10-Q

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 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 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 driving increased margins, operational and commercial initiatives, capital allocation and growth strategy plans, 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, without limitation, 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 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, risks resulting from possible future cybersecurity incidents, 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 higher interest rates; 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; 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 acquisitions or divestitures; an inability to achieve some or all of our goals and commitments in environmental and sustainability programs; 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 United States Securities and Exchange Commission. Overview Business 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 approximately 57% of our fiscal 2024 net sales. Water Management Solutions’ portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, as well as pressure management and control products and solutions. Water Management Solutions represented approximately 43% of our fiscal 2024 net sales. We estimate approximately 60% to 65% of our 2024 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 10% 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 reopened the facility in November 2023, the war caused supply chain disruption and labor availability challenges that hindered, and continue to hinder, our ability to most efficiently manufacture and deliver our products from our facility in Ariel, Israel. We have made investments in recruiting and training new team members and expanding our suppliers to increase production levels, as well as expediting product shipments and increasing inventory safety stock to meet customer delivery times. 24 Table of Contents The cybersecurity incident in the first quarter of fiscal 2024 consisted of unauthorized access and deployment of ransomware by a third party to a portion of our internal information system infrastructure. The incident caused temporary disruptions and limitations of access to portions of our business applications supporting certain aspects of our operations including shipping, receiving and payment functions. Operational delays as well as investigation and remediation costs in connection with the incident adversely impacted our results for the first quarter of fiscal 2024; however, there was no material impact to our consolidated net sales for the full fiscal 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. We completed the replacement of this system during the second quarter of fiscal 2024. In the first quarter of fiscal 2024, we incurred approximately $1.5 million of expenses related to the cybersecurity incidents. We continue to address 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. In January 2025, we announced the appointment of Ms. Melissa Rasmussen as Senior Vice President and Chief Financial Officer effective March 3, 2025 and Mr. Steven Heinrichs transitioned from his Chief Financial Officer and Chief Legal Officer roles to Senior Advisor and remains available to the Company on a consulting basis through September 30, 2025. For fiscal year 2025, we anticipate that consolidated net sales will increase between 5.7% and 6.5% as compared with fiscal 2024. The external operating environment remains uncertain as we face challenges emanating from changes in government policies and possible disruptions to global supply chains, the interest rate and tariff environment, geopolitics, as well as labor and material inflation and availability. We expect these challenges to continue during the remainder of fiscal 2025. We continue to anticipate resilient demand in the municipal repair and replacement end market driven by the aging water infrastructure albeit moderated by budgetary and operational pressures on municipalities. However, we anticipate that new residential construction activity and new lot and land development will be relatively constrained by the increased uncertainty and interest rate environment, depending on the geographic region. In April 2025, Blue Chip Economic Indicators forecasted relative consistency in housing starts for the calendar year 2025 as compared to calendar year 2024. After our short-cycle channel and customer inventory levels largely normalized during the first quarter of 2024, our orders and shipments reflected a more typical demand environment compared with the high backlog environment we experienced during and after the COVID-19 pandemic. For the remainder of fiscal 2025, we assume that we will continue to experience a more normalized demand environment leading to more normalized seasonality for consolidated net sales. Therefore, we anticipate quarterly consolidated net sales as a percentage of fiscal year 2025 consolidated net sales to be the highest in the third quarter and lowest in the first quarter, with a sequential increase in consolidated net sales in the second quarter as the construction season ramps up for the spring season. Inventory costs for the first six months of 2025 experienced approximately 1.4% inflation. For the remainder of fiscal 2025, we anticipate that inflation will rise, particularly for purchased parts due to new tariffs enacted after January 2025. At this time, excluding the impact of tariffs, we expect inflation to modestly impact manufacturing and transportation costs. We will continue to monitor the market and economic conditions impacting our business and take appropriate actions to address inflationary and other cost pressures, including new tariffs, by implementing price increases, cost containment measures and supplier management measures, among other mitigating actions. 