Sales cycles for metering systems can span several years, and it is common for customers to place orders throughout the contract period. Although we believe we have a common understanding with our customer as to the total value of a contract when it is awarded, we do not recognizeinclude customer orders in our backlog until the customer orders areorder is received.
Our primary research and development (“R&D”) facilities are located in Chattanooga, TennesseeTennessee; Ariel, Israel; Atlanta, Georgia; Toronto, Ontario; and Tel Aviv, Israel for Infrastructure and in Atlanta, Georgia and Toronto, Ontario for Technologies.Southampton, United Kingdom. The primary focus of these operations is to develop new products, improve and refine existing products and obtain and assure compliance with industry approval certifications or standards, (suchsuch as AWWA, UL, FM, NSF and The Public Health and Safety Company). At September 30, 2019, we employed 84 people dedicated to R&D activities.Company. R&D expenses were $14.3$24.5 million, $11.6$17.1 million and $12.1$15.0 million during 2019, 20182022, 2021 and 2017,2020, respectively.
Our operations are subject to numerous federal, state and local laws and regulations, both within and outside the United States, in areas such as: competition, government contracts, international trade, labor and employment, tax, licensing, consumer protection, environmental protection, workplace health and safety, and others. These and other laws and regulations impact the manner in which we conduct our business, and changes in legislation or government policies can affect our operations, both favorably and unfavorably. For example, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state laws affect our operations by, among other things, imposing investigation and cleanup requirements for threatened or actual releases of hazardous substances. Under CERCLA, joint and several liability may be imposed on operators, generators, site owners, lessees and others regardless of fault or the legality of the original activity that caused or resulted in the release of the hazardous substances. Thus, we may be subject to liability under CERCLA and similar state laws for properties thatthat: (1) we currently own, lease or operate,operate; (2) we, our predecessors, or former subsidiaries previously owned, leased or operated,operated; (3) sites to which we, our predecessors or former subsidiaries sent waste materials,materials; and (4) sites at which hazardous substances from our facilities’ operations have otherwise come to be located. The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under CERCLA in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’sthe Environmental Protection Agency’s (“EPA”) remediation costs, the number and financial viability of the other PRPs (there are fourthree other PRPs currently) and the determination of the final allocation of the costs among the PRPs. For more information regarding this matter as well as others that may affect our business, including our capital expenditures, earnings and competitive position, see “Item 1A. RISK FACTORS,” “Item 3. LEGAL PROCEEDINGS - Environmental,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 17. of the Notes to Consolidated Financial Statements.
Item 1A. RISK FACTORS
Our end markets are subjectRisks related to risks relating to general economic cyclesour industries
A significant portion of our business depends on spending for water and conditions, which affect demand for our products and services and may adversely affect our financial results.wastewater infrastructure construction activity.
Our primary end markets are repair and replacement of water infrastructure, driven by municipal spending and new water infrastructure installation driven by new residential construction. Sustained uncertainty about any of these end markets could cause our distributors and end use customers to delay purchasing, or determine not to purchase, our products or services. General economic and other factors, including interest rates, inflation, unemployment levels, energy costs, the state of the credit markets (including municipal bonds, mortgages, home equity loans and consumer credit) and other factors beyond our control, could adversely affect our sales, profitability and cash flows. For example, increases in interest rates can significantly increase the costs of the projects in which our products are utilized — such as water and wastewater infrastructure upgrade, repair and replacement projects — and lead to such projects being reduced, delayed and/or rescheduled, which couldAs a result, in a decrease in our revenues and earnings and adversely affect our financial condition. In addition, higher interest rates are often accompanied by inflation. In an inflationary environment, we may be unable to raise the prices of our products sufficiently to keep up with the rate of inflation, which would reduce our profit margins.
A significant portion of our business depends on spending for water and wastewater infrastructure construction activity.
A significant portion of our business depends on local, state and federal spending on water and wastewater infrastructure upgrade, repair and replacement. Funds for water and wastewater infrastructure repair and replacement typically come from local taxes, water fees and water rates. State and local governments and private water entities that do not adequately budget for capital expenditures when setting tax rates, water rates and water fees, as applicable, maycould be unable to pay for water infrastructure repair and replacement if they do not have access to other funding sources. In addition, reductions or delays in federal spending related to water or wastewater infrastructure could adversely affect state or local projects and may adversely affect our financial results.
Governments and private water entities may have limited abilities to increase taxes, water fees or water rates, as applicable. It is not unusual for water and wastewater projects to be delayed and rescheduled for a number of reasons, including changes in project priorities, increasing interest rates, and inflation (as discussed above) and difficulties in complying with environmental and other governmental regulations. In addition, reductions or delaysFor example, changes in federal spending related tointerest rates and credit markets, including municipal bonds, mortgages, home equity loans and consumer credit, have in the past and may in the future significantly increase the costs of the projects in which our products are utilized, such as in new residential construction and water orand wastewater infrastructure could adversely affect state or localupgrade, repair and replacement projects, and maylead to such projects being reduced, delayed and/or rescheduled, which could result in a decrease in our revenues and earnings and adversely affect our financial results.condition. In addition, higher interest rates are often accompanied by inflation. We have in the past and may in the future be unable to raise the prices of our products sufficiently to keep up with the rate of inflation, which would reduce our profit margins and cash flows.
Some state and local governments have placed or may place significant restrictions on the use of water by their constituents.constituents and/or increase their water conservation efforts. These types of water use restrictions and water conservation efforts may lead to reduced water revenues by private water entities, municipalities or other governmental agencies, which could similarly affect funding decisions for water-related projects.
Poor economic conditions may cause states, municipalities or private water entities to receive lower than anticipated revenues, which may lead to reduced or delayed funding for water infrastructure projects. Even if favorable economic conditions exist, water infrastructure owners may choose not to address deferred infrastructure needs due toas a result of a variety of political factors or competing spending priorities.
Low levels of spending for water and wastewater infrastructure construction activity could adversely affect our sales, profitability and cash flows.
Residential construction activity is important to our business and adverse conditions or sustained uncertainty regardingwithin this market could adversely affect our financial results.
New water and wastewater infrastructure spending is heavily dependent upon residential construction. As a result, our financial performance depends significantly on the stability and growth of the residential construction market. This market depends on a variety of factors beyond our control, including household formation, consumer confidence, interest rates, inflation and the availability of mortgage financing, as well as the mix between single and multifamily construction, availability of construction labor and ultimately the extent to which new construction leads to the development of raw land. Adverse conditions or sustained uncertainty regarding the residential construction market could adversely affecthave had and may in the future have an adverse effect on our sales, profitability and cash flows.flows, including the risk that one or more of our distributors and/or end use customers decide to delay purchasing, or determine not to purchase, our products or services.
Our business depends on a small group of key customers for a significant portion of our sales.
Infrastructure sellsA majority of our products are sold primarily to distributors and our success depends on these outside parties operating their businesses profitably and effectively. These distributors’ profitability and effectiveness can vary significantly from company to company and from region to region within the same company. Further, our largest distributors generally also carry competing products. We may fail to align our operations with successful distributors in any given market.
Distributors in our industry have experienced consolidation in recent years. If such consolidation continues, our distributors could be acquired by other distributors who have better relationships with our competitors, and consequently,
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pricing and profit margin pressure may intensify. Pricing and profit margin pressure or the loss of any one of our key distributors in any market could adversely affect our operating results.
TechnologiesCertain products and solutions, primarily sellstechnology-enabled products and solutions, are sold directly to end users. Some of these customers represent a relatively high concentration of net sales. Over time, expected growth in sales is expected to lessen the significance of individual customers. In the short term, net sales could decline if existing significant customers do not continue to purchase our products or services and new customers are not obtained to replace them.
Strong competition could adversely affect prices and demand for our products and services, which would adversely affect our operating results.
The U.S.United States and Canadian markets for water infrastructure and flow control products are very competitive. While there are only a few competitors for most of our product and service offerings, many of our competitors are well-established companies with strong brand recognition. We compete on the basis of a variety of factors, including the quality, price and innovation of our products, services and service levels. Our ability to retain our customers in the face of competition depends on our ability to market our products and services to our customers and end users effectively.
The U.S.United States markets for water metering products and systems are highly competitive. Our primary competitors benefit from strong market positions and many end users are slow to transition to new products or new brands. Our ability to gainattract new customers depends on our technological advancements and ability to market our products and services to our customers and end users effectively.
In addition to competition from North American companies, we face the threat of competition from outside of North America. The intensity of competition from these companies is affected by fluctuations in the value of the U.S.United States dollar against theirforeign local currencies, the cost to ship competitive products into North America and the availability of trade remedies, if any. Competition may also increase as a result of U.S. competitors located in the United States shifting their operations to lower-cost countries or otherwise reducing their costs.
Our competitors may reduce the prices of their products or services, improve their quality, improve their functionality or enhance their marketing or sales activities. Any of these potential developments could adversely affect our prices and demand for our products and services.
The long-term success of our newer systems and solutions, including the related products, software and services, such as smart metering, leak detection, pressure monitoring and pipe condition assessment, depends on market acceptance.
Technologies’Our technology-enabled smart metering, and leak detection, pressure monitoring and pipe condition assessment products and services have much less market history than many of Infrastructure’sour traditional products. Our investments in smart metering have primarily focused on the market for AMI and have been based on our belief that water utilities will transition over time from traditional manually-read meters to automatically-read meters. The market for AMI is relatively new and continues to evolve, and the U.S.United States markets for water meter products and systems are highly competitive. Water utilities have traditionally been slow adopters of new technology and may not adopt AMI as quickly as we expect, due, in part, topartially as a result of the substantial investment related to installation of AMI systems. The strong market positions of our primary competitors may also slow the adoption of our products. Similarly, the adoption of our pressure monitoring, leak detection and pipe condition assessment products and services depends on the willingness of our customers to invest in new product and service offerings,offerings, and the pace of adoption may be slower than we expect. If the marketexpect. The markets for AMI developsour technology-enabled products and services have developed more slowly than we expect or if our new leak detectionexpected and pipe condition assessmentmay continue to do so. If these products and services fail to gain market acceptance, our opportunity to grow these businesses will be limited.
Risks related to our business strategy
We may not be able to adequately manage the risks associated with the introduction and deployment of new products and systems, including increased warranty costs.
The success of our new products and systems, such as our recently launched smart hydrant and Sentryx™ Sentryx™ software platform, will depend on our ability to manage the risks associated with their introduction, including the risk that new products and systems may have quality or other defects or deficiencies in their early stages that result in their failure to satisfy performance or reliability requirements. Our success will depend in part on our ability to manage these risks, including costs associated with manufacturing, installation, maintenance and warranties. These challenges can be costly and technologically challenging, and we cannot determine in advance the ultimate effect they may have. For example, during the quarters ended March 30, 2017 and June 30, 2018, we recorded discrete warranty expenses of $9.8 million and $14.1 million, respectively, associated with certain products that Technologies produced prior to 2017, as described more fully in Note 17. to the Notes to the Consolidated Financial Statements. Warranty liabilities and the related reserve estimation process is highly judgmental due toas a result of the complex nature of these exposures and the unique circumstances of each claim. Furthermore, once claims are asserted for an alleged product defect by municipalities or other customers, it can be difficult to determine the level of potential exposure or liability related to such allegation to which the assertion of these claims will expand geographically. Although we have obtained insurance for product liability claims, such policies may not be available or adequate to cover the liability for damages, the cost of repairs and/or the expense of litigation. Current and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors. Failure to successfully manage these challenges could result in lost revenue, significant expenses,expense, and harm to our reputation.
Inefficient or ineffective allocation of capital, along with increased capital expenditure levels to modernize our aging facilities and expand our capabilities, could adversely affect our operating results and/or shareholderstockholder value, including negatively impacting our available cash reserves and prevent acquisition or other cash-intensive opportunities.
Our goal is to invest capital to generate long-term value for our shareholders.stockholders. This includes spending on capital projects, such as developing or acquiring strategic businesses, technologies and product lines with the potential to strengthen our industry position, enhancing our existing set of product and service offerings, or entering into new markets, as well as periodically returning value to our stockholders through share repurchases and dividends. For example, we are nearing completionhave completed the construction of our large valve manufacturing expansion in Chattanooga, Tennessee and recently made an additional investment in a facility in Kimball, Tennessee to further expand our capabilities in the area and allow us to insource more products and operations. We also expect to makemade significant progress in fiscal 20202022 on the construction of our new brass manufacturing facility in Decatur, Illinois, which we expect to be completedsubstantially complete in 2022.2023. To a large degree, capital efficiency reflects how well we manage key risks. The actions taken to address specific risks may affect how well we manage the more general risk of capital efficiency. If we do not allocate properly allocate and manage our capital, we may fail to produce optimalexpected financial results, and we may experience a reduction in stockholder value, including increased volatility in our stock price.
We may not realize the expected benefits from our strategic reorganization plans.
During the quarter endedBetween November 2019 and September 30, 2017,2022, we announcedtransitioned all, or substantially all, operations from our strategic reorganization plan designedfacilities in Hammond, Indiana; Aurora, Illinois; Woodland, Washington; and Surrey, British Columbia, Canada; to accelerate our product innovation and revenue growth. In particular, we reconfigured our divisional structure around products, with five business teams that have line and cross-functional responsibility for managing distinct product portfolios. We believe the new organizational structure will be better aligned with business needs and generate greater efficiencies.
Activities under the plan were initiated in the fourth quarter of 2017 and essentially completed in 2018. We incurred approximately $8.8 million in restructuring charges associated with the reorganization. We do not expect to incur additional material charges related to this reorganization.
During October 2018, we announced the move of our Middleborough, Massachusetts facility to Atlanta, which will allow us to consolidate our resources and accelerate product innovation through creation of a research and development center of excellence for software and electronics in Atlanta, Georgia. As a result of this reorganization, we expect annual cost savings of approximately $1.5 million, which takes into account the hiring and alignment of new engineering talent. We incurred approximately $4.3 million in charges related to this reorganization in fiscal 2019, of which approximately $0.7 million was accrued at September 30, 2019.Kimball, Tennessee facility. We cannot guarantee that the activities under the restructuring and reorganization activities will result in the desired efficiencies and estimated cost savings.
savings, if any.
Our business strategy includes developing, acquiring and investing in companies and technologies that broaden our product portfolio or complement our existing business, which could be unsuccessful or consume significant resources and adversely affect our operating results.
We willAs part of our long-term business strategy, we continue to evaluate the development or acquisition of strategic businesses, technologies and product lines with the potential to strengthen our industry position, enhance and expand our existing set of product and service offerings, or enter new markets. We may be unable to identify or successfully complete suitable acquisitions in the future and completed acquisitions may not be successful.
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Acquisitions and technology investments may involve significant cash expenditures, the incurrence of debt, incurrence, operating losses and expenses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. These types of transactions involve numerous other risks, including:including but not limited to:
•Diversion of management time and attention from existing operations;operations,
•Difficulties in integrating acquired businesses, technologies and personnel into our business or into our compliance and control programs, particularly those that involveinclude international operations;operations,
•Working with partners or other ownership structures with shared decision-making authority (our interests and other ownership interests may be inconsistent);,
•Difficulties in obtaining and verifying relevant information regarding a business or technology prior to the consummation of the transaction, including the identification and assessment of liabilities, claims or other circumstances, including those relating to intellectual property claims, that could result in litigation or regulatory exposure;exposure,
•Assumptions of liabilities that exceed our estimated amounts;amounts,
•Verifying the financial statements and other business information of an acquired business;business,
•Inability to obtain required regulatory approvals and/or required financing on favorable terms;terms,
•Potential loss of key employees, contractual relationships or customers;customers of the acquired company,
•Increased operating expenses related to the acquired businesses or technologies;technologies,
•The failure of new technologies, products or services to gain market acceptance with acceptable profit margins;margins,
•Entering new markets in which we have little or no experience or in which competitors may have stronger market positions;positions,
•Dilution of interests of holders of our common sharesstockholder value through the issuance of equity securities or equity-linked securities;securities, and
•Inability to achieve expected synergies.synergies or the achievement of such synergies taking longer than expected to realize, including increases in revenue, enhanced efficiencies, or increased market share, or the benefits ultimately may be smaller than we expected.
Any acquisitions or investments may ultimately harm our business or financial condition, as they may not be successful and may ultimately have an adverse effect on our operating results or financial condition and/or result in impairment charges.
Potential international business opportunities may expose us to additional risks, including currency exchange fluctuations.
A part of our growth strategy depends on us expanding internationally. Although net sales outside of the United States and Canada account for a relatively small percentage of our total net sales, we expect to increase our level of business activity outside of the United States and Canada, as illustrated by our December 2018 acquisition of Krausz Industries, whichthat is based in Tel Aviv, Israel, and our acquisition in December 2018.June 2021 of i2O Water Ltd, that is based in Southampton, United Kingdom. Some countries that present potential good business opportunities also face political and economic instability and vulnerability to infrastructure and other disruptions. Seeking to expand our business internationally exposes us to additional risks, which include foreign exchange risks and currency fluctuations, (asas discussed more fully below),below, political and economic uncertainties, changes in local business conditions and national and international conflicts. A primary risk we face in connection with our export shipments relates to our ability to collect amounts due from customers. We also face the potential risks arising from staffing, monitoring and managing international operations, including the risk such activities may divert our resources and management time.
In addition, compliance with the laws, regulations and regulationstaxes of multiple international jurisdictions increases our cost of doing business. International operations are subject to anti-corruption laws and anti-competition regulations, among others. For example, the U.S.United States Foreign Corrupt Practices Act and similar non-U.S. anti-corruption laws outside of the United States generally prohibit companies and
their intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials and certain others for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Violations of these laws and regulations could result in criminal and civil sanctions, disrupt our business and adversely affect our brands, international expansion efforts, business and operating results.
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We earn revenues and incur expenses in foreign currencies as part of our operations outside of the United States. Accordingly, fluctuations in currency exchange rates may significantly increase the amount of U.S.United States dollars required for foreign currency expenses or significantly decrease the U.S.United States dollars we receive from revenues denominated in a foreign currency revenues. Ascurrency. Changes between a result, changes between the foreign exchange ratesrate and the U.S.United States dollar affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We expect that our exposure to foreign currency exchange rate fluctuations will grow as the relative contribution of our non-U.S. operations outside the United States increases through both organic and inorganic growth.
If significant tariffs or other restrictions continue
Risks related to be placed on foreign imports by the United States and related counter-measures are taken by impacted foreign countries, our revenue and results of operations may be harmed.
