12
| |
Note 7. |
Note 8. Stock-based Compensation Plans |
We have grantedgrant various forms of stock-based compensation, including stock options,market-based restricted stock units (“MRSUs”), restricted stock units, stock options and both cash-settled and stock-settled performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”)., Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants during the nine months ended June 30, 2021 are as follows:
A PRSU | | | | | | | | | | | | | | | | | |
| Units granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
Quarter ended December 31, 2020 | | | | | |
MRSUs | 234,199 | | | $ | 15.39 | | | $ | 3.6 | |
Phantom Plan instruments | 180,987 | | | 11.86 | | | 2.1 | |
Restricted stock units | 129,081 | | | 11.86 | | | 1.5 | |
Non-qualified stock options | 423,405 | | | 3.05 | | | 1.3 | |
PRSUs: 2020 award | 60,019 | | | 11.86 | | | 0.7 | |
2019 award | 84,483 | | | 11.86 | | | 1.0 | |
Employee stock purchase plan instruments | 40,286 | | | 1.92 | | | 0.1 | |
| | | | | |
Quarter ended March 31, 2021 | | | | | |
MRSUs | 4,187 | | | $ | 14.26 | | | $ | 0.1 | |
Phantom Plan instruments | 1,254 | | | 11.94 | | | 0 | |
Restricted stock units | 82,565 | | | 12.81 | | | 1.1 | |
Non-qualified stock options | 8,115 | | | 3.08 | | | 0 | |
Employee stock purchase plan instruments | 35,325 | | | 2.24 | | | 0.1 | |
| | | | | |
Quarter ended June 30, 2021 | | | | | |
Phantom Plan instruments | 3,567 | | | $ | 14.29 | | | $ | 0.1 | |
Restricted stock units | 7,127 | | | 13.32 | | | 0.1 | |
Employee stock purchase plan instruments | 32,916 | | | 2.52 | | | 0.1 | |
| | | | | $ | 11.9 | |
An MRSU award represents a target number of units that may be paid out at the end of a multi-yearthree-year award cycle based on a calculation of our relative total shareholder return (“TSR”) performance as compared with a selected peer group's TSR. Settlements, in our common shares, will range from 0 to 2 times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group.
Compensation expense attributable to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the grant date fair value are indicated below. | | | | | | | | | | | |
| January 27, 2021 | | December 2, 2020 |
Variables used in determining grant date fair value: | | | |
Dividend yield | 1.84 | % | | 1.77 | % |
Risk-free rate | 0.16 | % | | 0.21 | % |
Expected term (in years) | 2.67 | | 2.83 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding.
At June 30, 2021, the outstanding Phantom Plan instruments had a fair value of $14.42 per instrument and our liability for Phantom Plan instruments was $2.7 million and is included within Other current liabilities and Other noncurrent liabilities.
Stock options generally vest on each anniversary date of the original grant ratably over three years. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, as determined using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below. | | | | | | | | | | | |
| January 27, 2021 | | December 2, 2020 |
Variables used in determining grant date fair value: | | | |
Dividend yield | 2.01 | % | | 2.01 | % |
Risk-free rate | 0.66 | % | | 0.66 | % |
Expected term (in years) | 6.00 | | 6.00 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the options are expected to be outstanding.
A PRSU award consists of a number of units that may be paid out at the end of a three-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we determineestablish the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, we consider that portion of a PRSU award to be granted. Thus, each award consists of a grant in the year of award and grants in the designatedtwo following years. SettlementSettlements, in our common shares, will range from zero0 to two2 times the number of PRSUs granted, depending on our financial performance againstrelative to the targets. As determined at the date of award, PRSUs may settle in cash-value equivalent of, or directly in, shares of our common stock.
We awarded 171,288 stock-settled PRSUs in the quarter ended December 31, 2017 scheduled to settle in three years.
We issued 146,061 shares and 263,410did not issue any shares of common stock during the quartersthree months ended December 31, 2017 and 2016, respectively,June 30, 2021. We issued 103,058 shares of common stock during the nine months ended June 30, 2021 to settle PRSUs.
In additionPRSUs during the period. Additionally, we issued 2,324 and 221,873 shares of common stock to the PRSU activity, 213,532settle restricted stock units vested during the quarter ended December 31, 2017.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At December 31, 2017, the outstanding Phantom Plan instruments had a fair valueand issued 0 and 108,950 shares of $12.53 per instrument and our liability for Phantom Plan instruments was $1.2 million.
