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, expanding our suppliers, and shifting certain Krausz branded manufacturing to our Cleveland, Tennessee facility to increase production levels, as well as expediting product shipments and increasing inventory safety stock to meet customer delivery times. 25 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 6.9% and 7.6% 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 associated with the municipal repair and replacement end market driven by the aging water infrastructure and increasing water rates, moderated by budgetary and operational pressures on municipalities. We anticipate that new residential construction activity and new lot and land development will be relatively constrained by the uncertainty in the economy, affordability concerns and interest rate environment, depending on the geographic region. In July 2025, Blue Chip Economic Indicators forecasted a 2.2% decline 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. In fiscal 2025, we have experienced a more normalized demand environment. Therefore, we anticipate quarterly consolidated net sales as a percentage of fiscal 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. Accordingly, for the remainder of fiscal 2025, we assume that we will experience typical seasonality and a normalized demand environment, leading to lower consolidated net sales for the fourth quarter relative to the third quarter. Inventory costs for the first nine months of 2025 increased approximately 1.5% due to inflation. For the remainder of fiscal 2025, we anticipate that inflation will continue to rise, particularly for purchased parts, due to new tariffs enacted after March 2025. At this time, excluding the impact of tariffs, we expect inflation to modestly impact manufacturing and transportation costs. We have implemented targeted price increases for certain products, as well as supply chain and operations initiatives, to mitigate these higher tariffs. 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 increased tariffs, by implementing price increases, cost containment measures and supplier management measures, among other mitigating actions. 26 Table of Contents Results of Operations Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024 Three months ended June 30, 2025 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 216.6 $ 163.7 $ — $ 380.3 Gross profit $ 83.8 $ 61.9 $ — $ 145.7 Operating expenses: Selling, general and administrative 23.3 31.6 16.1 71.0 Strategic reorganization and other charges — 0.2 0.8 1.0 Total operating expenses 23.3 31.8 16.9 72.0 Operating income (loss) $ 60.5 $ 30.1 $ (16.9) 73.7 Non-operating expenses: Interest expense, net 1.7 Income before income taxes 72.0 Income tax expense 19.5 Net income $ 52.5 Three months ended June 30, 2024 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 208.1 $ 148.6 $ — $ 356.7 Gross profit $ 81.9 $ 49.5 $ — $ 131.4 Operating expenses: Selling, general and administrative 24.1 22.6 14.8 61.5 Strategic reorganization and other charges — 1.4 1.5 2.9 Total operating expenses 24.1 24.0 16.3 64.4 Operating income (loss) $ 57.8 $ 25.5 $ (16.3) 67.0 Non-operating expenses: Pension expense other than service 1.0 Interest expense, net 2.8 Income before income taxes 63.2 Income tax expense 15.9 Net income $ 47.3 Consolidated Analysis Net sales for the three months ended June 30, 2025 were $380.3 million as compared with $356.7 million in the prior year period, an increase of $23.6 million or 6.6%, primarily as a result of increased volumes and higher pricing across most product lines. 27 Table of Contents Gross profit for the three months ended June 30, 2025 was $145.7 million as compared with $131.4 million in the prior year period, an increase of $14.3 million or 10.9%, primarily as a result of manufacturing efficiencies and higher volumes. Gross profit was negatively impacted by approximately 7% due to inflation and increased tariffs. As a result, gross margin was 38.3% in the three months ended June 30, 2025 as compared with 36.8% in the prior year period. Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2025 were $71.0 million as compared with $61.5 million in the prior year period, an increase of $9.5 million or 15.4%, primarily due to $9.1 million unfavorable foreign currency fluctuation primarily resulting from the depreciation of the U.S. dollar versus the Israeli shekel during the quarter, inflation of approximately 3%, higher personnel-related expense and third-party fees, partially offset by lower intangible amortization and engineering expense. The unfavorable foreign currency impact for the three months ended June 30, 2025 was $7.7 million. SG&A as a percentage of net sales was 18.7% and 17.2% for the three months ended June 30, 2025 and June 30, 2024, respectively. Strategic reorganization and other charges for the three months ended June 30, 2025 were $1.0 million and consisted of expenses