If significant tariffs or other restrictions continue to be placed on foreign imports by the United States and related counter-measures are taken by impacted foreign countries, our revenue and results of operations may be harmed. The Trump Administration has signaled that it may continue to alter trade agreements and terms between China and the United States, including limiting trade with China and/or imposing additional tariffs on imports from China. In March 2018, President Trump imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports and announced additional tariffs on goods imported from China specifically, as well as certain other countries. The materials subject to these tariffs to date can impact our raw material costs as well. However, if further tariffs are imposed on a broader range of imports, or if further retaliatory trade measures are taken by China or other countries in response to additional tariffs, we may be required to raise our prices, which may result in the loss of customers and harm our operating performance.
Our reliance on vendors for certain products, some of which are single-source or limited source suppliers, could harm our business by adversely affecting product availability, reliability or cost.
We maintain several single-source or limited-source supplier relationships with manufacturers, including some outside of the United States. If the supply of a critical single- or limited-source product is delayed or curtailed, we may not be able to ship the related products in desired quantities or in a timely manner. Even where multiple sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales,profits, which could harm our operating results.
These relationships reduce our direct control over production. Our reliance on these vendors subjects us to a greater risk of shortages, and reduced control over delivery schedules of products, as well as a greater risk of increases in product costs. In instances where we stock lower levels of product inventories, a disruption in product availability could harm our financial performance and our ability to satisfy customer needs. In addition, defective products from these manufacturers could reduce product reliability and harm our reputation.
A disruption in our supply chain or other factors impacting the distribution of our products could adversely affect our business.
A disruption within our logistics or supply chain network at any of the freight companies that deliver us components for our manufacturing operations in the United States or ship our fully-assembled products to our customers could adversely affect our business and result in lost sales and increased expenses or harm to our reputation. Our supply chain is dependent on third party ocean-going container ships, rail, barge and trucking systems and, therefore, disruption in these logistics services because of weather-related problems, strikes, bankruptcies or other events could adversely affect our financial performance and financial condition, negatively impacting sales, profitability and cash flows.
Seasonal demand for certain of our products and services may adversely affect our financial results.
Sales of some of our products, including iron gate valves and fire hydrants, are seasonal, with lower sales in our first and second fiscal quarters when weather conditions throughout most of North America tend to be cold resulting in lower levels of construction activity. This seasonality in demand has resulted in fluctuations in our sales and operating results. To satisfy demand during expected peak periods, we may incur costs associated with building inventory in off-peak periods, and our projections as to future needs may not be accurate. Because many of our expenses are fixed, seasonal trends can cause reductions in our profitability and profit margins and deterioration of our financial condition during periods affected by lower production or sales activity.
Transportation costs are relatively high for most of our products.
Transportation costs can be an important factor in a customer’s purchasing decision. Many of our products are big, bulky and heavy, which tend to increase transportation costs. We also have relatively few manufacturing sites, which tends to increase transportation distances to our customers and consequently increases our transportation costs. High transportation costs could make our products less competitive compared to similar or alternative products offered by competitors.
Our business, financial condition and results of operations may be adversely impacted by the effects of inflation.
Inflation has the potential to adversely affect our business, financial condition and results of operations by increasing our overall cost structure, including purchased parts, commodity and raw material costs. In an inflationary environment, we may be unable to raise the prices of our products sufficiently to keep up with the rate of inflation, which would reduce our profit margins and cash flows. Other inflationary pressures could affect wages, the cost and availability of components and raw materials and other inputs and our ability to meet customer demand. Inflation may further exacerbate other risk factors, including supply chain disruptions, risks related to international operations and the recruitment and retention of qualified employees.
Our high fixed costs may make it more difficult for us to respond to economic cycles.
A significant portion of our cost structure is fixed, including manufacturing overhead, capital equipment and research and development costs. In a prolonged economic downturn, these fixed costs may cause our gross margins to erode and our earnings to decline.
We may experience difficulties implementing upgrades to our enterprise resource planning system.software systems.
We continue to be engagedengage in a multi-year implementation ofimplementations and upgrades to our enterprise resource planning system (ERP) and other systems.software systems, including to our Enterprise Resource Planning (“ERP”) system. The ERP is designed to accurately maintain the company’s books and records and provide information important to the operation of the business to the company’sCompany’s management team. These upgrades will requireAny software implementation or upgrade requires significant investment of human and financial resources. In implementing the ERP upgrade,resources and we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of theour software systems, including our ERP, upgrades could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. While we have investedinvest significant resources in planning and project management, significant implementation issues may arise.
Normal operations at our key manufacturing facilities may be interrupted.
Some of our key products, including fire hydrants, and iron gate valves, service brass products, and repair products are manufactured at a single facility or few manufacturing facilities, that depend on critical pieces of heavy equipment that cannot be moved economically moved to other locations. We are therefore limited in our ability to shift production among locations. The operations at our manufacturing facilities may be interrupted or impaired by various operating risks, including, but not limited to:
•Catastrophic events, such as fires, floods, explosions, natural disasters, severe weather or other similar occurrences;occurrences,
•Terrorist attacks, war, mass shootings or other acts of violence;violence,
•Interruptions in the delivery of raw materials, shortages of equipment or spare parts, or other manufacturing inputs;inputs,
•Adverse government regulations;regulations,
•Equipment or information systems breakdowns or failures;failures,
•Violations of our permit requirements or revocation of permits;permits,
•Releases of pollutants and hazardous substances to air, soil, surface water or ground water;water,
•Labor disputes, and
Labor disputes.•Cyberattacks and events.
The occurrence of any of these events may impair our production capabilities and adversely affect our sales, profitability and cash flows.
Any inability to protect our intellectual property or our failure to effectively defend against intellectual property infringement claims could adversely affect our competitive position.
Our business depends on our technology and expertise, which were largely developed internally and are not subject to statutory protection. We rely on a combination of patent protection, copyright and trademark laws, trade secrets protection, employee and third-party confidentiality agreements andas well as technical measures to protect our intellectual property rights. The measures thatmethods we takeemploy to protect our intellectual property rights may not adequately deter infringement, misappropriation or independent development of our technology, and they may not prevent an unauthorized party from obtaining or using information or intellectual property that we regard as proprietary or keep others from using brand names similar to our own. The disclosure, misappropriation or infringement of our intellectual property could harm our competitive position. In addition, our actions to enforce our rights may result in substantial costs and the diversion of management time and other resources. We may also be subject to intellectual property infringement claims from time to time, which may result in additional expenses and divertingthe diversion of resources to respond to these claims. Finally, for those products in our portfolio that rely on patent protection, once a patent has expired the product is more subjectfurther subjected to competition. Products under patent protection potentially generate significantly higher revenue and earnings than those not protected by patents. If we fail to successfully enforce our intellectual
Index to Financial Statements
property rights or register new patents, our competitive position could suffer, which could adversely affect our business, financial condition, results of operations and cash flows.
If we do not successfully maintain our information and technology networks, including the security of those networks, our operations could be disrupted and unanticipated increases in costs and/or decreases in revenues could result.
We rely on various information technology systems, some of which are controlled by outside service providers, to manage key aspects of our operations. The proper functioning of our information technology systems is important to the successful operation of our business. If critical information technology systems fail, or are otherwise unavailable, our ability to manufacture products, process orders, track credit risk, identify business opportunities, maintain proper levels of inventories, collect accounts receivable, pay expenses and otherwise manage our business would be adversely affected.
We depend on the Internet and our information technology infrastructure for electronic communications among our locations around the world and among our personnel and suppliers and customers. Cyber and other data security breaches of this infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we or our service providers are unable to prevent these breaches, our operations could be disrupted or we may suffer financial, reputational or other harm because of lost or misappropriated information.
We may fail to effectively manage confidential data, which could harm our reputation, result in substantial additional costs and subject us to litigation.
As we grow our Technologies businesses,technology-enabled products, services and solutions, we continue to accumulate increasing volumes of customer data. In addition, we store personal information in connection with our human resources operations. Our efforts to protect this information may be unsuccessful due toas a result of employee errors or malfeasance, technical malfunctions, the actions of third parties (suchsuch as cyber attack)a cyberattack or other factors. If our cyber defenses and other countermeasures we deploy are unable to protect personal data, it could be accessed or disclosed improperly, which could expose us to liability, harm our reputation and deter current and potential users from using our products and services. The regulatory environment related to cyber and information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.
Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, unauthorized access to customer data, or harm to our reputation.
CyberthreatsCybersecurity threats are constantly evolving and can take a variety of forms, increasing the difficulty of detecting and successfully defending against them. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT.information technology systems. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, radio communication protocols, or other infrastructure in order to attack our products and servicesservices. Additionally, these actors may reverse engineer trade secrets or other confidential intellectual property, or gain access to our networks and datacenters,data centers, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or actingact in a coordinated manner to launch distributed denial of service attacks, deny or other coordinated attacks.postpone access to critical water infrastructure telemetry through vulnerabilities in our cloud services and infrastructure, or logging, sensing, and telemetry products. Inadequate account security practices may also result in unauthorized access to confidential data.
We may have no current capability to detect certain vulnerabilities, which may allow them to persist in the environment over long periods of time. CyberthreatsCybersecurity threats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers. Breaches of our facilities, network, or data security could disrupt the security of our systems and business applications, impair our ability to provide services to our customers and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our reputation, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improved technologies, or otherwise adversely affect our business.
Misuse of our technology-enabled products, services and solutions could lead to reduced revenue, increased costs, liability claims, or harm to our reputation.
As we continue to design and develop products, services and solutions that leverage our hosted or cloud-based resources, the internet-of-things and other wireless/remote technologies and include networks of distributed and interconnected devices that contain sensors, data transfers and other computing capabilities, our customers’ data and systems may be subjected to harmful or illegal content or attacks, including potential cybersecurity threats. Additionally, we may not have adequately anticipated or precluded such cybersecurity threats through our product design or development. These products, services and
solutions inevitably contain vulnerabilities or critical security defects which may not been remedied and cannot be disclosed without compromising security. We may also make prioritization decisions in determining which vulnerabilities or security defects to fix, and the timing of these fixes, which could result in compromised security. These vulnerabilities and security defects could expose us or our customers to a risk of loss, disclosure, or misuse of information/data; adversely affect our operating results; result in litigation, liability, or regulatory action (including under laws related to privacy, data protection, data security, network security, and consumer protection); deter customers or sellers from using our products, services and solutions; and otherwise harm our business and reputation.
We are subject to a variety of claims, investigations and litigation that could adversely affect our results of operations and harm our reputation.
In the normal course of our business, we are subject to claims and lawsuits, including from time to time claims for damages related to product liability and warranties, investigations by governmental agencies, litigation alleging the infringement of intellectual property rights and litigation related to employee matters and commercial disputes. We may also be subject to investigations, claims, litigation and other proceedings outside the ordinary course of business, such as the February 2019June 2021 mass shooting event we experienced in our Aurora, IllinoisAlbertville, Alabama facility. Defending these lawsuits and becoming involved in these investigations may divert our management’s attention, and may cause us to incur significant expenses, even if there is no evidence that our systems or componentspractices were the cause of the claim. In addition, we may be required to pay damage awards, penalties or settlements, or become subject to injunctions or other equitable remedies, that could have a material adverse effect on our business, financial condition, results of operations and cash flows. Moreover, any insurance or indemnification rights that we have may be insufficient or unavailable to protect us against potential loss exposures. See “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 3. LEGAL PROCEEDINGS - Environmental,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 17. of the Notes to Consolidated Financial Statements.
We are subject to stringent environmental, health and safety laws and regulations that impose significant compliance costs. Any failure to satisfy these laws and regulations may adversely affect us.
We are subject to stringent laws and regulations relating to the protection of the environment, health and safety and incur significant capital and other expenditures to comply with these requirements. Failure to comply with any environmental, health or safety requirements could result in the assessment of damages, the imposition of penalties, suspension of production, changes to equipment or processes or a cessation of operations at our facilities, any of which could have a material adverse effect on our business. Because these laws are complex, subject to change and may be applied retroactively, we cannot predict with certainty the extent of our future liabilities with respect to environmental, health and safety matters and whether they will be material.
In addition, certain statutes such as CERCLA may impose joint and several liability for the costs of remedial investigations and actions on entities that generated waste, arranged for disposal of waste, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such “potentially responsible parties” (“PRP”) (or, or any one of them, including us)us, may be required to bear all of such costs regardless of fault, the legality of the original disposal or ownership of the disposal site. As a result, we may be required to conduct investigations and perform remedial activities at current and former operating and manufacturing sites where we have been deemed, or in the future could be, named a PRP with respect to such environmental liabilities, any of which could require us to incur material costs. The final remediation costs of these environmental sites may exceed current estimated costs, and additional sites in the future may require material remediation expenses. If actual expenditures exceed our estimates, our results of operations and financial position could be materially and adversely affected. See “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 3. LEGAL PROCEEDINGS - Environmental,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 17. of the Notes to Consolidated Financial Statements.
WeClimate change and legal or regulatory responses thereto may have substantial additional liability for federal income tax allegedly owed by Walter Energy.an adverse impact on our business and results of operations.
We wereThere is growing concern that a membergradual increase in global average temperatures as a result of the Walter Energy, Inc. (“Walter Energy”) federal tax consolidated group, through December 14, 2006, at which time the company was spun-off from Walter Industries. Until our spin-off from Walter Energy, we joinedincreased concentration of carbon dioxide and other greenhouse gases in the filingatmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Many of our manufacturing plants use significant amounts of electricity generated by burning fossil fuels, which releases carbon dioxide. Such climate change may impair our production capabilities, disrupt our supply chain or impact demand for our products. Growing concern over climate change also may result in additional legal or regulatory requirements designed to reduce or mitigate the Walter Energy consolidated federal income tax return for each taxable year during which we were a membereffects of carbon dioxide and other greenhouse gas emissions on the consolidated group. Asenvironment. Increased energy or compliance costs and expenses as a result we are jointly and severally liable for the federal income tax liability, if any, of the consolidated group for each of those years. Accordingly, we could be liableincreased legal or regulatory requirements may cause disruptions in, or an increase in the event any such federal income tax liability is incurred,costs associated with, the manufacturing and not discharged, by any other memberdistribution of the Walter Energy tax consolidated group for any period during whichour products. The impacts of climate change and legal or regulatory initiatives to address climate change could have a long-term adverse impact on our business and results of operations. If we were included in the Walter Energy tax consolidated group.
In July 2015, Walter Energy filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the Northern District of Alabama (“Walter Bankruptcy Case”). On February 2, 2017, the Walter Bankruptcy Case was convertedfail to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy is now in the process of being wound down and liquidated.
The IRS had alleged that Walter Energy owed substantial amounts (the “Walter Tax Liability”) for prior taxable periods in which we were a member of the Walter Energy tax consolidated group (specifically, 1983-1994, 2000-2002 and 2005). On January 11, 2016, the IRS filed a proof of claim in the Walter Bankruptcy Case, alleging that Walter Energy owed taxes, interest and penalties for the years 1983-1994, 2000-2002 and 2005 in an aggregate amount of $554.3 million ($229.1 million of which
achieve or improperly report on our
progress toward achieving our goals and commitments to reduce our carbon footprint or in environmental and sustainability programs and initiatives, the results could have an adverse impact on our business and results of operations.
the IRS claimed was entitled to priority status in the Walter Bankruptcy Case). The IRS asserted that its claim was based on an alleged settlement of Walter Energy’s tax liability for years 1983 through 1994, which Walter Energy disputed. In the proof of claim, the IRS included an alternative calculation in an aggregate amount of $860.4 million, which it asserted would be appropriate in the event the alleged settlement were determined to be non-binding ($535.3 million of which the IRS claimed was entitled to priority status in the Walter Bankruptcy Case). The IRS had indicated its intent to pursue collection of amounts included in the proofs of claim from former members of the Walter Energy tax consolidated group.
We have been working constructively with the parties involved in this matter in an effort to reach a consensual resolution with respect to the Walter Tax Liability. On November 5, 2019, we acknowledged and agreed to be bound by a settlement agreement between the bankruptcy trustee in the Walter Bankruptcy Case and the Internal Revenue Service to resolve the Walter Tax Liability. On November 18, 2019, the settlement agreement was approved by the U.S. Bankruptcy Court in the Northern District of Alabama, which is responsible for the Walter Bankruptcy Case. The approval was made over the objection of a third party and is subject to appeal and/or a motion for reconsideration, the outcome of which cannot be predicted. Should the approval order become effective, under the terms of the settlement agreement, we would contribute approximately $22 million to the settlement, plus interest through the payment date, with another former Walter Energy subsidiary agreeing to contribute approximately $17 million to the settlement. No assurances as to the timing or outcome of any appeal or motion to reconsider the approval order can be made; however, we expect our liabilities with respect to the Walter Tax Liability will be fully resolved should the order become effective and we make the required contribution.
We rely on successors to Tyco to indemnify us for certain liabilities and they may become financially unable or fail to comply with the terms of the indemnity.
Under the terms of the acquisition agreement relating to the August 1999 sale by Tyco of our businesses to a previous ownerwhich make up certain of these businesses,the companies within Mueller Water Products, Inc., we are indemnified by certain Tyco entities (“Tyco Indemnitors”) for all liabilities arising in connection with the operation of these businesses prior to their sale by Tyco, including with respect to products manufactured or sold prior to the closing of that transaction, as well as certain environmental liabilities. These indemnities survive indefinitely and are not subject to any dollar limits. In the past, Tyco Indemnitors have made substantial payments and assumed defense of claims in connection with these indemnification obligations. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. The result of these transactions is that the assets of, and control over, Tyco Indemnitors has changed. Should any Tyco Indemnitor become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
Risks related to our human capital
We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and
skilled personnel, we may not be able to achieve our strategic objectives and our business may be adversely
affected.
Our ability to expand or maintain our business depends on our ability to hire, train and retain employees with the skills necessary to understand and adapt to the continuously developing needs of our customers. The increasing demand for qualified personnel makes it more difficult for us to attract and retain employees with requisite skill sets, particularly employees with specialized technical and trade experience. Changing demographics and labor work force trends also may result in a loss of knowledge and skills as experienced workers retire. If we fail to attract, motivate, train and retain qualified personnel, or if we experience excessive turnover, we may experience declining sales, manufacturing delays or other inefficiencies, increased recruiting, training and relocation costs and other difficulties, and our business, financial condition, results of operations and cash flows could be materially and adversely affected. Competition for qualified personnel is intense and we may not be successful in attracting or retaining qualified personnel, which could negatively impact our business.
If we are unable to negotiate collective bargaining agreements on satisfactory terms or we experience strikes, work stoppages, labor unrest or higher than normal absenteeism, our business could suffer.