We granted stock-based compensation awards under the 2006 Stock Plan, the Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan and the Phantom Plancommon stock to settle stock options exercised during the three and nine months ended December 31, 2017 as follows.June 30, 2021, respectively.
|
| | | | | | | | | | | |
| | Number granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
Restricted stock units | | 171,288 |
| | $ | 12.41 |
| | $ | 2.1 |
|
Employee stock purchase plan instruments | | 35,099 |
| | 2.28 |
| | 0.1 |
|
Phantom Plan awards | | 160,672 |
| | 12.41 |
| | 2.0 |
|
PRSUs: 2018 award | | 57,092 |
| | 12.41 |
| | 0.7 |
|
2017 award | | 71,070 |
| | 12.41 |
| | 0.9 |
|
2016 award | | 71,072 |
| | 12.41 |
| | 0.9 |
|
| | | | | | $ | 6.7 |
|
Income from continuing operationsOperating income included stock-based compensation expense of $2.4$3.4 million and $2.7$1.8 million during the three months ended December 31, 2017June 30, 2021 and 2016,2020, respectively, and $8.4 million and $5.0 million during the nine months ended June 30, 2021 and 2020, respectively. At December 31, 2017,June 30, 2021, there was approximately $8.9$11.5 million of unrecognized compensation expense related to stock-based compensation arrangements and 185,270there were 199,994 PRSUs that have been awarded for the 20192021 and 20202022 performance periods for which performance goals have not been set.goal achievement cannot yet be determined.
We excluded 70,996131,178 and 323,010 of474,423 stock-based compensation instruments from the calculations of diluted earnings per share for the quartersthree months ended December 31, 2017June 30, 2021 and 2016,2020, respectively, and 566,666 and 274,009 for the nine months ended June 30, 2021 and 2020, respectively, since their inclusion would have been antidilutive.
Note 9. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below. | | | | | | | | | | | |
| June 30, | | September 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
Inventories, net: | | | |
Purchased components and raw material | $ | 102.2 | | | $ | 87.3 | |
Work in process | 31.2 | | | 32.4 | |
Finished goods | 43.5 | | | 42.8 | |
Total inventories, net | $ | 176.9 | | | $ | 162.5 | |
| | | |
Other current assets: | | | |
Prepaid expenses | $ | 10.7 | | | $ | 10.9 | |
Non-trade receivables | 7.1 | | | 8.5 | |
Workers’ compensation reimbursement receivable | 1.1 | | | 0 | |
Maintenance and repair supplies and tooling | 2.7 | | | 3.7 | |
Income taxes | 0.6 | | | 5.5 | |
Other current assets | 4.0 | | | 0.4 | |
Total other current assets | $ | 26.2 | | | $ | 29.0 | |
| | | |
Property, plant and equipment, net: | | | |
Land | $ | 6.1 | | | $ | 6.2 | |
Buildings | 81.6 | | | 80.4 | |
Machinery and equipment | 428.4 | | | 406.3 | |
Construction in progress | 76.0 | | | 57.4 | |
Total property, plant and equipment | 592.1 | | | 550.3 | |
Accumulated depreciation | (316.8) | | | (296.5) | |
Total property, plant and equipment, net | $ | 275.3 | | | $ | 253.8 | |
| | | |
Other noncurrent assets: | | | |
Operating lease right-of-use assets | $ | 24.0 | | | $ | 25.6 | |
Maintenance and repair supplies and tooling | 19.1 | | | 17.5 | |
Workers’ compensation reimbursement receivable | 3.2 | | | 0 | |
Pension assets | 4.2 | | | 0.9 | |
Note receivable | 1.8 | | | 1.8 | |
Deferred financing fees | 1.4 | | | 1.3 | |
Other noncurrent assets | 5.2 | | | 4.2 | |
Total other noncurrent assets | $ | 58.9 | | | $ | 51.3 | |
Selected supplemental liability information is presented below. | | | | | | | | | | | |
| June 30, | | September 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
Other current liabilities: | | | |
Compensation and benefits | $ | 38.9 | | | $ | 32.8 | |
Customer rebates | 16.0 | | | 9.6 | |
Warranty accrual | 3.1 | | | 7.2 | |
Deferred revenues | 7.4 | | | 5.6 | |
Refund liability | 5.5 | | | 4.3 | |
Taxes other than income taxes | 4.7 | | | 3.9 | |
Operating lease liabilities | 3.8 | | | 4.0 | |
Workers’ compensation accrual | 3.6 | | | 2.7 | |
CARES Act payroll tax liabilities | 3.6 | | | 0 | |
Restructuring liabilities | 2.6 | | | 2.8 | |
Environmental liabilities | 1.2 | | | 1.2 | |
Interest payable | 1.7 | | | 7.3 | |
Income taxes payable | 0 | | | 0.2 | |
Other | 9.2 | | | 5.0 | |
Total other current liabilities | $ | 101.3 | | | $ | 86.6 | |
| | | |
Other noncurrent liabilities: | | | |
Operating lease liabilities | $ | 21.8 | | | $ | 23.3 | |
Warranty accrual | 8.0 | | | 7.2 | |
Transition tax liability | 4.7 | | | 5.2 | |
Uncertain tax position liability | 5.0 | | | 4.5 | |
NMTC liability | 3.9 | | | 0 | |
Workers’ compensation accrual | 8.5 | | | 3.8 | |
Asset retirement obligation | 3.6 | | | 3.5 | |
CARES Act payroll tax liabilities | 3.6 | | | 3.3 | |
Deferred development grant | 2.5 | | | 2.5 | |
Other | 3.2 | | | 3.0 | |
Total other noncurrent liabilities | $ | 64.8 | | | $ | 56.3 | |
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1st 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 carrying value.