25 Table of Contents Results of Operations Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 Three months ended March 31, 2025 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 216.2 $ 148.1 $ — $ 364.3 Gross profit $ 77.0 $ 51.0 $ — $ 128.0 Operating expenses: Selling, general and administrative 21.9 19.6 14.2 55.7 Strategic reorganization and other charges 1.0 0.1 1.3 2.4 Total operating expenses 22.9 19.7 15.5 58.1 Operating income (loss) $ 54.1 $ 31.3 $ (15.5) 69.9 Non-operating expenses: Pension benefit other than service (0.1) Interest expense, net 2.3 Income before income taxes 67.7 Income tax expense 16.4 Net income $ 51.3 Three months ended March 31, 2024 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 205.8 $ 147.6 $ — $ 353.4 Gross profit $ 77.2 $ 53.2 $ — $ 130.4 Operating expenses: Selling, general and administrative 24.6 24.2 14.9 63.7 Strategic reorganization and other charges — — 3.2 3.2 Total operating expenses 24.6 24.2 18.1 66.9 Operating income (loss) $ 52.6 $ 29.0 $ (18.1) 63.5 Non-operating expenses: Pension expense other than service 1.0 Interest expense, net 3.6 Income before income taxes 58.9 Income tax expense 14.6 Net income $ 44.3 Consolidated Analysis Net sales for the three months ended March 31, 2025 were $364.3 million as compared with $353.4 million in the prior year period, an increase of $10.9 million or 3.1%, primarily as a result of higher pricing across most product lines, as well as increased volumes. 26 Table of Contents Gross profit for the three months ended March 31, 2025 was $128.0 million as compared with $130.4 million in the prior year period, a decrease of $2.4 million or 1.8%, primarily as a result of manufacturing inefficiencies partially offset by higher volumes and favorable price/cost. Included in the manufacturing inefficiencies was a $0.8 million write-down of other assets associated with our legacy brass foundry in Decatur, Illinois. Inflation impacted Gross margin by approximately 3%. As a result, Gross margin was 35.1% in the three months ended March 31, 2025 as compared with 36.9% in the prior year period. Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2025 were $55.7 million as compared with $63.7 million in the prior year period, a decrease of $8.0 million or 12.6%, primarily due to lower amortization, incentive and travel expenses as well as favorable foreign exchange impacts, partially offset by approximately 3% inflation. SG&A as a percentage of net sales was 15.3% and 18.0% for the three months ended March 31, 2025 and March 31, 2024, respectively. Strategic reorganization and other charges for the three months ended March 31, 2025 were $2.4 million and consisted of expenses associated with our leadership transition, non-cash asset impairment and certain transaction-related expenses. Strategic reorganization and other charges for the three months ended March 31, 2024 were $3.2 million and consisted of expenses associated with our leadership transition, severance and certain transaction-related expenses. Net interest expense for the three months ended March 31, 2025 was $2.3 million as compared with $3.6 million in the prior year period, a decrease of $1.3 million or 36.1%, primarily due to higher interest income. The components of net interest expense are as shown below: Three months ended March 31, 2025 2024 (in millions) 4.0% Senior Notes $ 4.5 $ 4.5 Deferred financing costs amortization 0.2 0.2 ABL Agreement 0.2 0.3 Capitalized interest (0.1) — Other interest expense 0.3 0.1 Total interest expense 5.1 5.1 Interest income (2.8) (1.5) Interest expense, net $ 2.3 $ 3.6 The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below: Three months ended March 31, 2025 2024 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 3.9 3.4 Excess tax (benefit) deficit related to stock-based compensation (1.0) — Tax credits (1.6) (2.1) Global Intangible Low-Taxed Income 0.3 0.2 Foreign income tax rate differential (0.4) (0.8) Nondeductible compensation 1.4 1.0 Uncertain tax positions 0.3 0.5 Other 0.3 1.6 Effective income tax rate 24.2 % 24.8 % 27 Table of Contents Segment Analysis Water Flow Solutions Net sales for the three months ended March 31, 2025 were $216.2 million as compared with $205.8 million in the prior year period, an increase of $10.4 million or 5.1%, primarily as a result of higher volumes of iron gate and specialty valves as well as higher pricing across most product lines, partially offset by lower volumes of service brass products. Gross profit for the three months ended March 31, 2025 was $77.0 million as compared with $77.2 million in the prior year period, a decrease of $0.2 million or 0.3%. This decrease was primarily a result of manufacturing inefficiencies, including a $0.8 million write-down of other assets related to our legacy brass foundry in Decatur, Illinois, partially offset by higher