Many of our employees at our manufacturing locations are covered by collective bargaining agreements. While we generally have been able to renegotiate collective bargaining agreements on generally satisfactory terms, negotiations may be challenging as the Company must have a competitive cost structure in each market while meeting the compensation and benefits needs of our employees. If we are unable to renew collective bargaining agreements on satisfactory terms, our labor costs could increase, which could impact our financial position and results of operations. Strikes, work stoppages or other forms of labor unrest at any of our plants could impair our ability to supply products to our distributors and customers, which could reduce our revenues, increase our expenses and expose us to customer claims.
Furthermore, our ability to meet product delivery commitments and labor needs while controlling labor costs is subject to numerous external factors, including, but not limited to:
•Market pressures with respect to prevailing wage rates,
•Unemployment levels,
•Health and other insurance costs,
•The impact of legislation or regulations governing labor relations, immigration, minimum wage, and healthcare benefits,
•Changing demographics, and
•Our reputation within the labor market.
Index to Financial Statements
We also compete with many other industries and businesses for most of our hourly production employees. An inability to provide wages and/or benefits that are competitive could adversely impact our ability to attract and retain employees. Further, changes in market compensation rates may adversely affect our labor costs.
Our expenditures for pension obligations could be materially higher than we have predicted.
We provide pension benefits to certain current and former employees. To determine our future payment obligations under the plans, certain rates of return on the plans’ assets, growth rates of certain costs and participant longevity have been estimated. The proportion of the assets held by our U.S.United States pension plan invested in fixed income securities, instead of equity securities, has increaseddecreased over historical levels. This shift in asset allocation has not resulted in a decrease in thematerial change to our estimated rate of return on plan assets for this plan. Assumed discount rates, expected return on plan assets and participant longevity have significant effects on the amounts reported for the pension obligations and pension expense.
The funded status of our pension plans canmay also be influenced by regulatory requirements, which can change unexpectedly and impose higher costs if funding levels are below certain thresholds. We may increase contributions to our pension plans to avoid or reduce these higher costs.
Significant adverse changes in credit and capital markets or changes in investments could result in discount rates or actual rates of return on plan assets being materially lower than projected and require us to increase pension contributions in future years to meet funding level requirements. Increasing life spans for plan participants may increase the estimated benefit payments and increase the amounts reported for pension obligations, pension contributions and pension expense. If increased funding requirements are particularly significant and sustained, our overall liquidity could be materially reduced, which could cause us among other things, to reduce investments and capital expenditures, or restructure or refinance our debt.debt, among other things.
Risks related to our international operations
Any failure to satisfy international trade laws and regulations or to otherwise comply with changes or other trade developments may adversely affect us.
Our operations require importing and exporting goods and technology among countries on a regular basis. Thus, the sale and shipment of our products and services across international borders, as well as the purchase of components and products from international sources, subject us to extensive trade laws and regulations. Trade laws and regulations are complex, differ by country, and are enforced by a variety of government agencies. Because we are subject to extensive trade laws and regulations in the countries in which we operate, we are subject to the risk that laws and regulations could change in a waymanner that would expose us to additional costs, penalties or liabilities, and our policies and procedures may not always protect us from actions that would violate international trade laws and regulations. For example, certain federal legislation requires the use of American iron and steel products in certain water projects receiving certain federal appropriations. We have incurred costs in connection with ensuring our ability to certify to these requirements, including those associated with enhancing our assembly operations and sourcing practices. As a result of the varying legal and regulatory requirements to which our cross-border activities are subject, we may not always be in compliance with the trade laws and regulations in all respects. Any improper actions could subject us to civil or criminal penalties, including material monetary fines, or other adverse actions, including denial of import or export privileges, and could harm our reputation and our business prospects.
Our high fixedIf significant tariffs or other restrictions continue to be placed on foreign imports by the United States and related countermeasures are taken by impacted foreign countries, our revenue and results of operations may be harmed.
If significant tariffs or other restrictions continue to be placed on foreign imports by the United States and related countermeasures are taken by impacted foreign countries, our revenue and results of operations may be harmed. For example, trade tensions between the United States and China have led to series of significant tariffs on the importation of certain product categories over recent years. The materials subject to these tariffs could impact our raw material costs as well. However, if further tariffs are imposed on a broader range of imports, or if further retaliatory trade measures are taken by China or other countries in response to additional tariffs, we may make it more difficult for usbe required to respond to economic cycles.
A significant portionraise our prices or incur additional expenses, which may result in the loss of customers and harm our cost structure is fixed, including manufacturing overhead, capital equipmentoperating performance, revenue and research and development costs. In a prolonged economic downturn, these fixed costs may cause our gross margins to erode and earnings to decline.profit.
The prices of our purchased components and raw materials can be volatile.
Our operations require substantial amounts of purchased components and raw materials, such as scrap steel, sand, resin, brass ingot and steel pipe. We generally purchase components and raw materials at current market prices. The cost and availability of these materials are subject to economic forces largely beyond our control, including North American and international demand, inflation, foreign currency exchange rates, freight costs, tariffs, commodity speculation and commodity speculation.other external factors beyond our control, such as the COVID-19 pandemic or other supply chain
Index to Financial Statements
challenges. Inflation in raw material costs has occurred in fiscal 2022, which has led to increased raw material price volatility and costs, which we expect to continue into fiscal 2023.
We may not be able to pass on the entire cost of price increases, or at all, for purchased components and raw materials to our customers or offset fully the effects of these higher costs through productivity improvements. In particular, when purchased component or raw material prices increase rapidly or to significantly higher than normal levels, we may not be able to pass cost increases through to our customers on a timely basis, if at all, which would reduce our profitability and cash flows. In addition, if purchased components or raw materials wereare not available or not available on commercially reasonable terms, our sales, profitability and cash flows would be reduced. Our competitors may secure more reliable sources of purchased components and raw materials or they may obtain these supplies on more favorable terms than we do, which could give them a cost advantage.
Seasonal demand for certainOther risks related to our business
The negative impact of the COVID-19 pandemic on our productsoperations may increase.
The COVID-19 pandemic has had, and services may adversely affect our financial results.
Sales of some of our products, including iron gate valves and fire hydrants, are seasonal, with lower sales in our first and second fiscal quarters when weather conditions throughout most of North America tendcontinues to be cold resulting in lower levels of construction activity. This seasonality in demand has resulted in fluctuations in our sales and operating results. To satisfy demand during expected peak periods, we may incur costs associated with building inventory in off-peak periods, and our projections as to future needs may not be accurate. Because many of our expenses are fixed, seasonal trends can cause reductions in our profitability and profit margins and deterioration ofhave, meaningful adverse impacts on our financial condition during periods affected by lower production or sales activity.
operations as discussed in PART II, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” We may be affected by new governmental legislation and regulations relating to carbon dioxide emissions.
Manyfrom time-to-time experience plant closures, limitations in the ways we operate within our facilities, illness or quarantine of our manufacturing plants use significant amountsemployees, supply chain disruptions, transportation delays, cost increases, more extensive travel restrictions, closures or disruptions of electricity generated by burning fossil fuels, which releases carbon dioxide. Several state courtsbusinesses and administrative agenciesfacilities, or social, economic, political or labor instability in the affected areas. These same factors may continue to impact our suppliers, customers and distributors and the severity of such impacts could increase. The health implications of the pandemic are consideringextensive and the scopeextent, duration and scaleseverity of carbon dioxide emission regulation under various laws pertainingthe pandemic remain highly uncertain. We are unable to the environment, energy use and development and greenhouse gas emissions. In addition, several states are considering various carbon dioxide registration and reduction programs. The final details and scope of these various legislative, regulatory and policy measures are unclear and their potential impact is still uncertain, so we cannot fully predictestimate the impact onof measures we may undertake in the future and the actions taken, or that will be taken, by governmental agencies. Should there be unexpected health implications for our business.
The potential impacts of climate change onemployees, communities or others, we could face litigation or other claims and suffer damage to our operations are highly uncertain. Although the financial impact of these potential changes is not reasonably estimable at this time, our operations in certain locationsreputation, brand and those of our customers and suppliers could potentially be adversely affected,operations, which could adversely affect our sales, profitability and cash flows.business.
We may not be ablehave incurred additional costs to efficiently integrate future acquisitions.
address the pandemic as discussed in PART II, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, including costs associated with unfavorable volume variances, voluntary emergency paid leave, incentive payments for vaccinations, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities. We expect to continue making acquisitionsto incur such costs, which may be significant, as partwe continue to implement operational changes in response to the pandemic. The pandemic is causing disruptions in our supply chain that have caused and could result in further higher costs in the manufacture and delivery of our long-term business strategy. These acquisitionsproducts. We expect these conditions to persist for the near term and may worsen until the pandemic abates. Further, we expect additional costs, added administrative burdens and other transactionsnegative cost and arrangements involve significant challengesoperational impacts as a result of the United States’ Occupational Safety and risks, including that they do not advanceHealth Administration (“OSHA”) emergency temporary standard (the “Vaccine/Test Mandate”) related to COVID-19 vaccination and testing requirements.
Continued disruptions in our markets and the global economy may cause us to have to assess impairments of our assets and cause us to incur and record non-cash impairment charges.
Management is focused on mitigating the impact of the pandemic on our operations, which has required, and will continue to require, a large investment of time and resources across our business strategy,and may delay other strategic initiatives and large capital projects that we get an unsatisfactory return onare important to the business. Additionally, many of our investment, that we have difficulty integratingemployees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and retaining new employees, business systems, and technology, or that they distract management from our other businesses. The success of these transactions and arrangements will depend in part onconsequently impair our ability to leverage themmanage our business.
The extent to enhancewhich the pandemic and the evolving regulatory environment impacts us will depend on a number of factors and developments that we are not able to predict or control, including, among others: the severity of the virus; the duration of the outbreak; governmental, business and other actions which could include limits on funding for our existing products or services; the health of and services or develop compelling new ones. It may take longer than expected to realize the full benefits from these transactionseffect on our workforce; and arrangements,the potential effects on our internal controls including those over financial reporting and information technology as a result of changes in working environments such as increased revenue, enhanced efficiencies,shelter-in-place and similar orders that are applicable to our employees, including management. In addition, if the pandemic continues to create disruptions or increased market share,turmoil in the credit or the benefits may ultimately be smaller than we expected. These eventsfinancial markets, it could adversely affect our operatingability to access capital on favorable terms, it at all, and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted.
The pandemic may also impact third parties with which we do business, and each of their financial conditions, including their viability and ability to pay for our products and services, which could adversely impact us. The extent of the impact of the pandemic on our operations and financial results or financial condition.
depends on future developments and is highly uncertain. The situation is ever
changing and future impacts may materialize that are not yet known.
Item 2.PROPERTIES
Our principal properties are listed below.
|
| | | | | | | | | | | | | | | | | | | |
Location | | Activity | | Size
(sq. ft.) Square Footage | | Owned or leased
|
Infrastructure:Albertville, AL | | Manufacturing | | 422,000 | | | Owned |
Albertville, ALAriel, Israel | | Manufacturing | | 422,000221,000 |
| | OwnedLeased |
Ariel, IsraelAtlanta, GA | | ManufacturingCorporate headquarters | | 221,00025,000 |
| | Leased |
Aurora, ILAtlanta, GA | | ManufacturingResearch and development | | 147,00021,000 |
| | OwnedLeased |
Aurora, ILBarrie, Ontario | | Distribution | | 84,00050,000 |
| | Leased |
Barrie, OntarioBrownsville, TX | | DistributionManufacturing | | 50,000 |
| | Leased |
Brownsville, TXCalgary, Alberta | | ManufacturingDistribution | | 50,00040,000 |
| | Leased |
Calgary, AlbertaChattanooga, TN | | DistributionManufacturing | | 11,000525,000 |
| | LeasedOwned |
Chattanooga, TN | | Manufacturing | | 525,000 |
| | Owned |
Chattanooga, TN | | General and administration | | 17,000 |
| | Leased |
Chattanooga, TN | | Research and development | | 22,000 |
| | Leased |
Cleveland, TNNC | | Manufacturing | | 109,500190,000 |
| | Owned |
Dallas, TXCleveland, TN | | DistributionManufacturing | | 26,000109,500 |
| | LeasedOwned |
Decatur, ILCleveland, TN | | ManufacturingWarehouse | | 467,000100,000 |
| | OwnedLeased |
Hammond, INDallas, TX | | ManufacturingDistribution | | 51,00026,000 |
| | OwnedLeased |
Jingmen, ChinaDecatur, IL | | Manufacturing | | 154,000467,000 |
| | Owned |
Kimball, TNEmporia, KS | | Manufacturing | | 233,00063,000 |
| | OwnedLeased |
Ocala, FLJingmen, China | | DistributionManufacturing | | 50,000154,000 |
| | LeasedOwned |
Ontario, CAKimball, TN | | DistributionManufacturing | | 73,000233,000 |
| | LeasedOwned |
Surrey, British ColumbiaOcala, FL | | ManufacturingDistribution | | 33,00050,000 |
| | Leased |
Tai Cang, ChinaOntario, CA | | ManufacturingDistribution | | 19,00073,000 |
| | Leased |
Woodland, WARosh Haayin, Israel | | ManufacturingGeneral and administration | | 20,0008,400 |
| | Leased |
Sharjah, United Arab Emirates | | Distribution | | 10,000 |
| | Leased |
Technologies:Southampton, United Kingdom | | | | | | |
Cleveland, NC | | Manufacturing | | 190,000 |
| | Owned |
Atlanta, GA | | Research and development | | 21,0002,300 |
| | Leased |
Toronto, Ontario | | Research and development | | 18,000 |
| | Leased |
Corporate: | | | | | | |
Atlanta, GA | | Corporate headquarters | | 25,000 |
| | Leased |
We consider our facilities to be well maintained and believe we have sufficient capacity to meet our anticipated needs through 2020.2023. Our leased properties have terms expiring at various dates through 2028.
2033.
Item 3.LEGAL PROCEEDINGS
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below.operations. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described below,elsewhere in this Annual Report, we do not believe that any of our outstanding litigation would have a material adverse effect on our business or prospects.
Environmental. We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
In the acquisition agreement pursuant to which a predecessor to Tyco sold our businesses to a previous owner in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999, including environmental liabilities. The indemnity survives indefinitely. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the Tyco indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such Tyco indemnitors has changed. Should any of these Tyco indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suit against Mueller Canada Ltd. and its directors seeking C$10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. Mueller Canada Ltd. leased the property from 1988 through 2008. We are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification. On December 7, 2011, the Court denied the plaintiff’s motion for summary judgment.
The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. Accordingly, because the amount of such costs cannot be reasonably estimated at this time, no amounts had been accrued for this matter at September 30, 2019.
See “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 1A. RISK FACTORS - We are subject to increasingly stringent environmental, health and safety laws and regulations that impose significant compliance costs. Any failure to satisfy these laws and regulations may adversely affect us,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 17. of the Notes to Consolidated Financial Statements.
Walter Energy. We were a member of the Walter Energy federal tax consolidated group, through December 14, 2006, at which time the company was spun-off from Walter Industries. Until our spin-off from Walter Energy, we joined in the filing of the Walter Energy consolidated federal income tax return for each taxable year during which we were a member of the consolidated group. As a result, we are jointly and severally liable for the federal income tax liability, if any, of the consolidated group for each of those years. Accordingly, we could be liable in the event any such federal income tax liability is incurred, and not discharged, by any other member of the Walter Energy tax consolidated group for any period during which we were included in the Walter Energy tax consolidated group.In July 2015, Walter Energy filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the Northern District of Alabama (“Walter Bankruptcy Case”). On February 2, 2017, the Chapter 11 case was converted to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy is now in the process of being wound down and liquidated.
The IRS had alleged that Walter Energy owed substantial amounts (“Walter Tax Liability”) for prior taxable periods in which we were a member of the Walter Energy tax consolidated group (specifically, 1983-1994, 2000-2002 and 2005). On January 11, 2016, the IRS filed a proof of claim in the Walter Bankruptcy Case, alleging that Walter Energy owed taxes, interest and penalties for the years 1983-1994, 2000-2002 and 2005 in an aggregate amount of $554.3 million ($229.1 million of which the IRS claimed was entitled to priority status in the Walter Bankruptcy Case). The IRS asserted that its claim was based on an alleged settlement of Walter Energy’s tax liability for years 1983 through 1994, which Walter Energy disputed. In the proof of claim, the IRS included an alternative calculation in an aggregate amount of $860.4 million, which it asserted would be appropriate in the event the alleged settlement were determined to be non-binding ($535.3 million of which the IRS claimed was entitled to priority status in the Walter Bankruptcy Case). The IRS had indicated its intent to pursue collection of amounts included in the proofs of claim from former members of the Walter Energy tax consolidated group.
We have been working constructively with the parties involved in this matter in an effort to reach a consensual resolution with respect to the Walter Tax Liability. On November 5, 2019, we acknowledged and agreed to be bound by a settlement agreement between the bankruptcy trustee in the Walter Bankruptcy Case and the Internal Revenue Service to resolve the Walter Tax Liability. On November 18, 2019, the settlement agreement was approved by the U.S. Bankruptcy Court in the Northern District of Alabama which is responsible for the Walter Bankruptcy Case. The approval was made over the objection of a third party and is subject to appeal and/or a motion for reconsideration, the outcome of which cannot be predicted. Should the approval order become effective, under the terms of the settlement agreement, we would contribute approximately $22 million to the settlement, plus interest through the payment date, with another former Walter Energy subsidiary agreeing to contribute approximately $17 million to the settlement. No assurances as to the timing or outcome of any appeal or motion to reconsider the approval order can be made; however, we expect our liabilities with respect to the Walter Tax Liability will be fully resolved should the order become effective and we make the required contributions.
Chapman. In 2017, our warranty analyses identified that certain Technologies radio products produced prior to 2017 and installed in particularly harsh environments had been failing at higher than expected rates. During the quarter ended March 31, 2017, we conducted additional testing of these products and revised our estimates of warranty expenses. As a result, we recorded additional warranty expense of $9.8 million in the second quarter of 2017. During the quarter ended June 30, 2018, we completed a similar analysis and determined, based on this new information, that certain other Technologies products had been failing at higher-than-expected rates as well and that the average cost to repair or replace certain products under warranty was higher than previously estimated. As a result, in the third quarter of 2018, we recorded additional warranty expense of $14.1 million associated with such products. Related to the above warranty expenses, on April 11, 2019, an alleged stockholder filed a putative class action lawsuit against Mueller Water Products, Inc. and certain of our former and current officers (collectively, the “Defendants”) in the U.S. District Court for the Southern District of New York. The proposed class consists of all persons and entities that acquired our securities between May 9, 2016 and August 6, 2018 (the “Class Period”). The complaint alleges violations of the federal securities laws, including, among other things, that we made materially false and/or misleading statements and failed to disclose material adverse facts about our business, operations, and prospects during the proposed Class Period. The plaintiff seeks compensatory damages and attorneys’ fees and costs but does not specify the amount. Defendants filed their motion to dismiss on November 1, 2019. We believe the allegations are without merit and intend to vigorously defend against the claims. However, the outcome of this legal proceeding cannot be predicted with certainty.