The following table summarizes information concerning our goodwill balance for the nine months ended June 30, 2021, in millions.
| | | | | |
Note 8.Balance at September 30, 2020 | Supplemental Balance Sheet Information $ |
Selected supplemental balance sheet information is presented below.
|
| | | | | | | |
| December 31, | | September 30, |
| 2017 | | 2017 |
| (in millions) |
Inventories: | | | |
Purchased components and raw material | $ | 74.3 |
| | $ | 67.7 |
|
Work in process | 37.8 |
| | 35.6 |
|
Finished goods | 43.1 |
| | 35.6 |
|
| $ | 155.2 |
| | $ | 138.9 |
|
| | | |
Other current assets: | | | |
Maintenance and repair tooling | $ | 3.2 |
| | $ | 3.3 |
|
Income taxes | 11.9 |
| | 10.9 |
|
Other | 11.4 |
| | 10.2 |
|
| $ | 26.5 |
| | $ | 24.4 |
|
| | | |
Property, plant and equipment: | | | |
Land | $ | 5.5 |
| | $ | 5.6 |
|
Buildings | 51.4 |
| | 53.4 |
|
Machinery and equipment | 270.0 |
| | 266.7 |
|
Construction in progress | 25.2 |
| | 24.7 |
|
| 352.1 |
| | 350.4 |
|
Accumulated depreciation | (229.8 | ) | | (228.1 | ) |
| $ | 122.3 |
| | $ | 122.3 |
|
Other current liabilities: | | | |
Compensation and benefits | $ | 18.2 |
| | $ | 26.9 |
|
Customer rebates | 8.1 |
| | 6.5 |
|
Taxes other than income taxes | 2.4 |
| | 3.2 |
|
Warranty | 3.7 |
| | 3.5 |
|
Income taxes | 0.8 |
| | 0.9 |
|
Environmental | 1.2 |
| | 1.3 |
|
Interest | 0.7 |
| | 0.6 |
|
Restructuring | 4.2 |
| | 3.3 |
|
Other | 6.8 |
| | 7.3 |
|
| $ | 46.1 |
| | $ | 53.5 |
|
99.8 | |
Note 9.Acquisition of i2O Water Ltd | Segment Information 13.6 | |
Effects of changes in foreign currency exchange rates | 2.6 | |
Balance at June 30, 2021 | $ | 116.0 | |
Note 10. Segment Information
Summarized financial information for our segments is presented below. Net sales and operating income associated with certain products have been reclassified as Technologies segment items to conform to the current period presentation. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended | | |
| June 30, | | June 30, | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
| | | | | | | | | | | |
| (in millions) |
Net sales, excluding intercompany: | | | | | | | | | | | |
Infrastructure | $ | 287.3 | | | $ | 209.4 | | | $ | 750.1 | | | $ | 641.6 | | | | | |
Technologies | 23.2 | | | 19.1 | | | 65.3 | | | 57.2 | | | | | |
| $ | 310.5 | | | $ | 228.5 | | | $ | 815.4 | | | $ | 698.8 | | | | | |
Operating income (loss): | | | | | | | | | | | |
Infrastructure | $ | 64.0 | | | $ | 43.6 | | | $ | 158.2 | | | $ | 129.4 | | | | | |
Technologies | (2.7) | | | (3.6) | | | (8.8) | | | (10.0) | | | | | |
Corporate | (18.6) | | | (20.0) | | | (45.5) | | | (43.3) | | | | | |
| $ | 42.7 | | | $ | 20.0 | | | $ | 103.9 | | | $ | 76.1 | | | | | |
Depreciation and amortization: | | | | | | | | | | | |
Infrastructure | $ | 13.0 | | | 12.2 | | | $ | 38.2 | | | $ | 36.3 | | | | | |
Technologies | 2.1 | | | 2.3 | | | 6.2 | | | 6.4 | | | | | |
Corporate | 0.1 | | | 0 | | | 0.2 | | | 0.1 | | | | | |
| $ | 15.2 | | | $ | 14.5 | | | $ | 44.6 | | | $ | 42.8 | | | | | |
Strategic reorganization and other (credits) charges: | | | | | | | | | | | |
Infrastructure | $ | 0.2 | | | $ | 0 | | | $ | (0.4) | | | $ | 0.4 | | | | | |
Technologies | 0 | | | 0 | | | 0 | | | 0 | | | | | |
Corporate | 3.7 | | | 8.6 | | | 6.5 | | | 11.5 | | | | | |
| $ | 3.9 | | | $ | 8.6 | | | $ | 6.1 | | | $ | 11.9 | | | | | |
Capital expenditures: | | | | | | | | | | | |
Infrastructure | $ | 13.8 | | | $ | 13.4 | | | $ | 43.3 | | | $ | 49.1 | | | | | |
Technologies | 1.2 | | | 0.5 | | | 2.7 | | | 1.8 | | | | | |
Corporate | 0 | | | 0 | | | 0.1 | | | 0.3 | | | | | |
| $ | 15.0 | | | $ | 13.9 | | | $ | 46.1 | | | $ | 51.2 | | | | | |
Infrastructure disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 71.1 | | | $ | 57.4 | | | $ | 192.1 | | | $ | 163.6 | | | | | |
Northeast | 52.9 | | | 38.7 | | | 141.8 | | | 135.3 | | | | | |
Southeast | 57.6 | | | 35.6 | | | 144.1 | | | 119.8 | | | | | |
West | 71.2 | | | 50.7 | | | 188.1 | | | 154.3 | | | | | |