volumes and favorable price/cost. Inflation impacted Gross profit by approximately 4%. Gross margin was 35.6% in the three months ended March 31, 2025 and 37.5% in the prior year period. SG&A for the three months ended March 31, 2025 was $21.9 million as compared with $24.6 million in the prior year period, a decrease of $2.7 million or 11.0%, primarily as a result of lower amortization, travel and incentive expenses, partially offset by higher personnel-related expenses and inflation of approximately 3%. SG&A as a percentage of net sales was 10.1% and 12.0% in the three months ended March 31, 2025 and 2024, respectively. Water Management Solutions Net sales for the three months ended March 31, 2025 were $148.1 million as compared with $147.6 million in the prior year period, an increase of $0.5 million or 0.3%, primarily as a result of higher pricing across most product lines, partially offset by lower volumes primarily in natural gas distribution products. Gross profit for the three months ended March 31, 2025 was $51.0 million as compared with $53.2 million in the prior year period, a decrease of $2.2 million or 4.1%. The decrease was primarily a result of manufacturing inefficiencies partially offset by favorable price/cost. Inflation impacted Gross profit by approximately 2%. Gross margin was 34.4% in the three months ended March 31, 2025 as compared with 36.0% in the prior year period. SG&A for the three months ended March 31, 2025 was $19.6 million as compared with $24.2 million in the prior year period, a decrease of $4.6 million or 19.0%, primarily due to lower amortization, favorable foreign exchange impacts and lower travel expenses, partially offset by approximately 4% inflation. SG&A as a percentage of net sales was 13.2% and 16.4% in the three months ended March 31, 2025 and 2024, respectively. Corporate SG&A for the three months ended March 31, 2025 was $14.2 million as compared with $14.9 million in the prior year period, a decrease of $0.7 million or 4.7%, primarily as a result of lower compensation as well as consulting and professional fees partially offset by approximately 3% inflation. 28 Table of Contents Six months ended March 31, 2025 Compared to Six months ended March 31, 2024 Six months ended March 31, 2025 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 390.8 $ 277.8 $ — $ 668.6 Gross profit $ 132.1 $ 98.9 $ — $ 231.0 Operating expenses: Selling, general and administrative 41.7 39.9 28.0 109.6 Strategic reorganization and other charges 1.0 0.4 2.7 4.1 Total operating expenses 42.7 40.3 30.7 113.7 Operating income (loss) $ 89.4 $ 58.6 $ (30.7) 117.3 Non-operating expenses: Pension benefit other than service (0.1) Interest expense, net 3.9 Income before income taxes 113.5 Income tax expense 26.9 Net income $ 86.6 Six months ended March 31, 2024 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 347.1 $ 262.7 $ — $ 609.8 Gross profit $ 123.8 $ 92.9 $ — $ 216.7 Operating expenses: Selling, general and administrative 43.8 48.8 28.0 120.6 Strategic reorganization and other charges 0.2 — 9.6 9.8 Total operating expenses 44.0 48.8 37.6 130.4 Operating income (loss) $ 79.8 $ 44.1 $ (37.6) 86.3 Non-operating expenses: Pension expense other than service 2.0 Interest expense, net 6.9 Other expense 1.6 Income before income taxes 75.8 Income tax expense 17.2 Net income $ 58.6 Consolidated Analysis Net sales for the six months ended March 31, 2025 were $668.6 million as compared with $609.8 million in the prior year period, an increase of $58.8 million or 9.6%, primarily as a result of increased volumes as well as higher pricing across most product lines. Gross profit for the six months ended March 31, 2025 was $231.0 million as compared with $216.7 million in the prior year period, an increase of $14.3 million or 6.6%, primarily as a result of higher volumes and favorable price/cost which more than offset the impact of manufacturing inefficiencies. Included in the manufacturing inefficiencies was a $4.1 million write-down of 29 Table of Contents inventory and other assets associated with our legacy brass foundry in Decatur, Illinois. Inflation negatively impacted Gross profit by approximately 4%. As a result, Gross margin was 34.5% in the six months ended March 31, 2025 as compared with 35.5% in the prior year period. Selling, general and administrative expenses (“SG&A”) for the six months ended March 31, 2025 were $109.6 million as compared with $120.6 million in the prior year period, a decrease of $11.0 million or 9.1%, primarily due to lower amortization, favorable foreign exchange impacts as well as reduced travel and incentive expenses, partially offset by approximately 3% inflation and higher personnel-related expense as well as consulting and professional fees. SG&A as a percentage of net sales was 16.4% and 19.8% for the six months ended March 31, 2025 and March 31, 2024, respectively. Strategic reorganization and other charges for the six months ended March 31, 2025 were $4.1 million and consisted of expenses associated with our leadership transition, non-cash asset impairment and certain transaction-related costs. Strategic reorganization and other charges for the six months ended March 31, 2024 were $9.8 million and consisted of expenses associated with our leadership transition, severance, certain transaction-related costs, as well as cybersecurity incidents