Indemnifications. We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.
Additionally, in connection with the sale of assets and the divestiture of businesses, such as the divestitures of U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.
Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.
Other Matters. We are party to a number of other lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our future financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our business or prospects.
PART II
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Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the trading symbol MWA.
Covenants contained in certain of the debt instruments described in Note 7.8. of the Notes to Consolidated Financial Statements restrict the amount we canour ability to declare and pay in cash dividends. Future dividends will be declared at the discretion of our boardBoard of directorsDirectors and will depend on our future earnings, financial condition and other factors.
At September 30, 2022, there w2019ere 97 s, there were 102 stockholderstockholders of record for our common stock. This figure does not include stockholders whose shares are held in street namethe account of a stockbroker, bank or custodian on behalf of a stockholder or shares which are otherwise beneficially held.
Equity Compensation Plan Information
The informationInformation regarding our compensation plans under which equity securities are authorized for issuance is set forth in “Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.”
Sale of Unregistered Securities
We did not issue any unregistered securities within the past three years.
Issuer Purchases of Equity Securities
We didIn 2015, we announced the authorization of a stock repurchase program for up to $50.0 million of our common stock. The program does not repurchasecommit us to any particular timing or quantity of purchases, and we may suspend or discontinue the program at any time. In 2017, we announced an increase to the authorized amount of this program to $250.0 million.
During the three months ended September 30, 2022, we repurchased 830,842 shares of our common stock in the quarter endedfor$10.0 million under our share repurchase authorization, and we had $100.0 million remaining under this authorization as of September 30, 2019.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum dollar value of shares that may yet be purchased under the plans or programs (in millions) |
July 1-31, 2022 | | 200 | | | $ | 11.74 | | | — | | | $ | 110.0 | |
August 1-31, 2022 | | 830,842 | | | $ | 12.02 | | | 830,842 | | | $ | 100.0 | |
September 1-30, 2022 | | 3,681 | | | $ | 10.53 | | | — | | | $ | 100.0 | |
Total | | 834,723 | | | $ | 12.01 | | | 830,842 | | | |
Index to Financial Statements
Stock Price Performance Graph
The following graph compares the Company’s cumulative quarterly stock market performance of our common stock price performance with the Russell 2000 Stock Index (“Russell 2000”) and the Dow Jones U.S. Building Materials & Fixtures Index (“DJ U.S. Building Materials & Fixtures”) since September 30, 2014.2017. Total return values were calculated based on cumulative total return assuming (i) the investment of $100 in our common stock, the Russell 2000 and the DJ U.S. Building Materials & Fixtures on the dates indicated and (ii) reinvestment of all dividends.
Item 6. [Reserved]
Not applicable.
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Item 6. | SELECTED FINANCIAL DATA |
The selected financial and other data presented below should be read in conjunction with, and are qualified by reference to, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the consolidated financial statements and notes thereto included elsewhere in this annual report.
|
| | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in millions, except per share data) |
Statement of operations data: | | | | | | | | | | |
Net sales | | $ | 968.0 |
| | $ | 916.0 |
| | $ | 826.0 |
| | $ | 800.6 |
| | $ | 793.4 |
|
Cost of sales | | 647.1 |
| | 626.1 |
| | 558.1 |
| | 531.7 |
| | 547.5 |
|
Gross profit | | 320.9 |
| | 289.9 |
| | 267.9 |
| | 268.9 |
| | 245.9 |
|
Selling, general and administrative expenses | | 182.7 |
| | 166.7 |
| | 155.4 |
| | 149.5 |
| | 147.6 |
|
Loss on Walter receivable | | — |
| | — |
| | — |
| | — |
| | 11.6 |
|
Gain on sale of idle property | | (2.4 | ) | | (9.0 | ) | | — |
| | — |
| | — |
|
Other charges | | 16.3 |
| | 10.5 |
| | 10.4 |
| | 7.2 |
| | 7.9 |
|
Interest expense, net | | 19.8 |
| | 20.9 |
| | 22.2 |
| | 23.6 |
| | 27.5 |
|
Loss on early extinguishment of debt | | — |
| | 6.5 |
| | — |
| | — |
| | 31.3 |
|
Walter Energy Accrual | | 22.0 |
| | — |
| | — |
| | — |
| | — |
|
Pension costs other than service | | 0.4 |
| | 1.0 |
| | 1.4 |
| | 19.3 |
| | (0.8 | ) |
Gain on settlement of interest rate swap contracts | | — |
| | (2.4 | ) | | — |
| | — |
| | — |
|
Income before income taxes | | 82.1 |
|
| 95.7 |
|
| 78.5 |
|
| 69.3 |
|
| 20.8 |
|
Income tax (benefit) expense | | 18.3 |
| | (9.9 | ) | | 24.2 |
| | 24.2 |
| | 8.3 |
|
Income from continuing operations | | 63.8 |
| | 105.6 |
| | 54.3 |
| | 45.1 |
| | 12.5 |
|
Discontinued operations(1) | | — |
| | — |
| | 69.0 |
| | 18.8 |
| | 18.4 |
|
Net income | | $ | 63.8 |
| | $ | 105.6 |
| | $ | 123.3 |
| | $ | 63.9 |
| | $ | 30.9 |
|
Earnings per basic share: | | | | | | | | | | |
Continuing operations | | $ | 0.40 |
| | $ | 0.67 |
| | $ | 0.34 |
| | $ | 0.28 |
| | $ | 0.08 |
|
Discontinued operations(1) | | — |
| | — |
| | 0.43 |
| | 0.12 |
| | 0.11 |
|
Net income | | $ | 0.40 |
| | $ | 0.67 |
| | $ | 0.77 |
| | $ | 0.40 |
| | $ | 0.19 |
|
Earnings per diluted share: | | | | | | | | | | |
Continuing operations | | $ | 0.40 |
| | $ | 0.66 |
| | $ | 0.34 |
| | $ | 0.28 |
| | $ | 0.08 |
|
Discontinued operations(1) | | — |
| | — |
| | 0.42 |
| | 0.11 |
| | 0.11 |
|
Net income | | $ | 0.40 |
| | $ | 0.66 |
| | $ | 0.76 |
| | $ | 0.39 |
| | $ | 0.19 |
|
Weighted average shares outstanding: | | | | | | | | | | |
Basic | | 157.8 |
| | 158.2 |
| | 160.1 |
| | 161.3 |
| | 160.5 |
|
Diluted | | 159.0 |
| | 159.7 |
| | 161.8 |
| | 163.4 |
| | 163.2 |
|
Balance sheet data (at September 30): | | | | | | | | | | |
Cash and cash equivalents | | $ | 176.7 |
| | $ | 347.1 |
| | $ | 361.7 |
| | $ | 195.0 |
| | $ | 113.1 |
|
Working capital | | 388.4 |
| | 518.4 |
| | 528.7 |
| | 426.5 |
| | 381.5 |
|
Property, plant and equipment, net | | 217.1 |
| | 150.9 |
| | 122.3 |
| | 108.4 |
| | 100.0 |
|
Total assets | | 1,337.3 |
| | 1,291.9 |
| | 1,258.3 |
| | 1,280.6 |
| | 1,229.8 |
|
Total debt | | 446.3 |
| | 445.0 |
| | 480.6 |
| | 484.4 |
| | 488.3 |
|
Long-term liabilities | | 566.5 |
| | 560.0 |
| | 627.2 |
| | 675.3 |
| | 694.0 |
|
Total liabilities | | 745.0 |
| | 727.1 |
| | 768.8 |
| | 861.1 |
| | 862.0 |
|
Total equity | | 592.3 |
| | 564.8 |
| | 489.5 |
| | 419.5 |
| | 367.8 |
|
Other data (year ended September 30): | | | | | | | | | | |
Depreciation and amortization | | 53.0 |
| | 43.7 |
| | 41.9 |
| | 39.5 |
| | 43.4 |
|
Capital expenditures | | 86.6 |
| | 55.7 |
| | 40.6 |
| | 31.5 |
| | 27.2 |
|
Cash dividends declared per share | | 0.2025 |
| | 0.190 |
| | 0.150 |
| | 0.100 |
| | 0.075 |
|
| |
(1) | In 2017, we sold Anvil. The results of its operations and the gain on the sale of Anvil are classified as discontinued operations for 2015 through 2017, as applicable. |
| |
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and related notes theretoincluded in Item 8. “Financial Statements and Supplementary Data” of this Annual Report. This discussion and analysis contains forward-looking statements that appear elsewhereinvolve risks, uncertainties and other factors that may cause actual results to differ materially from those projected in this annual report.any forward-looking statements, as discussed in “Disclosure Regarding Forward-Looking Statements.” These risks and uncertainties include but are not limited to those set forth in “Item 1A. RISK FACTORS”.
Overview
Organization
On October 3, 2005, Walter Energy acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed them to its U.S. Pipe business to form the Company. In June 2006, we completed an initial public offering of common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in the Company, completing our spin-off. We subsequently sold our U.S. Pipe and Anvil businesses.
On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million. The acquisition of Krausz was financed with cash on hand. The results of Krausz are included within our Infrastructure segment for all periods following the acquisition date.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.
Business
We adopted a new management structure effective October 1, 2021 which resulted in a change to our reportable segments. Under this new structure, we operate our business through two segments, InfrastructureWater Flow Solutions and Technologies.Water Management Solutions.
We estimate approximately 60% to 65% of the Company’s 20192022 net sales were associated with repair and replacement directly related to municipal water infrastructure spending, approximately 25% to 30% were related to residential construction activity and less than 10% were related to natural gas utilities.
We expect our primary end markets, repairAfter experiencing challenges in 2020 and replacement of water infrastructure, driven by2021 resulting from the pandemic, municipal spending and new water infrastructure installation, driven by residential construction, to grow in 2022 recovered during the low-single digits in 2020. We expect the natural gas utilities market to grow in the mid-single digits in 2020.
Infrastructure
Municipal spending in 2019 was relatively flatfiscal year as compared with the prior year and economic forecasts predict this trend will continue.year. According to the U.S. Bureau of Economic Analysis, state and local tax receipts for the quarter ended September 30, 2019 were up year-over-year and, according to the U.S.United States Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 20192022 increased 3.2%4.7%. However, water conservation efforts, particularly in areasWhile the economic effects of the pandemic have impacted by recent drought conditions, have resulted in lower overall receiptsrevenues for some U.S. water utilities.utilities in the United States, water utilities were generally able to maintain repair and replacement activities.
The year-over-year percentage changeWe expect the operating environment during fiscal year 2023 to be very challenging as a result of the inflationary environment, labor challenges and potential recession. We anticipate healthy demand in housing starts isthe municipal repair and replacement market due to favorable budgets, especially at larger municipalities. While demand from the new residential construction end market has been at healthy levels during fiscal 2022, especially for lot and land development activity, we anticipate that activity levels will slow during fiscal 2023 based on higher interest rates leading to a key indicator ofdecrease in demand for Infrastructure’s products sold in thenew residential construction market. During our fiscal year, housing starts declined 2.2% according to the U.S. Census Bureau.. In November 2019,2022, Blue Chip Economic Indicators forecasted a 1.3% increase12.3% decrease in housing starts for the calendar 2020year 2023 compared to the prior year.
Technologies
The municipal market is the key end market for Technologies. The businesses in Technologies are project-oriented and depend on customer adoption of their technology-based products and services. We entered 2019 with a backlog of $8.9 million at Mueller Systems, largely for AMI products.calendar year 2022.
Consolidated
Overall for Mueller Water Products in 2020,For our fiscal year 2023, we expect year-over-yearanticipate that consolidated net sales percentage growth between 3%will be 6% to 8% higher than our fiscal year 2022 primarily driven by the benefits of higher pricing. In 2022, we encountered increased material costs as a result of higher raw material prices, particularly brass ingot and 5%. We expect incremental depreciation expense associated with large projectsscrap steel, as well as higher purchased parts, freight, labor costs and energy expenses. In 2023, we anticipate that inflation will slow operating income growth in the short term, but that these projects will expand operating margins when they are running at full capacity. Additionally, we expect our increasing SG&A spending relatedcontinue to improving our capabilities for new product development will be beneficial to the business in the long term, but may reduce our operating income in the short term.
increase material and other costs.
Results of Operations
Year Ended September 30, 20192022 Compared to Year Ended September 30, 20182021
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended September 30, 2022 |
| Water Flow Solutions | | Water Management Solutions | | Corporate | | Consolidated |
| (in millions) |
Net sales | $ | 714.1 | | | $ | 533.3 | | | $ | — | | | $ | 1,247.4 | |
Gross profit | 212.4 | | | 151.9 | | | — | | | $ | 364.3 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 87.1 | | | 102.8 | | | 48.8 | | | 238.7 | |
Strategic reorganization and other charges | 0.2 | | | 0.4 | | | 6.6 | | | 7.2 | |
Goodwill impairment | 6.8 | | | — | | | — | | | 6.8 | |
Total operating expenses | 94.1 | | | 103.2 | | | 55.4 | | | 252.7 | |
Operating income (loss) | $ | 118.3 | | | $ | 48.7 | | | $ | (55.4) | | | 111.6 | |
Pension benefit other than service | | | | | | | (3.9) | |
Interest expense, net | | | | | | | 16.9 | |
Income before income taxes | | | | | | | 98.6 | |
Income tax expense | | | | | | | 22.0 | |
Net income | | | | | | | $ | 76.6 | |
| | | | | | | |
| Year ended September 30, 2021 |
| Water Flow Solutions | | Water Management Solutions | | Corporate | | Consolidated |
| (in millions) |
Net sales | $ | 617.8 | | | $ | 493.2 | | | $ | — | | | $ | 1,111.0 | |
Gross profit | $ | 202.8 | | | $ | 155.7 | | | $ | — | | | $ | 358.5 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 81.8 | | | 85.8 | | | 51.2 | | | 218.8 | |
Strategic reorganization and other charges (benefits) | 0.1 | | | (0.4) | | | 8.3 | | | 8.0 | |
Total operating expenses | 81.9 | | | 85.4 | | | 59.5 | | | 226.8 | |
Operating income (loss) | $ | 120.9 | | | $ | 70.3 | | | $ | (59.5) | | | 131.7 | |
Pension benefit other than service | | | | | | | (3.3) | |
Interest expense, net | | | | | | | 23.4 | |
Loss on early extinguishment of debt | | | | | | | 16.7 | |
Income before income taxes | | | | | | | 94.9 | |
Income tax expense | | | | | | | 24.5 | |
Net income | | | | | | | $ | 70.4 | |
|
| | | | | | | | | | | | | | | |
| Year ended September 30, 2019 |
| Infrastructure | | Technologies | | Corporate | | Total |
| (in millions) |
Net sales | $ | 871.0 |
| | $ | 97.0 |
| | $ | — |
| | $ | 968.0 |
|
Gross profit | 302.9 |
| | 18.0 |
| | — |
| | $ | 320.9 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative | 121.3 |
| | 26.7 |
| | 34.7 |
| | 182.7 |
|
Gain on sale of idle property | (2.4 | ) | | — |
| | — |
| | (2.4 | ) |
Strategic reorganization and other charges | 1.7 |
| | — |
| | 14.6 |
| | 16.3 |
|
| 120.6 |
| | 26.7 |
| | 49.3 |
| | 196.6 |
|
Operating income (loss) | $ | 182.3 |
| | $ | (8.7 | ) | | $ | (49.3 | ) | | 124.3 |
|
Pension costs other than service | | | | | | | 0.4 |
|
Interest expense, net | | | | | | | 19.8 |
|
Walter Energy Accrual | | | | | | | 22.0 |
|
Income before income taxes | | | | | | | 82.1 |
|
Income tax expense | | | | | | | 18.3 |
|
Net income | | | | | | | $ | 63.8 |
|
| | | | | | | |
| Year ended September 30, 2018 |
| Infrastructure | | Technologies | | Corporate | | Total |
| (in millions) |
Net sales | $ | 818.8 |
| | $ | 97.2 |
| | $ | — |
| | $ | 916.0 |
|
Gross profit | $ | 284.7 |
| | $ | 5.2 |
| | $ | — |
| | $ | 289.9 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative | 104.5 |
| | 29.5 |
| | 32.7 |
| | 166.7 |
|
Gain on sale of idle property | — |
| | — |
| | (9.0 | ) | | (9.0 | ) |
Other charges | 0.1 |
| | 0.1 |
| | 10.3 |
| | 10.5 |
|
| 104.6 |
| | 29.6 |
| | 34.0 |
| | 168.2 |
|
Operating income (loss) | $ | 180.1 |
| | $ | (24.4 | ) | | $ | (34.0 | ) | | 121.7 |
|
Pension costs other than service | | | | | | | 1.0 |
|
Interest expense, net | | | | | | | 20.9 |
|
Loss on early extinguishment of debt | | | | | | | 6.5 |
|
Gain on settlement of interest rate swap contracts | | | | | | | (2.4 | ) |
Income before income taxes | | | | | | | 95.7 |
|
Income tax benefit | | | | | | | (9.9 | ) |
Net income | | | | | | | $ | 105.6 |
|
Consolidated Analysis
Net sales for 20192022 increased 5.7%$136.4 million, or 12.3%, to $968.0$1,247.4 million from $916.0$1,111.0 million in the prior year due primarily to Krausz net sales and $34.6 millionas a result of higher pricing across both segments,most of our product lines in addition to increased volumes.
Gross profit increased $5.8 million, or 1.6%, to $364.3 million for 2022 compared with $358.5 million in the prior year. This increase was primarily a result of higher pricing and increased volumes which were partially offset lower organic volume at Infrastructure.by higher cost of sales
Index to Financial Statements
associated with inflation, unfavorable manufacturing performance, including labor challenges, and supply chain disruptions. Gross profit was $320.9 million for 2019 and $289.9 millionmargin decreased to 29.2% in 2022 as compared with 32.3% in the prior year, and gross margin increased to 33.2% in 2019 from 31.6% in the prior year. These increases were primarily due to effects of $14.1 million warranty expense in 2018, Krausz gross profit, which was negatively affected by $6.8 million of Krausz inventory fair value step up, and higher pricing exceeding cost inflation in the current year.