United States | 252.9 | | | 182.4 | | | 666.2 | | | 573.0 | | | | | |
Canada | 27.9 | | | 20.7 | | | 60.4 | | | 47.3 | | | | | |
Other international locations | 6.5 | | | 6.3 | | | 23.5 | | | 21.3 | | | | | |
| $ | 287.3 | | | $ | 209.4 | | | $ | 750.1 | | | $ | 641.6 | | | | | |
Technologies disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 5.7 | | | $ | 5.1 | | | $ | 17.3 | | | $ | 13.6 | | | | | |
Northeast | 3.0 | | | 4.1 | | | 10.0 | | | 15.0 | | | | | |
Southeast | 8.5 | | | 5.2 | | | 22.3 | | | 16.6 | | | | | |
West | 4.8 | | | 3.7 | | | 12.7 | | | 8.9 | | | | | |
United States | 22.0 | | | 18.1 | | | 62.2 | | | 54.1 | | | | | |
Canada | 0.5 | | | 0.3 | | | 0.9 | | | 1.2 | | | | | |
Other international locations | 0.7 | | | 0.7 | | | 2.3 | | | 1.9 | | | | | |
| $ | 23.2 | | | $ | 19.1 | | | $ | 65.3 | | | $ | 57.2 | | | | | |
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Net sales, excluding intercompany: | | | |
Infrastructure | $ | 160.1 |
| | $ | 146.3 |
|
Technologies | 18.2 |
| | 20.9 |
|
| $ | 178.3 |
| | $ | 167.2 |
|
Intercompany sales: | | | |
Infrastructure | $ | — |
| | $ | 1.1 |
|
Technologies | — |
| | — |
|
| $ | — |
| | $ | 1.1 |
|
Operating income (loss): | | | |
Infrastructure | $ | 28.1 |
| | $ | 26.2 |
|
Technologies | (4.7 | ) | | (2.2 | ) |
Corporate | (2.7 | ) | | (9.8 | ) |
| $ | 20.7 |
| | $ | 14.2 |
|
Depreciation and amortization: | | | |
Infrastructure | $ | 9.1 |
| | $ | 9.0 |
|
Technologies | 1.4 |
| | 1.2 |
|
Corporate | 0.1 |
| | 0.1 |
|
| $ | 10.6 |
| | $ | 10.3 |
|
Strategic reorganization and other charges: | | | |
Infrastructure | $ | — |
| | $ | 0.1 |
|
Technologies | 0.1 |
| | — |
|
Corporate | 3.8 |
| | 1.2 |
|
| $ | 3.9 |
| | $ | 1.3 |
|
Capital expenditures: | | | |
Infrastructure | $ | 4.8 |
| | $ | 3.0 |
|
Technologies | 1.5 |
| | 1.1 |
|
Corporate | 0.1 |
| | 0.1 |
|
| $ | 6.4 |
| | $ | 4.2 |
|
Note 11. Accumulated Other Comprehensive Loss | |
Note 10. | Accumulated Other Comprehensive Loss
|
Accumulated other comprehensive loss is presented below. | | | | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Total |
| | | | | |
| (in millions) |
Balance at September 30, 2020 | $ | (32.7) | | | $ | 8.0 | | | $ | (24.7) | |
Current period other comprehensive income | 1.4 | | | 8.5 | | | 9.9 | |
Balance at June 30, 2021 | $ | (31.3) | | | $ | 16.5 | | | $ | (14.8) | |
Note 12. Commitments and Contingencies
|
| | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Derivative instruments, net of tax | | Total |
| |
Balance at September 30, 2017 | $ | (47.0 | ) | | $ | (3.3 | ) | | $ | (1.5 | ) | | $ | (51.8 | ) |
Current period other comprehensive income (loss) | 0.5 |
| | 0.1 |
| | 1.0 |
| | 1.6 |
|
Balance at December 31, 2017 | $ | (46.5 | ) | | $ | (3.2 | ) | | $ | (0.5 | ) | | $ | (50.2 | ) |
| |
Note 11. | Commitments and Contingencies
|
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. 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 financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters.matters, unless otherwise indicated below. Other than the litigation described below, 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 International plc, now Johnson Controls International plc (“JCI”), sold our businesses to a previous owner in August 1999, TycoJCI 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’sJCI’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, TycoJCI has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the TycoJCI indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such TycoJCI indemnitors has changed. Should any of these TycoJCI 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 a 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, which was sold in 2012, 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’sthe Environmental Protection Agency’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, becauseSince the amountamounts of such costs cannot be reasonably estimated at this time, no amounts hadhave been accrued for this matter at December 31, 2017.June 30, 2021.