associated with our leadership transition. Strategic reorganization and other charges for the three months ended June 30, 2024 were $2.9 million and consisted of expenses associated with non-cash asset impairment, our leadership transition, severance and certain transaction-related expenses. Net interest expense for the three months ended June 30, 2025 was $1.7 million as compared with $2.8 million in the prior year period, a decrease of $1.1 million or 39.3%, primarily due to higher interest income. The components of net interest expense are as shown below: Three months ended June 30, 2025 2024 (in millions) 4.0% Senior Notes $ 4.5 $ 4.5 Deferred financing costs amortization 0.2 0.2 ABL Agreement 0.2 0.2 Capitalized interest (0.1) — Other interest expense — 0.2 Total interest expense 4.8 5.1 Interest income (3.1) (2.3) Interest expense, net $ 1.7 $ 2.8 28 Table of Contents 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, 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 4.0 3.5 Tax credits (1.4) (1.8) Global Intangible Low-Taxed Income 0.3 (0.1) Foreign income tax rate differential (0.6) (0.4) Nondeductible compensation 1.5 1.0 Uncertain tax positions 0.3 0.4 Valuation allowances 0.4 0.7 Other 1.6 0.9 Effective income tax rate 27.1 % 25.2 % Segment Analysis Water Flow Solutions Net sales for the three months ended June 30, 2025 were $216.6 million as compared with $208.1 million in the prior year period, an increase of $8.5 million or 4.1%, primarily as a result of increased 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 June 30, 2025 was $83.8 million as compared with $81.9 million in the prior year period, an increase of $1.9 million or 2.3%. This increase was primarily a result of increased volumes and favorable manufacturing performance. Gross profit was negatively impacted by approximately 7% due to inflation and increased tariffs. Gross margin was 38.7% in the three months ended June 30, 2025 and 39.4% in the prior year period. SG&A for the three months ended June 30, 2025 was $23.3 million as compared with $24.1 million in the prior year period, a decrease of $0.8 million or 3.3%, primarily as a result of lower amortization and bad debt, partially offset by higher personnel-related expenses, third-party fees and inflation of approximately 3%. SG&A as a percentage of net sales was 10.8% and 11.6% in the three months ended June 30, 2025 and 2024, respectively. Water Management Solutions Net sales for the three months ended June 30, 2025 were $163.7 million as compared with $148.6 million in the prior year period, an increase of $15.1 million or 10.2%, primarily as a result of increased volumes of repair products and hydrants as well as higher pricing across most product lines, partially offset by lower volumes of natural gas distribution products. Gross profit for the three months ended June 30, 2025 was $61.9 million as compared with $49.5 million in the prior year period, an increase of $12.4 million or 25.1%. The increase was primarily a result of favorable manufacturing performance and increased volumes. Gross profit was negatively impacted by approximately 8% due to inflation and increased tariffs. Gross margin was 37.8% in the three months ended June 30, 2025 as compared with 33.3% in the prior year period. SG&A for the three months ended June 30, 2025 was $31.6 million as compared with $22.6 million in the prior year period, an increase of $9.0 million or 39.8%, primarily due to $7.1 million unfavorable foreign currency impact associated with depreciation of the U.S. dollar compared with the Israeli shekel, higher personnel-related expenses, approximately 2% inflation and higher third-party fees, partially offset by lower amortization and travel expenditures. SG&A as a percentage of net sales was 19.3% and 15.2% in the three months ended June 30, 2025 and 2024, respectively. 29 Table of Contents Corporate SG&A for the three months ended June 30, 2025 was $16.1 million as compared with $14.8 million in the prior year period, an increase of $1.3 million or 8.8%. Nine months ended June 30, 2025 Compared to Nine months ended June 30, 2024 Nine months ended June 30, 2025 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 607.4 $ 441.5 $ — $ 1,048.9 Gross profit $ 215.9 $ 160.8 $ — $ 376.7 Operating expenses: Selling, general and administrative 65.0 71.5 44.1 180.6 Strategic reorganization and other charges 1.0 0.6 3.5 5.1 Total operating expenses 66.0 72.1 47.6 185.7 Operating income (loss) $ 149.9 $ 88.7 $ (47.6) 191.0 Non-operating expenses: Pension benefit other than service (0.1) Interest expense, net 5.6 Income before income taxes 185.5 Income tax expense 46.4 Net income $ 139.1 Nine months ended June 30, 2024 Water Flow Solutions Water Management Solutions Corporate Total (in millions) Net sales $ 555.2 $ 411.3 $ — $ 966.5 Gross profit $ 205.7 $ 142.4 $ — $ 348.1 Operating expenses: Selling, general and administrative 67.9 71.4 42.8 182.1 