Selling, general and administrative expenses (“SG&A”) increased 9.6%9.1% to $182.7$238.7 million for 20192022 from $166.7$218.8 million in the prior year. The increase in SG&A was primarily a result of higher travel and trade show expenditures, higher costs associated with inflation, investments in research and development as well as information technology, and the inclusion of i2O Water, partially offset by lower incentive compensation in personnel-related expenses and foreign exchange gains. As a percentage of net sales, SG&A decreased 60 basis points to 19.1% of net sales from 19.7% in the prior year.
Strategic reorganization and other charges for 2022 of $7.2 million primarily consisted of certain transaction-related costs, expenses associated with our ongoing restructuring activities, and the Albertville tragedy. For the fiscal year 2021, Strategic reorganization and other charges of $8.0 million primarily relate to termination benefits associated with our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada, the Albertville tragedy, and certain transaction-related costs, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property.
During the year ended September 30, 2022, we incurred a non-cash impairment charge on our goodwill of $6.8 million within the Water Flow Solutions segment.
Interest expense, net declined $6.5 million in 2022 from the prior year primarily as a result of the retirement of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were replaced with 4.0% Senior Unsecured Notes (“4.0% Senior Notes”) as well as an increase in capitalized interest on our large capital projects, and higher interest income.
| | | | | | | | | | | |
| 2022 | | 2021 |
| (in millions) |
5.5% Senior Notes | $ | — | | | $ | 17.6 | |
4.0% Senior Notes | 18.0 | | | 6.2 | |
Deferred financing costs amortization | 1.0 | | | 1.1 | |
ABL Agreement | 0.9 | | | 0.9 | |
Capitalized interest | (2.6) | | | (2.3) | |
Other interest expense | 0.3 | | | 0.3 | |
Total interest expense | 17.6 | | | 23.8 | |
Interest income | (0.7) | | | (0.4) | |
Total interest expense, net | $ | 16.9 | | | $ | 23.4 | |
Income tax expense of $22.0 million in 2022 resulted in an effective income tax rate of 22.3%, which was lower than the 25.8% rate in the prior year reflecting benefits from research and development tax credits and lower foreign tax rates.
Segment Analysis
Water Flow Solutions
Net sales for 2022 increased $96.3 million, or 15.6%, to $714.1 million from $617.8 million in the prior year. Net sales increased primarily as a result of higher pricing and increased volumes across most of the Water Flow Solutions segment’s product lines.
Gross profit for 2022 increased $9.6 million, or 4.7%, to $212.4 million from $202.8 million in the prior year primarily as a result of higher pricing and increased 70volumes across most product lines except for service brass products, partially offset by higher cost of sales associated with inflation and unfavorable manufacturing performance, primarily at our brass foundry. Gross margin was 29.7% in 2022, as compared with 32.8% in the prior year.
SG&A in 2022 increased 6.5% to $87.1 million from $81.8 million in the prior year primarily as a result of increased travel and trade show expenditures, higher costs associated with inflation, and investments in research and development and information technology. SG&A as a percentage of net sales was 12.2% and 13.2% for 2022 and 2021, respectively.
During the year ended September 30, 2022, Water Flow Solutions incurred a non-cash goodwill impairment charge of $6.8 million.
Index to Financial Statements
Water Management Solutions
Net sales in 2022 increased 8.1% to $533.3 million from $493.2 million in the prior year primarily as a result of higher pricing across most of the Water Management Solutions segment’s product lines and increased volumes for fire hydrants, natural gas, and repair and installation product lines.
Gross profit in 2022 decreased $3.8 million to $151.9 million from $155.7 million in the prior year. Gross margin decreased to 28.5% in 2022 from 31.6% in the prior year primarily as a result of higher cost of sales associated with inflation, and unfavorable manufacturing performance, partially offset by higher pricing and increased volumes.
SG&A increased 19.8% to $102.8 million in 2022 from $85.8 million in the prior year primarily as a result of investments in research and development, the inclusion of i2O Water, increased travel and trade show expenditures, and higher costs associated with inflation, partially offset by foreign exchange gains. SG&A as a percentage of net sales was 19.3% for 2022 and 17.4% in the prior year.
Corporate
SG&A decreased by $2.4 million from $51.2 million in 2021 to $48.8 million in 2022 as a result of lower personnel-related expenses partially offset by higher costs associated with inflation.
Index to Financial Statements
Year Ended September 30, 2021 Compared to Year Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended September 30, 2021 |
| Water Flow Solutions | | Water Management Solutions | | Corporate | | Consolidated |
| (in millions) |
Net sales | $ | 617.8 | | | $ | 493.2 | | | $ | — | | | $ | 1,111.0 | |
Gross profit | $ | 202.8 | | | $ | 155.7 | | | $ | — | | | $ | 358.5 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 81.8 | | | 85.8 | | | 51.2 | | | 218.8 | |
Strategic reorganization and other (benefits) charges | 0.1 | | | (0.4) | | | 8.3 | | | 8.0 | |
Total operating expenses | 81.9 | | | 85.4 | | | 59.5 | | | 226.8 | |
Operating income (loss) | $ | 120.9 | | | $ | 70.3 | | | $ | (59.5) | | | 131.7 | |
Pension benefit other than service | | | | | | | (3.3) | |
Interest expense, net | | | | | | | 23.4 | |
Loss on early extinguishment of debt | | | | | | | 16.7 | |
Income before income taxes | | | | | | | 94.9 | |
Income tax expense | | | | | | | 24.5 | |
Net income | | | | | | | $ | 70.4 | |
| | | | | | | |
| Year ended September 30, 2020 |
| Water Flow Solutions | | Water Management Solutions | | Corporate | | Consolidated |
| (in millions) |
Net sales | $ | 532.2 | | | $ | 431.9 | | | $ | — | | | $ | 964.1 | |
Gross profit | $ | 180.0 | | | $ | 148.2 | | | $ | — | | | $ | 328.2 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 75.1 | | | 78.8 | | | 44.5 | | | 198.4 | |
Strategic reorganization and other charges | — | | | 0.7 | | | 12.3 | | | 13.0 | |
Total operating expenses | 75.1 | | | 79.5 | | | 56.8 | | | 211.4 | |
Operating income (loss) | $ | 104.9 | | | $ | 68.7 | | | $ | (56.8) | | | 116.8 | |
Pension benefit other than service | | | | | | | (3.0) | |
Interest expense, net | | | | | | | 25.5 | |
Walter Energy accrual | | | | | | | 0.2 | |
Income before income taxes | | | | | | | 94.1 | |
Income tax expense | | | | | | | 22.1 | |
Net income | | | | | | | $ | 72.0 | |
Consolidated Analysis
Net sales for 2021 increased 15.2% to $1,111.0 million from $964.1 million in the prior year primarily as a result of higher volume across most of our product lines and higher pricing. Additionally, net sales benefited as a result of $6.0 million of Krausz sales from the elimination of the one-month reporting lag.
Gross profit increased $30.3 million to $358.5 million for 2021 compared with $328.2 million in the prior year. This increase was primarily a result of increased volume and higher pricing, partially offset by higher manufacturing costs as a result of inflation, higher labor costs, and a $2.4 million inventory write-off associated with the announcement of our plant closures in
Index to Financial Statements
Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin decreased to 32.3% in 2021 as compared with 34.0% in the prior year.
SG&A increased 10.3% to $218.8 million for 2021 from $198.4 million in the prior year. As a percentage of net sales, SG&A decreased 90 basis points to 18.9%19.7% of net sales from 18.2% of net sales20.6% in the prior year. The increase in SG&A was primarily duea result of increased personnel-related expenses, including incentive compensation, sales commissions associated with higher net sales and orders, and stock-based compensation. Additional SG&A increases were a result of inflation, new product development and information technology spending. Fiscal year 2020 SG&A included pandemic-driven benefits from temporarily reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.
Strategic reorganization and other charges of $8.0 million for 2021 primarily related to inclusion of Krausz’s SG&Atermination benefits associated with our plant closures in Aurora, Illinois and additional investment in engineering resources,Surrey, British Columbia, Canada, the Albertville tragedy, and certain transaction-related costs, partially offset by lower personnel-related expenses.
Othera one-time settlement gain in connection with an indemnification of a previously owned property. In 2020, Strategic reorganization and other charges for 2019 consistedof $13.0 million primarily of costs of our previously announced strategic reorganizations, expenses related to the Aurora tragedy, anda legal settlement, facility closure costs, transaction costs associated with the acquisition of Krausz, net of a gain on a sale of an idle property in Quebec, Canada. In 2018, other charges consisted primarily of costs related to strategic reorganization and expenses related to our former U.S. Pipe and Anvil segments, net of a gain on the sale of a property in Burlington, New Jersey that we had retained in the sale of U.S. Pipe.personnel matters.
Interest expense, net declined $1.1$2.1 million in 20192021 from the prior year primarily as a result of an increase in capitalized interest associatedon our large capital projects and the retirement of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were replaced with major capital expenditure projects,4.0% Senior Unsecured Notes (“4.0% Senior Notes”), partially offset by higherlower interest expense associated with the 5.5% Senior Notes, which replaced the Term Loan in June 2018. The components of interest expense, net are provided below.income.
| | | | | | | | | | 2021 | | 2020 |
| 2019 | | 2018 | | (in millions) |
| (in millions) | |
Term Loan | $ | — |
| | $ | 14.4 |
| |
5.5% Senior Notes | 24.8 |
| | 7.5 |
| 5.5% Senior Notes | $ | 17.6 | | | $ | 24.8 | |
Interest rate swap contracts | — |
| | 0.6 |
| |
4.0% Senior Notes | | 4.0% Senior Notes | 6.2 | | | — | |
Deferred financing costs amortization | 1.2 |
| | 1.6 |
| Deferred financing costs amortization | 1.1 | | | 1.2 | |
ABL Agreement | 0.6 |
| | 0.6 |
| ABL Agreement | 0.9 | | | 0.6 | |
Capitalized interest | (3.0 | ) | | — |
| Capitalized interest | (2.3) | | | (0.3) | |
Other interest expense | (0.2 | ) | | 0.6 |
| Other interest expense | 0.3 | | | 0.3 | |
| 23.3 |
| | 25.3 |
| |
Total interest expense | | Total interest expense | 23.8 | | | 26.6 | |
Interest income | (3.5 | ) | | (4.4 | ) | Interest income | (0.4) | | | (1.1) | |
| $ | 19.8 |
| | $ | 20.9 |
| |
Total interest expense, net | | Total interest expense, net | $ | 23.4 | | | $ | 25.5 | |
On December, 22, 2017, tax legislation was enacted that made significant revisions to federal income tax laws, including lowering the corporate income tax rate to 21 percent from 35 percent, overhauling the taxation of income earned outside the United States and eliminating or limiting certain deductions. Since the effective date of the tax rate change was January 1, 2018, we were subject to a blended federal statutory tax rate of 24.5% throughout fiscal 2018 and are subject to a 21% rate in fiscal 2019.
Income tax was an expense of $18.3$24.5 million and ourin 2021 yielded an effective income tax rate was 22.3% in 2019. Excluding the one-time impacts from tax legislation, the effective income tax rate was 23.0%of 25.8%, which was lowerhigher than the 26.2%23.5% rate in the prior year primarily due to the change in federal statutory rates described above.year.
Segment Analysis
InfrastructureWater Flow Solutions
Net sales for 20192021 increased 6.4%$85.6 million, or 16.1%, to $871.0$617.8 million from $818.8$532.2 million in the prior year. Net sales increased primarily due to Krausz net sales as well asa result of increased volume, and favorable pricingpricing. The increased volume was a result of $33.7 million, which offset lower organic volume.strong demand driven by both residential construction and municipal repair and replacement activity.
Gross profit for 20192021 increased 6.4%$22.8 million, or 12.7%, to $302.9$202.8 million from $284.7$180.0 million in the prior year primarily dueas a result of increased volume. These increases were partially offset by higher material and other costs associated with inflation, specifically related to Krausz gross profit, which was negatively affected by $6.8brass ingot, scrap steel and purchased parts, a $2.4 million inventory write-off associated with the announcement of Krausz inventory fair value step up,the closure of our Aurora, Illinois and favorable sales pricing. Surrey, British Columbia, Canada facilities and certain expenses related to the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning expenses. Gross margin was flat at 34.8% for both 2019 and32.8% in 2021, a 100 basis point decrease compared with 33.8% in the prior year.
SG&A in 20192021 increased 16.1%$6.7 million, or 8.9% to $121.3$81.8 million from $104.5$75.1 million in the prior year primarily due to the inclusionas a result of Krausz’sincreased personnel-related costs including higher sales commissions associated with higher net sales and orders, inflation, information technology spending, and new product development. Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporarily reduced travel, trade show and additional investments in engineering resources.event spending as well as temporary employee furloughs and temporary salary reductions. SG&A was 13.9%13.2% and 12.8%14.1% of net sales for 20192021 and 2018,2020, respectively.
Water Management Solutions
Technologies
Net sales in 2019 decreased2021 increased 14.2% to $97.0$493.2 million from $97.2$431.9 million in the prior year primarily due to $1.0as a result of higher volumes, $6.0 million in Krausz net sales as a result of lower shipment volumes.the elimination of the one-month reporting lag, and the acquisition of i2O.
Gross profit in 20192021 increased $12.8$7.5 million to $18.0$155.7 million from $5.2$148.2 million in the prior year.year as a result of higher volumes partially offset by higher inflation. Gross margin increaseddecreased to 18.6%31.6% in 20192021 from 5.3%34.3% in the prior year. The increase in gross margin in 2019 as compared with 2018 was primarily due to the $14.1 million warranty charge in 2018.
SG&A decreasedincreased to $26.7$85.8 million in 20192021 from $29.5$78.8 million in the prior year primarily due toas a result of personnel-related expenses and information technology spending. Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporarily reduced personnel costs.travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions. SG&A as a percentage of net sales improved to 27.5%was 17.4% for 2019 from 30.3%2021 and 18.2% in the prior year.
Corporate
SG&A was $34.7increased by $6.7 million from $44.5 million in 20192020 to $51.2 million in 2021 as a result of increased personnel-related expenses and $32.7 million 2018.inflation. Fiscal year 2020 SG&A was higherincluded pandemic-driven benefits resulting from temporary reductions in 2019 due to higher investments in engineering resources, offset by lower personnel-related expenses.travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.
Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
Management’s Discussion and Analysis comparing the results for the year ended September 30, 2018 to the results for the year ended September 30, 2017 can be found in our Form 10-K for the year ended September 30, 2018.
Financial Condition
Cash and cash equivalents were $176.7$146.5 million at September 30, 20192022 and $347.1$227.5 million at September 30, 2018. 2021. Cash and cash equivalents decreased during 2019 due to the purchase2022 as a result of Krausz of $140.7 million, which was comprised of $127.5 million paid to the seller and the assumption of $13.2 million in debt which was immediately repaid, along with other investing activities, primarily capital expenditures of $86.6$54.7 million, and cash used in financing activities of $50.9 million, primarily dividend payments andof $36.5 million, $35.0 million in share repurchases, which wereand $6.4 million in effect of currency exchange rate changes on cash, partially offset by$52.3 million in cash provided by operating activities of $92.5 million. Cash and cash equivalents also decreased by $0.2 million during 2019 due to changes in currency exchange rates.activities.
Receivables, net were $172.8$228.0 million at September 30, 20192022 and $164.3$212.2 million at September 30, 2018. Receivables at September 30, 2019 and September 30, 2018 represented approximately 63 and 65 days2021. This increase was primarily a result of the increase in net sales respectively.year over year.
Inventories, net were $191.4$278.7 million at September 30, 20192022 and $156.6$184.7 million at September 30, 2018.2021. Inventories increased during 20192022 as a result of increased volume, inflationary costs, and inventory management due primarily to inflation in raw material and purchased parts costs, higher inventory levels at Infrastructure as well as the purchase of Krausz’s inventory.supply chain issues.
Property, plant and equipment, net was $217.1$301.6 million at September 30, 20192022 and $150.9$283.4 million at September 30, 2018, and depreciation expense was $26.0 million in 2019 compared to $20.9 million in 2018.2021. Property, plant and equipment increased due toprimarily as a result of our previously-announced capital expansion projects in Kimball, Tennessee and Decatur, Illinois. Capital expenditures were $54.7 million in 2022. Depreciation expense was $32.0 million in 2022 compared with $31.4 million in 2021 as a result of generally higher level of capital expenditures as well asover the purchase of Krausz’s property, plant and equipment . Capital expenditures, including software development costs capitalized and capitalized interest, were $86.6 million in 2019.last three years.
Intangible assets were $433.7$361.2 million at September 30, 20192022 and $408.1$392.5 million at September 30, 2018.2021. Finite-lived intangible assets, $162.3net totaling $88.5 million of net book value at September 30, 2019,2022, are amortized over their estimated useful lives. ThisAmortization expense was $28.5 million in 2022 and $28.2 million in 2021. We expect amortization expense was $27.0 million during 2019 compared to $22.8 million in 2018 and is expectedfor these assets to be approximately $25$28 million to $29and $27 million in each of the next five years.two years with a decrease to approximately $8 million in fiscal 2025, approximately $6 million in fiscal 2026 and approximately $5 million in fiscal 2027. Indefinite-lived intangible assets, $271.4$272.7 million at September 30, 2019,2022, are not amortized but are tested for possible impairment at least annually for possible impairment. We recognized $47.7 million in identifiable intangible assets in connection with the acquisition of Krausz.annually.
Accounts payable and other current liabilities were $177.6$240.2 million at September 30, 20192022 and $166.4$219.1 million at September 30, 2018. Payables2021. Accounts payable increased during 2019 due primarily to2022 as a result of increased production volume and the impact of the Walter Tax Accrualhigher inventory costs. Other current liabilities decreased during 2022 primarily as a result of lower personnel-related expenses, including incentive compensation and the assumption of Krausz’s payables , partially offset by the timing of payments.sales commissions, as well as customer rebates and income taxes.
OutstandingTotal outstanding debt was $446.3$446.9 million atas of September 30, 20192022 and $445.0 million at September 30, 2018.2021.
Deferred income taxes were net liabilities of $87.9$86.3 million at September 30, 2022 and $94.8 million at September 30, 2019 and $79.22021, primarily related to intangible assets. The $8.5 million at September 30, 2018. The $8.7 million increasedecrease in the net liability was primarily due to the acquisitiona result of Krausz. Deferred tax liabilities are primarily related toreductions in intangible assets.