Walter Energy. Each memberOn November 18, 2019, we paid approximately $22.2 million to the Internal Revenue Service in final settlement of thea tax dispute related to our former parent company, Walter Energy, consolidated group, which included us through December 14, 2006, is jointly and severally liable for the federal income tax liability of each other member of the consolidated group for any yearInc.
Mass Shooting Event at our Mueller Co. Facility in Albertville, Alabama. On June 15, 2021, we experienced a mass shooting event at our Mueller Co. facility in Albertville, Alabama, in which it is a member of the group at any time during such year. Accordingly, we could be liable intwo employees were killed and two employees were injured. Various workers’ compensation claims arising from the event anyhave been made to date, and we anticipate that additional claims may be made, and that liability under such federal income tax liability is incurred, and not discharged, by any other member of the Walter Energy consolidated group for any period during which we were included in the Walter Energy consolidated group.
Walter Energy effectively controlled all of our tax decisions for periods during which we were a member of the Walter Energy consolidated group for federal income tax purposes and certain combined, consolidated or unitary state and local income tax groups. Under the terms of an income tax allocation agreement between us and Walter Energy, dated May 26, 2006, we generally compute our tax liability on a stand-alone basis, but Walter Energy has sole authority to respond to and conduct all tax proceedings (including tax audits) relating to our federal income and combined state tax returns, to file all such tax returns on our behalf and to determine the amount of our liability to (or entitlement to payment from) Walter Energy for such previous periods.
As described further below, the IRS is currently alleging that Walter Energy owes substantial amounts for prior taxable periods (specifically, 1983-1994, 2000-2002 and 2005). As a matter of law, we are jointly and severally liable for any final tax determination, which means we would be liable in the event Walter Energy is unable to pay any amounts owed.
In July 2015, Walter Energy filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code before the Bankruptcy Court for the Northern District of Alabama (“Chapter 11 Case”). During the pendency of the Chapter 11 Case, we monitored the proceeding to determine whether we could be liable for all or a portion of this federal income tax liability if it is incurred, and not discharged, for any period during which we were included in the Walter Energy consolidated group. On January 11, 2016, the IRS filed a proof of claim in the Chapter 11 Case, alleging that Walter Energy owes 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 claims, is entitled to priority status in the Chapter 11 Case). The IRS asserts that its claim is based on an alleged settlement of Walter Energy’s tax liability for the 1983-1995 taxable periods in connection with Walter Energy’s prior bankruptcy proceeding in the United States Bankruptcy Court for the Middle District of Florida. In the proof of claim, the IRS included an alternative calculation in the event the alleged settlement of the prior bankruptcy court is found to be non-binding, which provides for a claim by the IRS in an aggregate amount of $860.4 million ($535.3 million of which the IRS claims is entitled to priority status in the Chapter 11 Case).
According to a quarterly report on Form 10-Q filed by Walter Energy with the SEC on November 5, 2015 (“Walter November 2015 Filing”), at September 30, 2015, Walter Energy had $33.0 million of accruals for unrecognized tax benefits in connection with the matters subject to the IRS claims. In the Walter November 2015 Filing, Walter Energy stated it believed it had sufficient accruals to address any claims, including interest and penalties, and did not believe that any potential difference between any final settlements and amounts accrued would have a material effect on Walter Energy’s financial position, but such potential difference could be material to its results of operations in a future reporting period.
According to a Form 8-K filed by Walter Energy with the SEC on April 1, 2016 (“Walter April 2016 Filing”), on March 31, 2016, Walter Energy closed on the sale of substantially all of Walter Energy’s Alabama assets pursuant to the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. The Walter April 2016 Filing further stated that Walter Energy would have no further material business operations after April 1, 2016 and Walter Energy was evaluating its options with respect to the wind down of its remaining assets. The asset sale did not impact the IRS’ proof of claim filed in the bankruptcy cases and the proof of claim, as well as the alleged tax liability thereunder, remain unresolved.
On February 2, 2017, at the request of Walter Energy, the Bankruptcy Court for the Northern District of Alabama signed an order converting the Chapter 11 Case to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy will be wound-down and liquidated (“Chapter 7 Case”). In its objection contesting such conversion, the IRS indicated its intent to pursue collection of amounts included in the Proof of Claim from former members of the Walter Energy consolidated group.