Strategic reorganization and other charges 0.2 1.4 11.1 12.7 Total operating expenses 68.1 72.8 53.9 194.8 Operating income (loss) $ 137.6 $ 69.6 $ (53.9) 153.3 Non-operating expenses: Pension expense other than service 3.0 Interest expense, net 9.7 Other expense 1.6 Income before income taxes 139.0 Income tax expense 33.1 Net income $ 105.9 30 Table of Contents Consolidated Analysis Net sales for the nine months ended June 30, 2025 were $1,048.9 million as compared with $966.5 million in the prior year period, an increase of $82.4 million or 8.5%, primarily as a result of increased volumes and higher pricing across most product lines. Gross profit for the nine months ended June 30, 2025 was $376.7 million as compared with $348.1 million in the prior year period, an increase of $28.6 million or 8.2%, primarily as a result of increased volumes, higher pricing, and manufacturing efficiencies, partially offset by approximately 5% due to inflation and increased tariffs. Manufacturing efficiencies were negatively impacted by a $4.1 million write-down of inventory and other assets associated with our legacy brass foundry in Decatur, Illinois. As a result, gross margin was 35.9% in the nine months ended June 30, 2025 as compared with 36.0% in the prior year period. SG&A for the nine months ended June 30, 2025 was $180.6 million as compared with $182.1 million in the prior year period, a decrease of $1.5 million or 0.8%, primarily due to lower intangible amortization, partially offset by unfavorable foreign currency fluctuation as a result of depreciation of the U.S. dollar compared with the Israeli shekel, as well as higher personnel-related expenses, third-party fees and approximately 3% inflation. SG&A as a percentage of net sales was 17.2% and 18.8% for the nine months ended June 30, 2025 and June 30, 2024, respectively. Strategic reorganization and other charges for the nine months ended June 30, 2025 were $5.1 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 nine months ended June 30, 2024 were $12.7 million and consisted of expenses associated with our leadership transition, certain transaction-related expenses, cybersecurity incidents expense, non-cash asset impairment and severance. Net interest expense for the nine months ended June 30, 2025 was $5.6 million as compared with $9.7 million in the prior year period, a decrease of $4.1 million or 42.3%, primarily due to higher interest income. The components of net interest expense are as shown below: Nine months ended June 30, 2025 2024 (in millions) 4.0% Senior Notes $ 13.5 $ 13.5 Deferred financing costs amortization 0.7 0.7 ABL Agreement 0.6 0.7 Capitalized interest (0.3) (0.1) Other interest expense 0.4 0.5 Total interest expense 14.9 15.3 Interest income (9.3) (5.6) Interest expense, net $ 5.6 $ 9.7 31 Table of Contents 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, 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 4.0 3.5 Excess tax benefit related to stock-based compensation (1.2) — Tax credits (1.4) (1.8) Global Intangible Low-Taxed Income 0.3 (0.1) Foreign income tax rate differential (0.6) (0.4) Nondeductible compensation 1.5 1.0 Uncertain tax positions 0.3 (0.7) Valuation allowances 0.4 0.4 Other 0.7 0.9 Effective income tax rate 25.0 % 23.8 % Segment Analysis Water Flow Solutions Net sales for the nine months ended June 30, 2025 were $607.4 million as compared with $555.2 million in the prior year period, an increase of $52.2 million or 9.4%, primarily as a result of increased volumes and higher pricing across most product lines. Gross profit for the nine months ended June 30, 2025 was $215.9 million as compared with $205.7 million in the prior year period, an increase of $10.2 million or 5.0%. This increase was primarily a result of increased volumes, higher pricing across most product lines and manufacturing efficiencies, partially offset by approximately 6% inflation and increased tariffs. Manufacturing efficiencies were negatively impacted by a $4.1 million write-down of inventory and other assets associated with our legacy brass foundry in Decatur, Illinois. Gross margin was 35.5% in the nine months ended June 30, 2025 and 37.0% in the prior year period. SG&A for the nine months ended June 30, 2025 was $65.0 million as compared with $67.9 million in the prior year period, a decrease of $2.9 million or 4.3%, primarily as a result of lower amortization, travel, bad debt and engineering materials expenses, partially offset by higher personnel-related expense, inflation of approximately 3%, and higher third-party fees. SG&A as a percentage of net sales was 10.7% and 12.2% in the nine months ended June 30, 2025 and 2024, respectively. Water Management Solutions Net sales for the nine months ended June 30, 2025 were $441.5 million as compared with $411.3 million in the prior year period, an increase of $30.2 million or 7.3%, primarily as a result of increased volumes and higher pricing across most