Liquidity and Capital Resources
We had cash and cash equivalents of $176.7$146.5 million at September 30, 20192022 and approximately $140$160.7 million of additional borrowing capacity under our ABL Agreementasset-based lending arrangement (the “ABL”) based on September 30, 20192022 data. Undistributed earnings from our subsidiaries in Israel, Canada and China are considered to be permanently invested outside of the United States. At September 30, 2019,2022, cash and cash equivalents included $13.5$40.5 million, $8.8$18.9 million, and $4.7$5.2 million in Israel, Canada and China, respectively.
Cash flows from operating activities are categorized below.
|
| | | | | | | |
| 2019 | | 2018 |
| (in millions) |
Collections from customers | $ | 966.6 |
| | $ | 895.5 |
|
Disbursements, other than interest and income taxes | (821.4 | ) | | (742.8 | ) |
Interest payments, net | (23.6 | ) | | (8.9 | ) |
Income tax payments, net | (29.1 | ) | | (10.7 | ) |
Cash provided by operating activities | $ | 92.5 |
| | $ | 133.1 |
|
We declared a quarterly dividend of $0.061 per share on October 21, 2022, payable on or about November 21, 2022 to holders of record as of November 10, 2022, which will result in an estimated $9.5 million cash outlay.We collected $71.1repurchased $35.0 million more cashof our outstanding common stock during the fiscal year ended September 30, 2022 and had $100.0 million remaining under our share repurchase authorization as of September 30, 2022.
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.
Collections from customers in 2019 than in 2018, which is relatively consistentwere higher during the fiscal year ended September 30, 2022 as compared with the $52.0 million increase inprior year period primarily as a result of net sales in 2019growth. Inventory purchases increased during the fiscal year ended September 30, 2022 as compared with 2018,the fiscal year ended September 30, 2021 as a result of inflation, increased sales, and which includes collections from Krausz customers.
We disbursed $78.6 million more cash excluding interest and income taxes in 2019 than in 2018, largelyinventory management due to increased production costs, increased operating expenses, disbursementssupply chain factors. Other current liabilities and other noncurrent liabilities decreased as a result of Krausz payablesemployee incentive payouts, income tax payments, the repayment of the CARES Act employer payroll tax deferral and timingthe payment of payments.customer rebates.
Capital expenditures were $86.6$54.7 million during 2019 and $55.7for 2022 compared with $62.7 million during 2018.for 2021. Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period. We estimate 20202023 capital expenditures will be $80between $70.0 million to $90and $80.0 million. We expect our capital expenditures will be higher over the next several years as we invest more in our machinery, equipment and facilities for product introductions, enhanced productivity and maintenance. At September 30, 2019, we had nearly completed our our large casting foundry in Chattanooga, Tennessee, had announced the construction of a new brass foundry in Decatur, Illinois which will replace our existing foundry in Decatur, and had acquired a facility in Kimball, Tennessee which will support our large casting foundry and allow us to insource other parts and components which are currently being outsourced.
Interest payments during 2018 were abnormally low due to the retirement of our Term Loan and issuance of the 5.5% Senior Unsecured Notes.
Income tax payments were higher during 20192022 compared towith the prior year primarily due toas a result of the timing of tax payments in 2019 relative to 2018.certain federal and state extension payments. We expect the effective tax rate in 20202023 to be between 24%23% and 26%25%.
In 2015, we announced the authorization of aOur stock repurchase program forallows us to repurchase up to $50.0$250.0 million of our common stock.stock, of which we had remaining authorization of $100.0 million as of September 30, 2022. The program does not commit us to any particular timing or quantity of purchases, and we may suspend or discontinue the program at any time. In 2017, we announced an increase in the authorization of this program to $250 million. We acquired 1,074,2342,654,254 and 2,573,475651,271 shares of our common stock in 20192022 and 2018,2021, respectively. At
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. As of September 30, 2019,2022, we had remaining authorization$14.1 million of $150.0letters of credit and $31.1 million to repurchase shares of our common stock.surety bonds outstanding.
We anticipate our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, acquisitionneeds, income tax payments, capital expenditures and debt service obligations as they become due through September 30, 2020.2023. However, our ability to make these payments will depend partly uponlargely on our future operating performance, which willmay be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.
ABL Agreement
At September 30, 2019, theOur ABL, Agreement consistedas amended, is provided by a consortium of banking institutions and consists of a revolving credit facility forthat $175.0 million in borrowing that expires in July 29, 2025. Included in the ABL is the ability to borrow up to $175$25.0 million of revolving credit borrowings, swing line loans and up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150$150.0 million in certain circumstances. We may borrow upcircumstances subject to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.adequate borrowing base availability.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBORthe London Inter Bank Offered Rate (“LIBOR”) plus aan applicable margin ranging from 125range of 200 to 150225 basis points, or a base rate, as defined in the ABL, Agreement, plus aan applicable margin ranging from 25of 100 to 50125 basis points. At September 30, 2019,2022, the applicable LIBOR-based margin was 125 basis points. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of 25200 basis points per annum.
for LIBOR-based loans and 100 basis points for base rate loans.
The ABL Agreement terminates on July 13, 2021.
The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement 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 Agreement 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 the value of eligible inventory, less certain reserves. Prepayments can be made at any time with nowithout penalty.
Substantially all of our U.S.United States subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S.United States inventory, accounts receivable, certain cash balances and other supporting obligations.
The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement. The ABL AgreementABL. Excess availability based on September 30, 2022 data was $160.7 million, as reduced by $14.1 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.
4.0% Senior Unsecured Notes
On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million of financing costs, which are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand were used to redeem previously existing 5.5% 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 the outstanding 4.0% Senior Notes had a fair value of $382.1 million at September 30, 2022.
An indenture securing the 4.0% Senior Notes (“Indenture”) contains customary negative covenants and restrictions onevents of default, including covenants that limit our ability to engageincur certain debt and liens. We believe we were in compliance with these covenants at September 30, 2022. There are no financial maintenance covenants associated with the Indenture.
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 activities, such as:
Limitations on other debt, liens, investments and guarantees;
Restrictions on dividends and redemptionsredemption prices. Additionally, we may redeem up to 40% of our capital stock and prepayments and redemptionsthe aggregate principal amount of debt; and
Restrictions on mergers and acquisition, salesthe 4.0% Senior Notes at any time prior to June 15, 2024, with the net proceeds of assets and transactions with affiliates.specified equity offerings at specified redemption prices as set forth in the Indenture. Upon a change of 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 of the 4.0% Senior Notes.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were set to mature in June 2026 and bearbore interest at 5.5%, paid semi-annually. Substantially all of our U.S. Subsidiaries guaranteeWe called the 5.5% Senior Notes which are subordinate to borrowings under the ABL. Based on quoted market prices, the outstanding Notes had a fair value of $470.3 million at September 30, 2019.
An indenture securing the Notes (“Indenture”) contains customary covenantseffective June 17, 2021 and events of default, including covenants that limit our ability to incur debt, pay dividends, and make investments. We believe we were compliantsettled with these covenants at September 30, 2019 and expect to remain in compliance through September 30, 2020.
We may redeem some or all of the Notes at any time or from time to time prior to June 15, 2021 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or afterJune 15, 2021 at specified redemption prices (as set forth in the Indenture). Additionally, we may redeem up to 40% of the aggregate principal amount of the Notes at any time or from time to time prior to June 15, 2021 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture). Upon a change of control (as defined in the Indenture), we will be required to make an offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.
Term Loan
On November 25, 2014, we entered into a $500.0 million senior secured term loan (“Term Loan”), which accrued interest at a floating rate equal to LIBOR, subject to a floor of 0.75%, plus 250 basis points. The principal amount of the Term Loan was required to be repaid in quarterly installments of $1.225 million with any remaining principal due on November 25, 2021. We repaid the Term Loan on June 12, 2018 with the proceeds from the issuance of the 4.0% Senior Notes and cash on hand. We wrote-offAs a result, we incurred $16.7 million in loss on early extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the associatedremaining deferred debt issuance costs and recorded a loss onassociated with the early extinguishment of debt of $6.2 million.
As described more fully in Note 8.retirement of the Notes to Consolidated Financial Statements, we entered into interest rate swap contracts in April 2015 that hedged interest payments on $150 million of our Term Loan borrowings from September 30, 2016 through September 30, 2021. We terminated these interest rate swaps and reclassified all associated amounts from accumulated other comprehensive loss to earnings and recorded a cash gain of $2.4 million in the quarter ended June 30, 2018.5.5% Senior Notes.
Credit Ratings
Our corporate credit rating and the credit ratingratings for our debt and outlook are presented below.
|
| | | | | | | |
| Moody’s | | Standard & Poor’s |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Corporate credit rating | Ba2 | | Ba2 | | BB | | BB |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
Notes | Ba3 | | Ba3 | | BB | | BB |
Outlook | Stable | | Stable | | Stable | | Stable |
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, we do not have any undisclosed borrowings or debt or any derivative contracts other than those described in “Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK” or synthetic leases. Therefore, we are not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships. | | | | | | | | | | | | | | | | | | | | | | | |
| Moody’s | | Standard & Poor’s |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Corporate credit rating | Ba1 | | Ba1 | | BB | | BB |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
4.0% Senior Notes | Ba1 | | Ba1 | | BB | | BB |
Outlook | Stable | | Stable | | Stable | | Stable |
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At September 30, 2019, we had $15.5 million of letters of credit and $22.7 million of surety bonds outstanding.
Contractual Obligations
Our contractual obligations at September 30, 2019 are presented below.
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| | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021-2022 | | 2023-2024 | | After 2024 | | Total |
| (in millions) |
Debt principal payments | $ | 0.9 |
| | $ | 1.1 |
| | $ | 0.1 |
| | $ | 450.0 |
| | $ | 452.1 |
|
Debt interest payments | 24.9 |
| | 49.7 |
| | 49.6 |
| | 37.1 |
| | 161.3 |
|
Operating leases | 6.1 |
| | 9.3 |
| | 7.5 |
| | 15.8 |
| | 38.7 |
|
Unconditional purchase obligations(1) | 115.4 |
| | 0.8 |
| | — |
| | — |
| | 116.2 |
|
Other current liabilities(2) | — |
| | — |
| | — |
| | — |
| | — |
|
| $ | 147.3 |
| | $ | 60.9 |
| | $ | 57.2 |
| | $ | 502.9 |
| | $ | 768.3 |
|
| |
(1) | Includes contractual obligations for purchases of raw materials and capital expenditures. |
| |
(2) | Consists of obligations for required pension contributions. Actual payments may differ. We have not estimated required pension contributions beyond 2020.
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Effect of Inflation
We experience changing price levels primarily related to purchased components and raw materials. InfrastructureDuring the fiscal year 2022, we experienced a 2% decrease40% increase in the average cost per ton of scrap steel and a 2% decrease20% increase in the average cost of brass ingot in 2019as compared to 2018. Technologies was also favorably affected by2021. We anticipate inflation in raw and other material costs in 2023, which may have an adverse effect on our margins to the 2% decreaseextent we are unable to pass on such higher costs to our customers.
Index to Financial Statements
Material Cash Requirements
We enter into a variety of contractual obligations as part of our normal operations in the average costaddition to capital expenditures. As of brass ingot.September 30, 2022, we have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include cash interest payments of $18.0 million in 2023 annually through 2029; (ii) cumulative cash obligations of $32.6 million for operating leases through 2033 and $1.7 million for finance leases through 2026; and (iii) purchase obligations for raw materials and other purchased parts of approximately $155.1 million which we will incur during 2023. We expect to fund these cash requirements from cash on hand and cash generated from operations.
Seasonality
Our water infrastructure business depends on construction activity, which is seasonal in many areas due toas a result of the impact of cold weather conditions on construction.conditions. Net sales and operating income historically have historically been lowest in the quartersthree 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 and other field crew activity. For Infrastructure, approximately 45% of a fiscal year’s net sales occurs in the first half of the fiscal year with 55% occurring in the second half of the fiscal year. See “Item 1A. RISK FACTORS-Seasonal demand for certain of our products and services may adversely affect our financial results.”
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“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. We consider the accounting topics presented below to include ourOur critical accounting estimates.
estimates include the below items.
Revenue Recognition
We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer. See Note 3. for more information regarding our revenues.
Inventories, net
We record inventories at the lower of first-in, first-out method cost or estimated net realizable value. Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred. We evaluate the need to record adjustments for impairment of inventory at least quarterly. This evaluation includes such factors as anticipated usage, inventory levels and ultimate product sales value. If in our judgment persuasive evidence exists that the net realizable value of inventory is lower than its cost, the inventory value is written-down to its estimated net realizable value. Significant judgments regarding future events and market conditions must be made when estimating net realizable value.
Income Taxes
We recognize deferred tax liabilities and deferred tax assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the differences between the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets when, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our deferred tax balancesliabilities and assets are based on our expectations of future operating performance, reversal of taxable temporary differences, tax planning strategies, interpretation of the tax regulations currently enacted and rulings in numerous tax jurisdictions.
Index to Financial Statements
We only record tax benefits for positions that we believe are more likely than not of being sustained under audit examination based solely on the technical merits of the associated tax position. The amount of tax benefit recognized for any position that meets the more likely than notmore-likely-than-not threshold is the largest amount of the tax benefit that we believe is greater than 50% likely of being realized.
Accounting for the Impairment of Long-Lived Assets Including Goodwill and OtherIndefinite-lived Intangible Assets
We test goodwill and indefinite-lived intangible assets and goodwill for impairment annually (oror more frequently if events or circumstances indicate possible impairment).impairment. We testedperformed this annual impairment testing at September 1, 2022, using standard valuation methodologies and rates that we considered reasonable and appropriate.
We evaluate goodwill for impairment using a quantitative analysis. The carrying value of the reporting unit, including goodwill, is compared with the estimated fair value of the reporting unit utilizing a combination of the income and market approaches. The income approach, which is a level 3 fair value measurement, is based on projected debt-free cash flow which is discounted to the present value using discount rates that consider the timing and risk of the cash flows. The market approach is based on the guideline public company method, which uses market multiples to value our reporting units. We weight the income and market approaches in a manner considering the risks of the underlying cash flows.
This income approach is dependent on management’s best estimates of future operating results, including forecasted revenues, earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins and the selection of discount rates. There are inherent uncertainties related to the assumptions used and to management's application of these assumptions.
We test our trade name indefinite-lived intangible assets for impairment using a “royalty savings method,” which is a variation of the discounted cash flow method.This method estimates a fair value by calculating an estimated discounted future cash flow stream from the hypothetical licensing of the indefinite-lived intangible assets.If this estimated fair value exceeds the carrying value, no impairment is indicated.This analysis is dependent on management’s best estimates of future operating results and the selection of reasonable discount rates and hypothetical royalty rates. Significantly different projected operating results could result in a different conclusion regarding impairment. Standard valuation methodologies using rates considered reasonable by management have not indicated an impairment. We evaluated goodwill for impairment using a qualitative analysis.
We performed thisour annual impairment testing at September 1, 2022.As a result of this quantitative testing, we recognized a $6.8 million goodwill impairment charge for a reporting unit within our Water Flow Solutions segment as the carrying value exceeded its fair value.Our determination of the estimated fair value was based on a combination of the discounted cash flow method and concluded that our indefinite-lived intangible assets and goodwill were not impaired.the guideline public company method. Our testing indicated no other impairment.
Other long-lived assets, including finite-lived intangible assets, are amortized over their respective estimated useful lives and reviewed for impairment if events or circumstances indicate possible impairment.
Warranty CostsCost
We accrue for warranty expenses that can include customer costs of repair and/or replacement, including labor, materials, equipment, freight and reasonable overhead costs. We accrue for the estimated cost of product warranties at the time of sale if such costs are determined to be reasonably estimable at that time. Warranty cost estimates are revised throughout applicable warranty periods as better information regarding warranty costs becomes available. Critical factors in our analyses include warranty terms, specific claim situations, general incurred and projected failure rates, the nature of product failures, product and labor costs, and general business conditions. These estimates are inherently uncertain as they are based on historical data. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Additionally, a significant increase in costs of repair or replacement could require additional warranty expense. We monitor and analyze our warranty experience and costs periodically and may revise our warranty accrual as necessary. However, as we cannot predict actual future claims, the potential exists for the difference in any one reporting period to be material.
Index to Financial Statements
Contingencies
We are involved in litigation, investigations and claims arising out ofin the normal conductcourse of our business. We estimate and accrue liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements; assessments by counsel of pending or threatened litigation; and assessments of potential environmental liabilities and remediation costs. We believe we have adequately accrued for these potential liabilities; however, facts and circumstances may change and could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due toas a result of such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes. For more information on these and other contingencies, see Note 17. of the Notes to Consolidated Financial Statements. See also ��Item“Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 1A. RISK FACTORS” and “Item 3. LEGAL PROCEEDINGS”.
WorkersWorkers’ Compensation, Defined Benefit Pension Plans, Environmental and Other Long-term Liabilities
We are obligated for various liabilities that ultimately will ultimately be determined over what could be very long future time periods. We established the recorded liabilities for such items at September 30, 20192022 using estimates for when such amounts will be paid and what the amounts of such payments will be. These estimates are subject to change based on numerous factors including, among others, regulatory changes, technology changes, the investment performance of related assets, longevity of participants, the discount rate used and changes to plan designs.
Business Combinations
We recognize assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of purchase price over the estimated fair values of identifiable net assets recorded as goodwill. Assigning fair values requires us to make significant estimates and assumptions regarding the fair value of identifiable intangible assets. We may refine these estimates if necessary over a period not to exceed one year by taking into consideration new information that, if known at the acquisition date, would have affected the fair values recognized for assets acquired and liabilities assumed.
Significant estimates and assumptions are used in estimating the value of acquired identifiable intangible assets, including estimating future cash flows based on forecasted revenues and EBITDA margins that we expect to generate following the acquisition, selecting an applicable royalty rate where needed, applying an appropriate discount rate to estimate a present value of those cash flows and determining their useful lives. These assumptions are forward-looking and could be affected by future economic and market conditions.
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Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks, including potential losses arising from adverse changes in market prices and rates, such as various commodity prices interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Our primary financial instruments are cash and cash equivalents. This includes cash in banks and highly rated, liquid money market investments. We believe thosethese instruments are not subject to material potential near-term losses in future earnings from reasonably possible near-term changes in market rates or prices.
Commodity Price Risk
Our products are made using various purchased components and several basic raw materials, including brass ingot, scrap steel, sand and resin. We expect prices for these items to fluctuate based on marketplace demand and ourdemand. Our product margins and level of profitability may fluctuate whether or not we sufficiently pass changesincreases in purchased component and raw material costs on to our customers.