We cannot predict whether or to what extent we may become liable for the tax-related amounts of the Walter Energy consolidated group asserted in the IRS’ proof of claim filed in the bankruptcy cases, in part, because: (i) the amounts owed by the Walter Energy consolidated group for certain of the taxable periods from 1980 through 2006 remain unresolved; (ii) it is unclear what priority, if any, the IRS will receive in the Chapter 7 Case with respectis not expected to its claims against Walter Energy, and whether and to what extent funds will be available in the Chapter 7 Case to pay priority tax claims. We also intend to vigorously assert any and all available defenses against any liability we may have as a member of the Walter Energy consolidated group. However, we cannot currently estimate our liability, if any, relating to the tax-related liabilities of Walter Energy’s consolidated tax group for tax years prior to 2007, and such liability could have a material adverse effect on our business, financial condition, liquidity or results of operations.operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. We have taken action and continue to counter such disruption and work to protect the safety of our production workers as essential workers at our various manufacturing plants, distribution centers and research and development centers. We are uncertain of the potential magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the pandemic affects our results will depend on future developments, including COVID-19 variants, the outbreak could result in material effects to our future financial position, results of operations, cash flows and liquidity.
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 saledivestitures of assets and the divestiture of businesses, such as the divestitures ofsubsidiaries, 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 monitor and analyze our warranty experience and costs periodically and revise our accruals as necessary. 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.
We are party to a number of 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 businessfinancial position, results of operations, cash flows or prospects.liquidity.
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Note 12. | Note 13. Subsequent Events |
On January 24, 2018,July 29, 2021, our boardBoard of directorsDirectors declared a dividend of $0.05$0.0550 per share on our common stock, payable on or about FebruaryAugust 20, 20182021 to stockholders of record at the close of business on February 9, 2018.August 10, 2021.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address activities, events or developments that we intend, expect, plan, project, believethe Company intends, expects, plans, projects, believes or anticipateanticipates will or may occur in the future are forward-looking statements.statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, the COVID-19 pandemic, go-to-market strategies, operational excellence, acceleration of new product development, end market performance, net sales performance, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies, restructuring efficiencies and warranty charges. Forward-looking statements are based on certain assumptions and assessments made by us in light of ourthe Company based on experience and perception of historical trends, current conditions and expected future developments.
Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severity of the impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the financial/capital markets, government-mandated facility closures, COVID-19 related facility closures and other manufacturing restrictions, logistical challenges and supply chain interruptions, potential litigation and claims emanating from the COVID-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world; unexpected or greater than expected increases in costs of raw materials and purchased components; regional, national or global political, economic, business, competitive, market and competitive conditions; cyclical and changing demand in core markets such as municipal spending; government monetary or fiscal policies; residential and nonresidential construction, and natural gas distribution; manufacturing and product performance; expectations for changes in volumes, continued execution of cost productivity initiatives and improved pricing; warranty exposures (including the adequacy of warranty reserves); the Company’s ability to successfully resolve significant legal proceedings, claims, lawsuits or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; changing regulatory, conditionstrade and tariff conditions; failure to achieve expected cost savings, net sales expectations, profitability expectations and manufacturing efficiencies from restructuring and consolidation activities and our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; as well as other factors that are described underin the section entitled “RISK FACTORS” in Item 1A.1A of our annual reportthe Company’s most recently filed Annual Report on Form 10-K forand in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the year ended September 30, 2017 (“Annual Report”)pandemic). Forward-looking statements are only as of the date they are made and do not guarantee future performance. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. TheYou are advised to review any further disclosures the Company does not have any intention or obligation to update forward-looking statements, except as required by law.makes in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.
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. We manage our businesses and report operations through two business segments, Infrastructure and Technologies, based largely on the products sold and the customers served.
Overview
Organization
On October 3, 2005, Walter Energy, Inc (“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 Mueller Water Products, Inc. (“Mueller” or the Company.“Company”). In June 2006, we completed an initial public offering of 28,750,000 shares of Series A common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in the Company, consisting of all of the Company’s outstanding shares of Series B common stock. On January 28, 2009, each share of Series B common stock was converted into one share of Series A common stock and the Series A designation was discontinued.
On January 6, 2017, weMueller, completing our spin-off. We subsequently sold our formerU.S. Pipe and Anvil segment. Amounts applicable to Anvil have been classified as discontinued operations.businesses in 2012 and 2017, respectively.
Business
We expect our two primary end markets, repair and replacement of water infrastructure driven by municipal spending and new water infrastructure installation driven by residential construction to grow in 2018. We expect the residential construction market to grow faster than municipal spending.
Infrastructure
We estimate approximately 60%60-65% of Infrastructure’s 2017our 2020 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 30%25-30% were related to residential construction activity and approximatelyless than 10% were related to natural gas utilities.utilities spending.
Infrastructure announced price increases on valves, hydrants and gas products effective in February 2018 for its U.S. and Canadian markets. We believe that some customers may accelerate orders priorexpect the operating environment during the remainder of our fiscal year 2021 to continue to be very challenging due to the effective dateuncertainty around the depth and duration of the price increases.pandemic, which has accelerated and may continue to accelerate inflation and global supply chain disruptions. We anticipate that growth in the residential construction end market will continue to help offset anticipated challenges in the project-related portion of the municipal market. In July 2021, Blue Chip Economic Indicators forecasted a 16% increase in housing starts for calendar 2021 compared to the prior year primarily due to the low interest rate environment in the United States.