product lines. Gross profit for the nine months ended June 30, 2025 was $160.8 million as compared with $142.4 million in the prior year period, an increase of $18.4 million or 12.9%. The increase was primarily driven by increased volumes, higher pricing across most product lines and manufacturing efficiencies. Gross profit was negatively impacted by approximately 4% as a result of inflation and increased tariffs. Gross margin was 36.4% in the nine months ended June 30, 2025 as compared with 34.6% in the prior year period. SG&A for the nine months ended June 30, 2025 was $71.5 million as compared with $71.4 million in the prior year period, an increase of $0.1 million or 0.1%, primarily due to unfavorable foreign currency fluctuation associated with the depreciation of the U.S. dollar compared with the Israeli shekel, approximately 3% inflation, and higher consulting and professional fees, 32 Table of Contents partially offset by lower amortization, travel and bad debt expense, and engineering expenditures. SG&A as a percentage of net sales was 16.2% and 17.4% in the nine months ended June 30, 2025 and 2024, respectively. Corporate SG&A for the nine months ended June 30, 2025 was $44.1 million as compared with $42.8 million in the prior year period, an increase of $1.3 million or 3.0%. Inflation of approximately 3%, and higher insurance and travel expense were partially offset by lower consulting and professional fees as well as a decrease in personnel-related expense. Liquidity and Capital Resources We had cash and cash equivalents on hand of $372.0 million at June 30, 2025 and $163.0 million of additional borrowing capacity under our ABL based on June 30, 2025 data. At June 30, 2025, cash and cash equivalents included $78.7 million, $14.4 million and $8.1 million in Israel, Canada and China, respectively. We declared a quarterly dividend of $0.067 per share on July 30, 2025, payable on or about August 21, 2025 to stockholders of record as of August 12, 2025, which will result in an estimated $10.5 million cash outlay. We repurchased $15.0 million of our outstanding common stock during the nine months ended June 30, 2025 under our publicly announced share repurchase program, and as of June 30, 2025, we had $65.0 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. Cash flows provided by operating activities decreased $13.7 million to $135.8 million during the nine months ended June 30, 2025 compared with $149.5 million in the prior year period. The decrease was driven by changes in working capital and other assets and liabilities of $35.2 million and non-cash adjustments of $11.7 million which more than offset the increase in net income of $33.2 million. Working capital provided $9.6 million in year-over-year cash primarily due to increases in Accounts payable of $21.1 million offset by increases in Inventories of $11.9 million. Other assets and liabilities used $44.8 million in year-over-year cash primarily due to decreases in compensation-related accruals and other decreases in current and noncurrent liabilities. The decrease in non-cash adjustments was primarily due to lower amortization. Capital expenditures were $32.8 million in the nine months ended June 30, 2025 as compared with $28.0 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, our capital expenditures are expected to be between $50.0 million and $52.0 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 June 30, 2025, the applicable margin was 150 basis points for SOFR-based loans and 50 basis points for base rate loans. 33 Table of Contents 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. 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 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 June 30, 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 June 30, 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, the outstanding 4.0% Senior Notes had a fair value of $432.7 million at June 30, 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 June 30, 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 June 30, September 30, June 30, 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. 34 Table of Contents 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, 2025, we had (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 2025 through 2029, (ii) cumulative cash obligations of $33.1 million for operating leases through 2034 and $4.0 million for finance leases through 2030, and (iii) purchase obligations for raw materials and other purchased parts of approximately $128.7 million which we expect to incur during the next 12 months and $1.4 million beyond June 30, 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 June 30, 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 June 30, 2025, we had $11.8 million of letters of credit and $13.4 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 and nine months ended June 30, 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.