Infrastructure experiencedWe experienced a 2% decrease40% increase in the average cost per ton of scrap steel and a 2% decrease20% increase in the average cost of brass ingot in 20192022 compared to 2018. Technologies was also favorably affected by the 2% decrease in the average cost of brass ingot. 2021. See “Item 1A. RISK FACTORS-The prices of our purchased components and raw materials can be volatile.”
PriorIndex to the June 12, 2018 retirement of our Term Loan, we were exposed to interest rate risk that we managed to some extent using derivative instruments. We terminated these instruments in conjunction with the retirement of the Term Loan.Financial Statements
Currency Risk
Our principal assets, liabilities and operations outside the U.S.United States are in Israel, Canada and China. These assetsForeign reporting entities are remeasured into local currencies with the effect reflected in the consolidated statements of operations. Assets and liabilities are translated into U.S.United States dollars at currency exchange rates in effect at the end of each period, with the effect of such translation reflected in other comprehensive loss.income (loss). Our stockholders’ equity will fluctuate depending upon the weakening or strengthening of the U.S.United States dollar against these non-U.S.non-United States currencies. Net sales and expenses of these subsidiaries are translated into U.S.United States dollars at the average currency exchange rate during the period. At
September 30, 2019, $205.6 million of our net assets were denominated in non-U.S. currencies.
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Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Registered Public Accounting Firm, Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements that are filed as part of this annual reportAnnual Report are listed under “Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES” and are set forth beginning on page F-1.
Selected quarterly financial data for 2019 and 2018 are provided in Note 19. of the Notes to Consolidated Financial Statements.
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Item 9A. | CONTROLS AND PROCEDURES |
Item 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report.Annual Report. Based on this evaluation, those officers have concluded that, at September 30, 2019,2022, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There werehave been no changes in internal control over financial reporting during the quarter ended September 30, 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We did not include in our assessment the internal controls of Krausz, which we acquired in fiscal 2019 and included in the our results for the year ended September 30, 2019. At September 30, 2019, Krausz total assets represented 12.5% of our total assets and Krausz represented 3.9% of our net sales for the year ended September 30, 2019.
We assessed the effectiveness of our internal control over financial reporting at September 30, 2019.2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 framework). After doing so, management concluded that, at September 30, 2019,2022, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting at September 30, 20192022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in this annual report.Annual Report.
Item 9B. OTHER INFORMATION
Not applicable.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
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Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The name ageand position at November 15, 201918, 2022 and positionage of each of our executive officers and directors at September 30, 20192022 are presented below.
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| | | | | | | | | | | | | |
Name | | Age | | Position |
Scott Hall | | 5557 |
| | President and Chief Executive Officer |
Marietta Edmunds Zakas | | 60 |
| | Executive Vice President and Chief Financial Officer |
Steven S. Heinrichs | | 5154 |
| | Executive Vice President, Chief Legal and Compliance Officer and Secretary |
Michael S. NancarrowMarietta Edmunds Zakas | | 4563 |
| | Executive Vice President and Chief AccountingFinancial Officer |
Gregory S. Rogowski | | 60 |
| | Executive Vice President, Sales and Marketing |
William A. Cofield | | 6063 |
| | Senior Vice President, Operations & Supply Chain |
M. Joseph SchrockScott P. Floyd | | 5153 |
| | Senior Vice President, Water Flow Solutions |
Todd P. Helms | | 55 | | | Senior Vice President and Chief Human Resources Officer |
Chad D. Mize | | 46 | | | Senior Vice President, Sales and Marketing |
Kenji Takeuchi | | 50 | | | Senior Vice President, Water Management Solutions |
Richelle R. Feyerherm | | 51 | | | Vice President, Operations Controller |
Jennifer B. O’KeefeSuzanne G. Smith | | 4555 |
| | Vice President Human Resourcesand Chief Accounting Officer |
Mark J. O’Brien | | 79 | | | Non-Executive Chairman of the Board of Directors |
Shirley C. Franklin | | 7477 |
| | Director |
Thomas J. Hansen | | 7073 |
| | Director |
Jerry W. KolbChristine Ortiz | | 8352 |
| | Director |
Mark J. O’Brien | | 76 |
| | Director |
Christine Ortiz | | 49 |
| | Director |
Bernard G. Rethore | | 7881 |
| | Director |
Jeffery S. Sharritts | | 54 | | | Director |
Brian L. Slobodow | | 54 | | | Director |
Lydia W. Thomas | | 7577 |
| | Director |
Michael T. Tokarz | | 7072 |
| | Director |
Stephen C. Van Arsdell | | 6972 |
| | Director |
Scott Hall has served as our President and Chief Executive Officer since January 2017. He served as President and CEO of Textron’s Industrial segment from December 2009 until January 2017. Mr. Hall joined Textron in 2001 as president of Tempo, a multi-facility roll-up of communication test equipment. He was named president of Greenlee, a manufacturer of tools used in installing wire and cable, in 2003 when Tempo became part of Textron’s Greenlee business unit. Prior to joining Textron, Mr. Hall had several leadership roles at General Cable, a leading manufacturer of wire and cable. Mr. Hall ran General Cable’s Canadian businesses before taking over responsibility for General Cable’s global Communications business. Mr. Hall earned his Bachelor of Commerce degree from Memorial University of Newfoundland and his MBAa Master of Business Administration from the University of Western Ontario Ivey School of Business.
Marietta Edmunds Zakas has served as our Executive Vice President and Chief Financial Officer since January 2018. She served as Senior Vice President, Strategy, Corporate Development and Communications from November 2006 to December 2017. She was also the interim head of Human Resources from January 2016 to December 2017. Previously, Ms. Zakas held various positions at Russell Corporation, an athletic apparel, footwear and equipment company, culminating in her role as Corporate Vice President, Chief of Staff, Business Development and Treasurer. She earned a Bachelor of Arts degree with honors from Randolph-Macon Woman’s College (now known as Randolph College), a Master of Business Administration degree from the University of Virginia Darden School of Business and a Juris Doctor from the University of Virginia School of Law. Ms. Zakas Mr. Hall is a director of Atlantic Capital Bank and Atlantic Capital Bancshares.Altra Industrial Motion, Inc.
Steven S. Heinrichs has served as our Executive Vice President, Chief Legal and Compliance Officer and Secretary since August 2018. He served as Senior Vice President, General Counsel and Secretary of Neenah, Inc. (f/k/a Neenah Paper, Inc.), which spun off from Kimberly-Clark Corporation in December 2004, from June 2004 to July 2018. Mr. Heinrichs joined Kimberly-Clark as Chief Counsel, Pulp and Paper and General Counsel for Neenah, Inc. Prior to his employment with Kimberly-Clark, Mr. Heinrichs served as Associate General Counsel and Assistant Secretary for Mariner Health Care, Inc., a nursing home and long-term acute care hospital company. Before joining Mariner Health Care in 2003, Mr. Heinrichs served as Associate General Counsel and Assistant Secretary for American Commercial Lines LLC, a leading inland barge and shipbuilding company from 1998 through 2003. Mr. Heinrichs engaged in the private practice of law with Skadden, Arps, Slate, Meagher and Flom LLP and Shuttleworth, Smith, McNabb and Williams PLLC from 1994 through 1998. Mr. Heinrichs earned his MBAa Master of Business Administration from the Kellogg School of Management at Northwestern University in 2008, his law degree from Tulane University in 1994, and his Bachelor of Arts degree from the University of Virginia.
Michael S. Nancarrow has served as our Vice President and Chief Accounting Officer since January 2018. He served as the Company’s Senior Director, Financial Reporting and Assistant Controller since December 2014 and the Company’s Director of Financial Reporting since September 2006. Mr. Nancarrow earned a Bachelor of Science degree from The Ohio State University and is a certified public accountant.
Gregory S. Rogowski
Marietta Edmunds Zakas has served as our Executive Vice President and Chief Financial Officer since January 2018. She served as Senior Vice President, Strategy, Corporate Development and Communications from November 2006 to December 2017. She was also the interim head of Human Resources from January 2016 to December 2017. Previously, Ms. Zakas held various positions at Russell Corporation, an athletic apparel, footwear and equipment company, culminating in her role as Corporate Vice President, Chief of Staff, Business Development since October 2017. Mr Rogowski also served as our Executive Vice President, Sales and Marketing from October 2017 to September 2019, and was President of Infrastructure from May 2009 to October 2017. Previously, Mr. Rogowski was President and/or Chief Executive Officer of Performance Fibers, Inc., a polyester industrial fibers business from 2004 to 2009. HeTreasurer. She earned a Bachelor of ScienceArts degree with honors from Virginia Polytechnic Institute and State University, a Master of Science degree from the University of Akron andRandolph-Macon Woman’s College (now known as Randolph College), a Master of Business Administration degree from the University of Richmond.Virginia Darden School of Business and a Juris Doctor from the University of Virginia School of Law. Ms. Zakas is a director of BlueLinx Holdings Inc. and is a former director of Atlantic Capital Bank and Atlantic Capital Bancshares.
William A. Cofield has served as our Senior Vice President, Operations & Supply Chain since January 2018. Previously, Mr. Cofield served as Vice President of Operations and Supply Chain for MGA Entertainment from May 2014 to December 2018 and Vice President of Operations for the Rubbermaid business within Newell Brands, Inc. (formerly Newell Rubbermaid, Inc.) from January 2009 to May 2014. Mr. Cofield earned his Bachelor of Science degree from the United States Military Academy. Upon graduation, he was commissioned as an officer in the United States Army where he served for 10 years. Mr. Cofield achieved the rank of Major before resigning his commission.
M. Joseph SchrockScott P. Floyd has served as our Senior Vice President, Water Flow Solutions since October 2021. He served as Senior Vice President, Infrastructure from June 2020 to September 2021; Vice President and General Manager - Specialty Valves from February 2019 to May 2020; Plant Manager of our Cleveland, Tennessee facility from October 2007 to February 2019; Plant Manager of our Brownsville, Texas facility from March 2016 to February 2019; and Operations Manager of our Cleveland, Tennessee facility from September 1998 to October 2007.
Todd P. Helms has served as our Senior Vice President and Chief Human Resources Officer since February 2020. Previously, Mr. Helms held the position of Executive Vice President and Chief Human Resource Officer at Synovus Financial Corporation and as Senior Vice President, Human Resources at Genuine Parts Company. Mr. Helms earned a Bachelor of Science degree from King College, a Bachelor of Mechanical Engineering from Georgia Institute of Technology and a Master of Business Administration from Ohio University.
Chad D. Mize has served as our Senior Vice President, Sales and Marketing since October 2019. He served as Vice President and General Manager of the Brass, Gas and Repair Value Stream from October 2017 to September 2019; Chief Financial Officer and Vice President of Mueller Co. LLC from March 2010 to September 2017; Corporate Controller from January 2007 to February 2010; and Manager of Financial Reporting and Analysis from October 2004 to December 2006. Previously, Mr. Mize worked in accounting and finance for Archer Daniels Midland from May 1998 to September 2004. Mr. Mize earned a Bachelor of Science degree in Accounting from Illinois State University and a Master of Business Administration from Millikin University.
Kenji Takeuchi has served as our Senior Vice President, Water Management Solutions since October 2021. He served as Senior Vice President, Technology Solutions from October 2019 to September 2021. Previously, Mr. Takeuchi served as a Startup Catalyst at the Advanced Technology Development Center at Georgia Tech, Georgia’s technology incubator. Prior to that, he served as Chief Technology Officer and Vice President of Engineering of Honeywell International Inc. and held various executive-level positions at Flextronics, culminating in his role as Vice President, Products and Technology. Mr. Takeuchi earned a Bachelor of Mechanical Engineering from Georgia Institute of Technology and a Master of Engineering from the University of California at Berkeley and completed the Executive Education Program at Stanford University’s Graduate School of Business.
Richelle R. Feyerherm has served as our Vice President, Operations Controller since November 2019. Previously, Ms. Feyerherm served as a Financial Officer of the Water Products division of Lonza Group, Ltd. from October 2011 to February 2019. Ms. Feyerherm earned her Bachelor of Science degree from the State University of New York and is a certified public accountant.
Suzanne G. Smith has served as our Vice President and General Manager of our Brass, Gas and Repair Value StreamChief Accounting Officer since October 2019. Mr. SchrockJanuary 2021. Previously, Ms. Smith served as our Vice President, Operations Controller from January 2018 to September 2019, Vice President, Operations Controller of Mueller Co. LLC from October 2017 to January 2018, Senior Director of Finance, ControllerChief Accounting Officer for ModivCare Inc., from February 2016 to September 2017, Division Controller2019 through November 2020 and for Cumulus Media from May 2010 to January 20162017 through February 2019. Ms Smith is a certified public accountant, and Plant Controller from May 2005 to April 2010. Previously, Mr. Schrock served as Division Controller of the MasterBrand Cabinets division of Fortune Brands Home & Security, Inc. from January 2004 to April 2005 and was Division Accounting Manager from November 1995 to December 2003. Mr. Schrockshe earned hisa Bachelor of Science degree from The Ohio State University and his Executive MBAa Master of Business Administration from MillikinGeorgia State University.
Index to Financial Statements
Mark J. O’Brien has been a member of our Board of Directors since April 2006 and has served as our Vice President, Human ResourcesNon-Executive Chairman since December 2017, and was Senior Director, Talent & Rewards/Human Resources from January 2016 to November 2017. Previously, Ms. O’Keefe2018. He served as our Director, TalentChairman of Walter Investment Management & Human Resources,Corp. (formerly Walter Industries’ Homes Business), a mortgage portfolio owner and mortgage originator and servicer, from February 20142009 through December 2015, and he served as its Chief Executive Officer from 2009 to December 2015; Senior Manager, TalentOctober 2015. Mr. O’Brien served as President and Chief Executive Officer of Brier Patch Capital and Management, Inc., a real estate management and Human Resourcesinvestment firm, from June 20112004 to January 2014; Employee Services Manager from February 2010 to June 2011;2009. He served in various executive capacities at Pulte Homes, Inc., a home building company, for 21 years, retiring as President and Manager, Health and Welfare Plans from February 2007 to February 2010. SheChief Executive Officer in 2003.Mr. O’Brien earned a Bachelor of Arts degree in history from Furman University.the University of Miami.
Shirley C. Franklin has been a member of our boardBoard of directorsDirectors since November 2010. Ms. Franklin serves as Executive Chairthe President of the board of directors of Purpose Built Communities,Clarke-Franklin & Associates, Inc., a national non-profit organization established to transform struggling neighborhoods into sustainable communities. She alsomanagement consulting firm, and is a co-founder of Authenticity Partners. In addition, Ms. Franklin serves as Co-Chair of the Atlanta Regional Commission on Homelessness and as Chair of the board of directors of the National Center for Civil and Human Rights.Rights and is a board member of the Paul Volcker Alliance, both non-profit organizations dedicated to public service missions. Ms. Franklin also serves as a board member on CDC Foundation and several other non-profit organizations including CF Foundation, Atlanta Regional Commission on Homelessness, National Alliance for Public Charter Schools, and Purpose Built Schools Atlanta. From 2002 to 2010, Ms. Franklin was mayor of Atlanta, Georgia. Ms. Franklin earned a Bachelor of ScienceArts degree in sociology from Howard University and a Master’sMaster of Arts degree in sociology from the University of Pennsylvania.
Thomas J. Hansen has been a member of our boardBoard of directorsDirectors since October 2011. Until 2012, Mr. Hansen served as the Executive Vice President and Vice Chairman of Illinois Tool Works Inc. (“ITW”), a manufacturer of fasteners and components, consumable systems and a variety of specialty products and equipment. He joined ITW in 1980 as sales and marketing manager of the Shakeproof Industrial Products businesses. From 1998 until May 2006, Mr. Hansen served as Executive Vice President of ITW. Mr. Hansen earned a Bachelor of Science degree in marketing from Northern Illinois University and a Master of Business Administration degree from Governors State University.
Jerry W. Kolb has been a member of our board of directors since April 2006. From 1986 to 1998, Mr. Kolb served as a Vice Chairman of Deloitte LLP, a registered public accounting firm. Mr. Kolb earned a Bachelor of Science degree in accountancy with highest honors from the University of Illinois and Master of Business Administration degree in finance from DePaul University. Mr. Kolb is a certified public accountant.
Mark J. O’Brien has been a member of our board of directors since April 2006 and has served as our Non-Executive Chairman since January 2018. He served as Chairman of Walter Investment Management Corp. (formerly Walter Industries’ Homes Business), a mortgage portfolio owner and mortgage originator and servicer, from 2009 through December 2015, and he served as its Chief Executive Officer from 2009 to October 2015. Mr. O’Brien has been President and Chief Executive Officer of Brier Patch Capital and Management, Inc., a real estate management and investment firm, since 2004. He served in various executive capacities at Pulte Homes, Inc., a home building company, for 21 years, retiring as President and Chief Executive Officer in 2003.Mr. O’Brien earned a Bachelor of Arts degree in history from the University of Miami.
Christine Ortiz has been a member of our boardBoard of directorsDirectors since November 2018. Dr. Ortiz is the Morris Cohen Professor of Materials Science and Engineering at the Massachusetts Institute of Technology. The author of more than 180200 scholarly publications, she has supervised research projects across multiple academic disciplines, received 30 national and international honors, including the Presidential Early Career Award in Science and Engineering awarded to her by President George W. Bush, and served as the Dean for Graduate Education at MITMassachusetts Institute of Technology from 2010 to 2016. She is also the founder of an innovative, nonprofit, post-secondaryhigher education educational institution, Station1. Dr. Ortiz has served as a director of Enovis Corporation since 2022. She earned a B.S.Bachelor of Science degree from Rensselaer Polytechnic Institute and an M.S.a Master of Science degree and Ph.D.a Doctor of Philosophy degree from Cornell University, alleach in the field of materials science and engineering.
Bernard G. Rethore has been a member of our boardBoard of directorsDirectors since April 2006. Mr. Rethore has served as Chairman Emeritus of Flowserve Corporation, a manufacturer of pumps, valves, seals and components, since 2000. From January 2000 to April 2000, he served as Flowserve’s Chairman. Mr. Rethore hadChairman and previously served as its Chairman, President and Chief Executive Officer. In 2008, Mr. Rethore was honored by the Outstanding Directors Exchange as an Outstanding Director of the Year, and in 2012, he was designated a Board Leadership Fellow by the National Association of Corporate Directors. Mr. Rethore earned a Bachelor of Arts degree in Economics (Honors) from Yale University and a Master of Business Administration degree from the Wharton School of the University of Pennsylvania, where he was a Joseph P. Wharton Scholar and Fellow.