We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable volume variances, voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities. We expect to continue to incur such costs, which may be significant, as we continue to respond to the pandemic. All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced due to the pandemic. The last such closure was in August 2020. The pandemic also caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist in the near term and may worsen until the pandemic abates.
Infrastructure
In December 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. During the three months ended March 31, 2021, we aligned the consolidation of Krausz in the consolidated financial statements which previously included results on a one-month reporting lag. The impact of the elimination of the reporting lag during the nine months ended June 30, 2021 resulted in an increase of $6.0 million to net sales and $1.4 million in operating income.
In July 2014, Infrastructure acquired a 49% ownership interest in an industrial valve joint venture for $1.7 million. As a result of substantive control features in the operating agreement, all of the joint venture’s assets, liabilities and results of operations were included in our consolidated financial statements. Infrastructure acquired the remaining 51% ownership interest in the business in October 2019.
Technologies
The municipal market is the key end market for Technologies. These businesses areOur Technologies segment is typically project-oriented and dependdependent on customerour customers’ adoption of theirour technology-based products and services. Mueller Systems
On June 14, 2021, we acquired all the outstanding capital stock of i20 Water Ltd, a provider of pressure management solutions to more than 100 water companies in 45 countries for $19.7 million, net of cash acquired. i2O Water Ltd is benefiting from its recent introduction of new, longer-range radio capabilities, and its growth strategy is focused onorganized under the AMI segmentlaws of the market. Mueller Systems’ 2018 first quarter AMI backlog was lower at December 31, 2017 than at December 31, 2016. Echologics hadUnited Kingdom. The purchase agreement provides for customary final adjustments, including a greater number of projects under contract at at December 31, 2017 than at December 31, 2016.net working capital adjustment, which we expect to occur in 2021.
Results of Operations
Three Months Ended December 31, 2017June 30, 2021 Compared to Three Months Ended December 31, 2016
|
| | | | | | | | | | | | | | | |
| Three months ended December 31, 2017 |
| Infrastructure | | Technologies | | Corporate | | Total |
| (in millions) |
Net sales | $ | 160.1 |
| | $ | 18.2 |
| | $ | — |
| | $ | 178.3 |
|
Gross profit | $ | 52.5 |
| | $ | 2.9 |
| | $ | — |
| | $ | 55.4 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative | 24.4 |
| | 7.5 |
| | 7.9 |
| | 39.8 |
|
Gain on sale of idle property | — |
| | — |
| | (9.0 | ) | | (9.0 | ) |
Strategic reorganization and other charges | — |
| | 0.1 |
| | 3.8 |
| | 3.9 |
|
| 24.4 |
| | 7.6 |
| | 2.7 |
| | 34.7 |
|
Operating income (loss) | $ | 28.1 |
| | $ | (4.7 | ) | | $ | (2.7 | ) | | 20.7 |
|
Pension costs other than service | | | | | | | 0.2 |
|
Interest expense, net | | | | | | | 5.2 |
|
Income before income taxes | | | | | | | 15.3 |
|
Income tax benefit | | | | | | | (39.8 | ) |
Income from continuing operations | | | | | | | $ | 55.1 |
|
| | | | | | | |
| Three months ended December 31, 2016 |
| Infrastructure | | Technologies | | Corporate | | Total |
| (in millions) |
Net sales | $ | 146.3 |
| | $ | 20.9 |
| | $ | — |
| | $ | 167.2 |
|
Gross profit | $ | 47.6 |
| | $ | 4.2 |
| | $ | — |
| | $ | 51.8 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative | 21.3 |
| | 6.4 |
| | 8.6 |
| | 36.3 |
|
Other charges | 0.1 |
| | — |
| | 1.2 |
| | 1.3 |
|
| 21.4 |
| | 6.4 |
| | 9.8 |
| | 37.6 |
|
Operating income (loss) | $ | 26.2 |
| | $ | (2.2 | ) | | $ | (9.8 | ) | | 14.2 |
|
Pension costs other than service | | | | | | | 0.3 |
|
Interest expense, net | | | | | | | 6.4 |
|
Income before income taxes | | | | | | | 7.5 |
|
Income tax expense | | | | | | | 2.1 |
|
Income from continuing operations | | | | | | | $ | 5.4 |
|
June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2021 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 287.3 | | | $ | 23.2 | | | $ | — | | | $ | 310.5 | |
Gross profit | 101.1 | | | 4.3 | | | — | | | $ | 105.4 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 36.9 | | | 7.0 | | | 14.9 | | | 58.8 | |
Strategic reorganization and other charges | 0.2 | | | — | | | 3.7 | | | 3.9 | |
Total operating expenses | 37.1 | | | 7.0 | | | 18.6 | | | 62.7 | |
Operating income (loss) | $ | 64.0 | | | $ | (2.7) | | | $ | (18.6) | | | 42.7 | |
Other expenses (income): | | | | | | | |
Loss on early extinguishment of debt | | | | | | | 16.7 | |
Pension benefit other than service | | | | | | | (0.8) | |
Interest expense, net | | | | | | | 6.8 | |
Income before income taxes | | | | | | | 20.0 | |
Income tax expense | | | | | | | 5.6 | |
Net income | | | | | | | $ | 14.4 | |
| | | | | | | |