expense. Net interest expense for the six months ended March 31, 2025 was $3.9 million as compared with $6.9 million in the prior year period, a decrease of $3.0 million or 43.5%, primarily due to higher interest income. The components of net interest expense are as shown below: Six months ended March 31, 2025 2024 (in millions) 4.0% Senior Notes $ 9.0 $ 9.0 Deferred financing costs amortization 0.5 0.5 ABL Agreement 0.4 0.5 Capitalized interest (0.2) (0.1) Other interest expense 0.4 0.3 Total interest expense 10.1 10.2 Interest income (6.2) (3.3) Interest expense, net $ 3.9 $ 6.9 30 Table of Contents The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below: Six months ended March 31, 2025 2024 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 3.9 3.4 Excess tax (benefit) deficit related to stock-based compensation (2.0) 0.1 Tax credits (1.6) (2.1) Global Intangible Low-Taxed Income 0.3 0.2 Foreign income tax rate differential (0.4) (0.8) Nondeductible compensation 1.4 1.0 Uncertain tax positions 0.5 (1.6) Valuation allowances 0.1 — Other 0.5 1.5 Effective income tax rate 23.7 % 22.7 % Segment Analysis Water Flow Solutions Net sales for the six months ended March 31, 2025 were $390.8 million as compared with $347.1 million in the prior year period, an increase of $43.7 million or 12.6%, primarily as a result of higher volumes as well as higher pricing across most product lines. Gross profit for the six months ended March 31, 2025 was $132.1 million as compared with $123.8 million in the prior year period, an increase of $8.3 million or 6.7%. This increase was primarily a result of higher volumes across most product lines and favorable price/cost, partially offset by manufacturing inefficiencies, including a $4.1 million write-down of inventory and other assets associated with our legacy brass foundry in Decatur, Illinois. Inflation impacted Gross profit by approximately 5%. Gross margin was 33.8% in the six months ended March 31, 2025 and 35.7% in the prior year period. SG&A for the six months ended March 31, 2025 was $41.7 million as compared with $43.8 million in the prior year period, a decrease of $2.1 million or 4.8%, primarily as a result of lower amortization and travel expenses partially offset by higher personnel-related expense, inflation of approximately 3%, as well as consulting and professional fees. SG&A as a percentage of net sales was 10.7% and 12.6% in the six months ended March 31, 2025 and 2024, respectively. Water Management Solutions Net sales for the six months ended March 31, 2025 were $277.8 million as compared with $262.7 million in the prior year period, an increase of $15.1 million or 5.7%, primarily as a result of higher volumes and higher pricing across most product lines. Gross profit for the six months ended March 31, 2025 was $98.9 million as compared with $92.9 million in the prior year period, an increase of $6.0 million or 6.5%. The increase was primarily driven by higher volume across most product lines and favorable price/cost, partially offset by manufacturing inefficiencies. Inflation impacted Gross profit by approximately 2%. Gross margin was 35.6% in the six months ended March 31, 2025 as compared with 35.4% in the prior year period. SG&A for the six months ended March 31, 2025 was $39.9 million as compared with $48.8 million in the prior year period, a decrease of $8.9 million or 18.2%, primarily due to lower amortization, favorable foreign exchange impacts, lower bad debt and personnel-related expenses. The decrease was partially offset by approximately 3% inflation as well as higher consulting and professional fees. SG&A as a percentage of net sales was 14.4% and 18.6% in the six months ended March 31, 2025 and 2024, respectively. 31 Table of Contents Corporate SG&A for the six months ended March 31, 2025 and 2024 was $28.0 million. Inflation of 3% and higher insurance expense were offset by decreases in incentives, favorable foreign exchange impacts and lower consulting and professional fees. Liquidity and Capital Resources We had cash and cash equivalents on hand of $329.2 million at March 31, 2025 and $163.0 million of additional borrowing capacity under our ABL based on March 31, 2025 data. At March 31, 2025, cash and cash equivalents included $72.3 million, $7.5 million and $6.5 million in Israel, Canada and China, respectively. We declared a quarterly dividend of $0.067 per share on April 30, 2025, payable on or about May 21, 2025 to stockholders of record as of May 12, 2025, which will result in an estimated $10.5 million cash outlay. We repurchased $5.0 million of our outstanding common stock during the six months ended March 31, 2025 under our publicly announced share repurchase program, and as of March 31, 2025, we had $75.0 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. These covenants restrict our ability to engage in certain activities, including but not limited to, the payment of cash dividends and the redemption of our common stock. Net cash provided by operating activities was $68.4 million during the six months ended March 31, 2025 as compared with net cash provided by operating activities of $62.2 million in the prior year period. The increase in net operating cash flow was primarily driven by higher net income partially offset by changes in working capital, including decreases in Other current liabilities such as incentive