Jeffery S. Sharritts has been a member of our Board of Directors since March 2021. Mr. Sharritts is the Executive Vice President and Chief Customer and Partner Officer at Cisco. During his 22-year tenure at Cisco, Mr. Sharritts has held several executive sales roles, most recently Senior Vice President of the Americas from 2018 to 2022 and Senior Vice President, U.S. Commercial Sales from 2014 to 2018. Mr. Sharritts holds Advisory Board Member positions with the Georgia Chamber of Commerce and Metro Atlanta Chamber of Commerce. Mr. Sharritts earned a Bachelor of Science degree in Business Administration from The Ohio State University.
Brian L. Slobodow has been a member of our Board of Directors since October 2022. Mr. Slobodow is an Operating Partner of Operational Resource Group, LLC (“ORG”), whose clients include a leading middle-market private equity firm. From 2015 to 2020, he served as an Operating Executive at Golden Gate Capital, where, between 2007 and 2015, he also held senior leadership positions in multiple former portfolio companies. Prior to joining Golden Gate Capital, Mr. Slobodow held multiple leadership positions within Johnson & Johnson Consumer Products from 2003 to 2007 and was a Principal at A.T. Kearney from 2000 to 2003. Mr. Slobodow holds a Bachelor of Science degree in Industrial and Manufacturing Engineering and a Master of Business Administration degree from the Massachusetts Institute of Technology Sloan School of Management.
Lydia W. Thomas has been a member of our boardBoard of directorsDirectors since January 2008. Dr. Thomas served as President and Chief Executive Officer of Noblis, Inc., a public interest scientific research, technology and strategy company, from 1996 to 2007. She was previously with The MITRE Corporation, Center for Environment, Resources and Space, serving as Senior Vice
Index to Financial Statements
President and General Manager from 1992 to 1996, Vice President from 1989 to 1992 and Technical Director from 1982 to 1989. In 2013, she was honored by the Outstanding Directors Exchange as an Outstanding Director of the Year. Dr. Thomas is also a member of the Council on Foreign Relations. She earned a Bachelor of Science degree in zoology from Howard University, a Master of Science degree in microbiology from American University and a Doctor of Philosophy degree in cytology from Howard University.
Michael T. Tokarz has been a member of our boardBoard of directorsDirectors since April 2006. Since 2002, Mr. Tokarz has served as a member of the Tokarz Group, LLC, an investment company. From 19961985 until 2002, Mr. Tokarz served as a member of the limited liability company that serves as the general partner of Kohlberg Kravis Roberts & Co. L.P., a private equity company. He served as non-executive Chairman of the Board of Walter Energy, Inc. until July 2016, and until May 2017, he served as a director of CNO Financial Group, Inc. (formerly Conseco, Inc.), an insurance provider, and as a director of Walter Investment Management Corp. Mr. Tokarz has served as the Chairman of the Board of the Tokarz Group, LLC, an investment company, since 2002 and the Chairman of MVC Capital, Inc., a registered investment company, since 2003. He assumed the role of vice chair of Shield T3, LLC in 2020. In 2007, he was honored by the Outstanding Directors Exchange as an Outstanding Director of the Year. Mr. Tokarz earned a Bachelor of Arts degree in economics with high distinction and a Master of Business Administration degree in finance from the University of Illinois.
Stephen C. Van Arsdellhas been a member of our boardBoard of directorsDirectors since July 2019. Mr. Van Arsdell is a former senior partner of Deloitte LLP, where he served as Chairman and Chief Executive Officer of Deloitte & Touche LLP from 2010-2012 and as Deputy Chief Executive Officer from 2009-2010. He also served as a member of Deloitte’s Boardboard of directors from 2003-2009. During this2003-2009, during which time he held the position of Vice-Chairman of the Board andVice Chairman. Mr. Van Arsdell has served on and chaired various committees thereof, including the Audit and Finance Committee. He is currentlyas a member of the Dean’s Advisory Council for the Gies Collegeboard of Business at the Universitydirectors of IllinoisOld National Bancorp since February 2022 and has been a member of the Boardaudit committee of Directors andBrown Brothers Harriman since 2015. Mr. Van Arsdell previously served as a past Chairdirector of the University of Illinois Alumni Alliance. He also currently serves on the Board of Trustees of The Morton Arboretum, for which he is the Treasurer and Chair of the Finance Committee, and is a past chair of the Board of Trustees of The Conservation Foundation.First Midwest Bancorp, Inc. from 2017 to February 2022. Mr. Van Arsdell earned both a Bachelor of Science degree in Accounting and a MastersMaster of Accounting Science degree from the University of Illinois, where he was a James Scholar.Illinois. He is a certified public accountant.
Additional Information
Additional information required by this item will be contained in our definitive proxy statement issued in connection with the 20202023 Annual Meeting of Stockholders filed with the SEC within 120 days after September 30, 20192022 and is incorporated herein by reference.
Our website address is www.muellerwaterproducts.com. You may read and print our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and allany amendments to those reports from the investor relations section of our website free of charge. These reports are available on our website soon after we file them with or furnish them to the SEC. These reports should also be available through the SEC’s website at www.sec.gov.
We have adopted a written code of conduct that applies to all directors, officers and employees, including a separate code that applies only to our principal executive officer and senior financial officers in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. Our Code of Business Conduct and Ethics is available in the corporate governance section of our website. In the event that we make changes in, or provide waivers from, the provisions of this Code of Business Conduct and Ethics that thefor which SEC requires us to disclose,disclosure is required, we will make such disclose these events in the corporate governance section of our website.
We have adopted corporate governance guidelines. The guidelines and the charters of our board committees are available in the corporate governance section of our website. Copies of the Code of Business Conduct and Ethics, corporate governance guidelines and board committee charters are also available in print upon written request to the Corporate Secretary, Mueller Water Products, Inc., 1200 Abernathy Road N.E., Suite 1200, Atlanta, GA 30328.
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Item 11. | EXECUTIVE COMPENSATION |
Item 11.EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive proxy statement issued in connection with the 20202023 Annual Meeting of Stockholders and is incorporated herein by reference.
Index to Financial Statements
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Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information set forth below and the information set forth in “Part II, Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES,” the information required by this item will be contained in our definitive proxy statement issued in connection with the 20202023 Annual Meeting of Stockholders and is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
We have two compensation plans under which our equity securities are authorized for issuance.issuance: (1) The Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan (“ESPP”) was approved by our sole stockholder in May 2006, as amended; and amended by our stockholders in February 2016.(2) The Mueller Water Products, Inc. 2006 Stock Incentive Plan (“2006 Plan”) was approved by our sole stockholder in May 2006 and amended by our stockholders in January 2008, January 2009 and January 2012., as amended.
The following table sets forth certain information relating to these equity compensation plans at September 30, 20192022.
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance |
Equity compensation plans approved by stockholders: | | | | | | | | |
2006 Plan | 2,576,183 | | (1) | | $ | 12.19 | | (2) | | 5,083,831 | | (3) |
ESPP | 47,463 | | | | — | | | | 2,103,114 | | (4) |
Total | 2,623,646 | | | | | | | 7,186,945 | | |
(1)Consists of the maximum number of shares that could be earned upon exercise or vesting of outstanding stock-based awards granted under the 2006 Plan. This includes 1,410,503 shares associated with share-settled performance units that may or may not be earned, depending on Company performance or stock market performance, as described in Note 12. of the Notes to the Consolidated Financial Statements.
(2)Weighted-average exercise price of 1,013,293 options.
(3)The number of securities initially available for issuance under the 2006 Plan was 20,500,000 shares.
(4)The number of securities initially available for issuance under the ESPP Plan was 5,800,000 shares.
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| | | | | | | | | | | | |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance |
Equity compensation plans approved by stockholders: | | | | | | | | |
2006 Plan | 2,089,205 |
| (1) | | $ | 4.89 |
| (2) | | 7,022,737 |
| (3) |
ESPP | 41,321 |
| | | — |
| | | 2,583,129 |
| (4) |
Total | 2,130,526 |
| | | | | | 9,605,866 |
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(1) | Consists of the maximum number of shares that could to be earned upon exercise or vesting of outstanding stock-based awards granted under the 2006 Plan. This includes 747,646 shares associated with share-settled performance units that may not be earned, depending on Company performance, as described in Note 11. of the Notes to the Consolidated Financial Statements. |
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(2) | Weighted average exercise price of options to acquire 862,390 shares of our common stock. |
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(3) | The number of securities remaining available for future issuance under the 2006 Plan is 20,500,000 shares less the cumulative number of shares granted under the plan, assuming maximum payout of all share-settled performance units for which performance goals have not yet been set, plus the cumulative number of awards canceled under the plan and, after January 25, 2012, shares surrendered upon issuance to cover employees’ related tax liability.
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(4) | The number of securities remaining available for future issuance under the ESPP Plan is 5,800,000 shares less the cumulative number of shares that have been issued under the plan. |
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Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be contained in our definitive proxy statement issued in connection with the 20202023 Annual Meeting of Stockholders and is incorporated herein by reference.
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Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in our definitive proxy statement issued in connection with the 20202023 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
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Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)Financial Statements
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Index to financial statements | | Page number
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Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) | | |
Consolidated Balance Sheets at September 30, 20192022 and 20182021 | | |
Consolidated Statements of Operations for the years ended September 30, 2019, 20182022, 2021 and 20172020 | | |
Consolidated Statements of Comprehensive Income for the years ended September 30, 2019, 20182022, 2021 and 20172020 | | |
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2019, 20182022, 2021 and 20172020 | | |
Consolidated Statements of Cash Flows for the years ended September 30, 2019, 20182022, 2021 and 20172020 | | |
Notes to Consolidated Financial Statements for the three years ended September 30, 20192022 | | |
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(b) | Financial Statement Schedules |
Except for Schedule II, Valuation and Qualifying Accounts, the schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b)Financial Statement Schedules
The information required by Schedule II is included in the Notes to Consolidated Financial Statements. All other schedules required by Item 15(b) are not applicable or not required.
(c)Exhibits
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| | | |
Exhibit no. | | Document |
2.1 | | Agreement and Plan of Merger dated as of June 17, 2005 among Mueller Water Products, Inc., Walter Industries, Inc., JW MergerCo, Inc. and DLJ Merchant Banking II, Inc., as stockholders’ representative. Incorporated by reference to Exhibit 2.1 to Mueller Water Products, Inc. Form 8-K (File no. 333-116590) filed on June 21, 2005. |
2.2 | | |
2.3 | | |
2.42.5 | | |
2.5 | | |
3.1 | | |
3.2 | | |
4.34.2 | | |
10.2 | | |
10.3.1* | | |
10.4.2* | | |
|
10.6.1* | | |
Exhibit no. | | Document |
10.6.1* | | |
10.7* | | |
10.8* | | |
Index to Financial Statements
| | | | | | | | |
10.9*Exhibit no. | | Document |
10.9* | | |
10.10* | | |
10.11.2* | | |
10.14 | | |
10.15*10.16* | | |
10.16* | | |
10.17.1* | | |
10.19 | | Credit Agreement, dated August 26, 2010, among Mueller Water Products, Inc. and the borrowing subsidiaries named on the signature pages thereto, each as a Borrower, certain financial institutions, as Lenders, JPMorgan Chase Bank, N.A., as Syndication Agent, Wells Fargo Bank, National Association and SunTrust Bank, as Co-Documentation Agents, Bank of America, N.A. as Administrative Agent and Banc of America Securities LLC and J.P. Morgan Securities Inc., as Joint Lead Arrangers and Joint Bookrunners. Incorporated by reference to Exhibit 10.23 to Mueller Water Products, Inc. Form 8-K (File no. 001-32892) filed on August 27, 2010. |
10.19.1 | | |
10.19.2 | | |
10.19.3 | | |
10.19.410.21 | | |
10.20* | | |
10.20.1* | | |
10.20.2* | | |
10.20.3* | | |
10.20.4* | | |
10.21 | | |
|
10.29* | | |
Exhibit no. | | Document |
10.29* | | |
10.29.1*10.29.2* | | |
10.29.2* | | |
10.29.3*10.29.4* | | |
10.29.4** | | |
10.30* | | |
10.30.1*10.30.3* | | |
10.30.2* | | |
10.30.3** | | |
10.31* | | |
10.31.1*10.31.2* | | |
10.31.2** | | |
10.32*10.32 * | | |
14.1*10.33 * | | |
10.34 * | | |
Index to Financial Statements
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Exhibit no. | | Document |
10.35 | | Cooperation Agreement dated October 11, 2022, among Mueller Water Products, Inc. and Ancora Catalyst Institutional, LP; Ancora Merlin Institutional, LP; Ancora Catalyst, LP; Ancora Merlin, LP; Ancora Alternatives LLC; Ancora Advisors, LLC; Ancora Family Wealth Advisors, LLC; The Ancora Group LLC; Inverness Holdings LL; Ancora Holdings Group, LLC and Frederick D. DiSanto. Incorporated by reference to Exhibit 10.1 to Mueller Water Products, Inc. Form 8-K (File no 001-32892) filed October 13, 2022. |
14.1* | | |
21.1** | | |
23.1** | | |
31.1** | | |
31.2** | | |
32.1** | | |
32.2** | | |
101** | | |
104** | | |
* | Management compensatory plan, contract or arrangementCover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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** | Filed with this annual report |
* Management compensatory plan, contract or arrangement
** Filed with this Annual Report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 19, 201918, 2022
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| MUELLER WATER PRODUCTS, INC. |
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| By: | | /s/ Scott Hall |
| | Name: Scott Hall |
| | Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature | | Title | | Date |
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Signature | | Title | | Date |
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/s/ Scott Hall | | President and Chief Executive Officer | | November 19, 201918, 2022 |
Scott Hall | | | | |
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/s/ Marietta Edmunds Zakas | | Executive Vice President and Chief Financial Officer (principal financial officer) | | November 19, 201918, 2022 |
Marietta Edmunds Zakas | | | |
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/s/ Michael S. NancarrowSuzanne G. Smith | | Vice President and Chief Accounting Officer (principal accounting officer) | | November 19, 201918, 2022 |
Michael S. NancarrowSuzanne G. Smith | | | |
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/s/ Mark J. O’Brien | | Non-Executive Chairman of the Board of Directors | | November 18, 2022 |
Mark J. O’Brien | | | | |
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/s/ Shirley C. Franklin | | Director | | November 19, 201918, 2022 |
Shirley C. Franklin | | | | |
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/s/ Thomas J. Hansen | | Director | | November 19, 201918, 2022 |
Thomas J. Hansen | | | | |
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/s/ Jerry W. Kolb | | Director | | November 19, 2019 |
Jerry W. Kolb | | | | |
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/s/ Mark J. O’Brien | | Director | | November 19, 2019 |
Mark J. O’Brien | | | | |
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/s/ Christine Ortiz | | Director | | November 19, 201918, 2022 |
Christine Ortiz | | | | |
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/s/ Bernard G. Rethore | | Director | | November 19, 201918, 2022 |
Bernard G. Rethore | | | | |
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/s/ Jeffery S. Sharritts | | Director | | November 18, 2022 |
Jeffery S. Sharritts | | | | |
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/s/ Brian L. Slobodow | | Director | | November 18, 2022 |
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Brian L. Slobodow | | | | |
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/s/ Lydia W. Thomas | | Director | | November 19, 201918, 2022 |
Lydia W. Thomas | | | | |
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/s/ Michael T. Tokarz | | Director | | November 19, 201918, 2022 |
Michael T. Tokarz | | | | |
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/s/ Stephen C. Van Arsdell | | Director | | November 19, 201918, 2022 |
Stephen C. Van Arsdell | | | | |
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Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Mueller Water Products, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mueller Water Products, Inc. and subsidiaries(the Company) as of September 30, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended September 30, 2019,2022, and the related notes(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of September 30, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 19, 201918, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Index to Financial Statements
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| Valuation of Intangible Assets Resulting from the Acquisition of Krausz Industries Development LtdGoodwill |
Description of the Matter | At September 30, 2022, the Company’s goodwill was $98.6 million. As described in Note 46 to the consolidated financial statements, in December 2018,goodwill is tested at the Company completedreporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its acquisition of Krausz Industries Development Ltd and subsidiaries (“Krausz”) for $140.7 million, net of cash acquired, including the assumption of certain debt of $13.2 million.carrying value. The Company accounted for the business combination by recognizing the assets acquiredperformed its annual impairment tests of goodwill and liabilities assumed at their estimated acquisition date fair values. Among the assets acquired, the Company recognized identifiable intangible assets of $45.4 million related to patents ($32.1 million), customer relationships ($8.7 million), and tradenames ($4.6 million). Auditingdetermined the fair values of its reporting units using the identified intangible assets was complexdiscounted cash flow method, a form of the income approach, and the guideline public company method, a form of the market approach.
Auditing management’s estimates of reporting unit fair values using the discounted cash flow method involved especially subjective judgments due to the significant estimation uncertainty in management’s estimates ofdetermining the fair values of these assets.the reporting units. In particular, the patents and customer relationship intangiblefair value estimates were sensitive to significant assumptions such as forecasted revenues, EBITDA margins and discount rates. The tradenames intangible estimates were sensitive to forecasted revenues and the royalty rate. These significant assumptions are forward-looking and could be affected by future industry, market and economic and market conditions.
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How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over review of the fair values of the acquired intangible assets.reporting units. This included testing controls over management’s review of the forecasted results, the discount rates and the royalty rate used in the fair value estimates.significant assumptions described above.
To test the valuationestimated fair values of the identifiable intangible assets,reporting units, we performed audit procedures that included, among others, assessing valuationthe methodologies andused to estimate fair values, testing the significant assumptions used to develop the fair value estimates, and testing the underlying data used by the Company.Company in its analysis for completeness and accuracy. For example, we evaluated the reasonableness of management’s forecasted revenues and EBITDA margins used in the fair value estimates by comparing those assumptions to the historical results of Krausz and current industry, market and economic forecasts. We also involved our valuation specialists to evaluate the valuation methodologies and the reasonableness of the discount rate and royalty rate assumptions used in the estimates.rates. As part of this evaluation, we compared the discount rate and royalty rate assumptionsrates to market data. In addition, we performed a sensitivity analysis on the significant assumptions to evaluate the potential change in the fair values of the intangible assetsreporting units that would result from the changes in the assumptions.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Atlanta, Georgia
November 19, 201918, 2022
We have audited Mueller Water Products, Inc. and subsidiaries’ internal control over financial reporting as of September 30, 2019,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Mueller Water Products, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019,2022, based on the COSO criteria.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.