compensation. Capital expenditures were $21.1 million in the six months ended March 31, 2025 as compared with $15.8 million in the prior year period. Capital expenditures increased primarily as a result of timing and higher expenditures associated with our foundries, including replacement of aged lost foam equipment, and cybersecurity infrastructure improvements as compared with the prior year period. For the fiscal year 2025, 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 needs, income tax payments, capital expenditures and debt service obligations as they become due through the next 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, geopolitical, 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 borrowing capacity that matures the earlier of (a) March 16, 2029, which is ninety-one days prior to the stated maturity date of our 4.0% Senior Notes if the Notes are still outstanding on that date or (b) March 28, 2029. The ABL includes 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. Borrowings under the ABL bear interest at a floating rate equal to SOFR plus an adjustment of 10 basis points and an applicable margin range of 150 to 175 basis points, or a base rate (as defined in the ABL) plus an applicable margin range of 50 to 75 basis points. At March 31, 2025, the applicable margin was 150 basis points for SOFR-based loans and 50 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 inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less certain reserves. Prepayments can be made at any time without penalty. 32 Table of Contents The ABL allows cash dividend payments on the Company’s common stock of approximately $56.4 million in fiscal 2025, with such amount increasing 10% annually as set out in the ABL. Additionally, cash dividend payments in excess of such limits, repurchases of common stock and certain other Restricted Payments (as defined in the ABL) are permitted if (i) Pro Forma Availability (as defined in the ABL) is (i) greater than or equal to the greater of 17.5% of the Loan Cap (as defined in the ABL) and $30.6 million for each day during the 30-day period prior to such Restricted Payment, or (ii) Pro Forma Availability is greater than 12.5% but less than 17.5% of the Loan Cap and $21.9 million for each day during the 30-day period prior to such Restricted Payment and the fixed charge coverage ratio of the most recently ended Measurement Period (as defined in the ABL) is at least 1 to 1. Substantially all of our United States (“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. inventory, accounts receivable, certain cash balances and other supporting assets. The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum when the unused capacity is above 50% of the credit commitments, with a step down to 25.0 basis points per annum when unused capacity is less than or equal to 50% of the credit commitments. At March 31, 2025, the commitment fee was 37.5 basis points. 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. Excess availability based on March 31, 2025 data was $163.0 million, as reduced by $11.8 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% Unsecured Senior 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 our previously existing 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 $419.4 million at March 31, 2025. 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 March 31, 2025. We may redeem some or all of the 4.0% Senior Notes at any time after June 15, 2024, at specified redemption prices. Upon a Change of Control (as defined in the Indenture), we could be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount if there is a Ratings Decline (as defined in the Indenture). Our corporate credit rating and the credit rating for our debt and outlook are presented below: Moody’s Standard & Poor’s March 31, September 30, March 31, September 30, 2025 2024 2025 2024 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 Positive 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 March 31, 2025, we had (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include 33 Table of Contents annual cash interest payments of $18.0 million in 2025 through 2029, (ii) cumulative cash obligations of $32.8 million for operating leases through 2034 and $3.8 million for finance leases through 2030, and (iii) purchase obligations for raw materials and other purchased parts of approximately $110.9 million which we expect to incur during the next 12 months and $2.1 million beyond March 31, 2026. Additionally, we expect to invest to strengthen our systems, cybersecurity training, policies, programs, response plans and other similar measures. 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 March 31, 2025, 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 March 31, 2025, we had $11.8 million of letters of credit and $12.4 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 U.S. and most of Canada generally face weather conditions that restrict significant construction and other field crew activity. Therefore, the results of operations for the three months ended March 31, 2025 are not necessarily indicative of operating results that may be achieved for any other interim period or the full year. 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 2024 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting estimates since September 30, 2024.