| Three months ended June 30, 2020 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 209.4 | | | $ | 19.1 | | | $ | — | | | $ | 228.5 | |
Gross profit | 73.3 | | | 2.4 | | | — | | | $ | 75.7 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 29.7 | | | 6.0 | | | 11.4 | | | 47.1 | |
Strategic reorganization and other charges | — | | | — | | | 8.6 | | | 8.6 | |
Total operating expenses | 29.7 | | | 6.0 | | | 20.0 | | | 55.7 | |
Operating income (loss) | $ | 43.6 | | | $ | (3.6) | | | $ | (20.0) | | | 20.0 | |
Other expenses (income): | | | | | | | |
Pension benefit other than service | | | | | | | (0.7) | |
Interest expense, net | | | | | | | 6.1 | |
Income before income taxes | | | | | | | 14.6 | |
Income tax expense | | | | | | | 3.4 | |
Net income | | | | | | | $ | 11.2 | |
Consolidated Analysis
Net sales for the quarterthree months ended December 31, 2017June 30, 2021 increased $11.1$82.0 million or 35.9 percent to $178.3$310.5 million from $167.2$228.5 million duein the comparable prior year period. This increase was primarily toa result of increased shipment volumes includingat both Infrastructure and Technologies compared to the addition of Singer Valve,prior year and improvedhigher pricing at Infrastructure, which were partially offset by volume decline at Technologies.Infrastructure.
Gross profit for the quarterthree months ended December 31, 2017June 30, 2021 increased $3.6$29.7 million to $55.4$105.4 million from $51.8$75.7 million in the prior year period. Gross profit increased primarily as a result of increased volumes and higher pricing. Partially offsetting the increase in gross profit were higher manufacturing costs due to inflation. Gross margin was 33.9% for the three months ended June 30, 2021 and improved 80 basis points compared to 33.1% in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2021 increased $11.7 million to $58.8 million from $47.1 million in the prior year period primarily as a result of new product development and information technology expenses, higher personnel-related expenses including sales commissions associated with higher net sales and orders, incentive compensation and stock-based compensation. Additionally, travel and entertainment expenses were higher in the current year period, and we benefited from temporary reduction in personnel expenses due to increased shipment volumes, improved pricingfurloughs and Infrastructure's improved operating efficiencies and other manufacturing cost savings, partially offset by increased material costs. Gross margin increased to 31.1% for the quarter ended December 31, 2017 compared to 31.0%temporary pay cuts in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the quarter ended December 31, 2017 increased to $39.8 million from $36.3 million in the prior year period due primarily to the acquisition of Singer Valve during the second quarter of last year and higher personnel-related expenses. SG&A as a percentage of net sales was 22.3%18.9% and 20.6% in the quarterthree months ended December 31, 2017June 30, 2021 and 21.7%2020, respectively.
Strategic reorganization and other charges for the three months ended June 30, 2021 were $3.9 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the previously announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada and acquisition transaction costs. Strategic reorganization and other charges for the prior year period.three months ended June 30, 2020 of $8.6 million included an accrual related to a litigation settlement, facility relocation expenses and senior executive severance costs.
Interest expense, net declined $1.2increased $0.7 million in the quarterthree months ended December 31, 2017June 30, 2021 compared to the prior year period.period primarily as a result of the timing of the issuance of the 4.0% Senior Notes and the extinguishment of the 5.5% Senior Notes. The components of interest expense, net are provided below. | | | | | | | | | | | |
| Three months ended |
| June 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
5.5% Notes | $ | 5.2 | | | $ | 6.2 | |
4.0% Notes | 1.7 | | | — | |
Deferred financing costs amortization | 0.3 | | | 0.2 | |
ABL Agreement | 0.2 | | | 0.2 | |
Capitalized interest | (0.6) | | | (0.5) | |
Other interest cost | 0.1 | | | 0.1 | |
| 6.9 | | | 6.2 | |
Interest income | (0.1) | | (0.1) | |
Interest expense, net | $ | 6.8 | | | $ | 6.1 | |
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Term Loan | $ | 4.8 |
| | $ | 5.1 |
|
Interest rate swap contracts | 0.4 |
| | 0.6 |
|
Deferred financing costs amortization | 0.5 |
| | 0.4 |
|
ABL Agreement | 0.2 |
| | 0.2 |
|
Other interest expense | 0.1 |
| | 0.2 |
|
| 6.0 |
| | 6.5 |
|
Interest income | (0.8 | ) | | (0.1 | ) |
| $ | 5.2 |
| | $ | 6.4 |
|
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 are subject to a blended federal statutory tax rate of 24.5 percent throughout fiscal 2018.
For the quarter ended December 31, 2017, we reported a net income tax benefit of $39.8 million, which was driven by a benefit of $42.6 million related to remeasurement of our net deferred income tax liabilities using the enacted tax rates in effect when we expect to recognize the related tax expenses or benefits. Other than this remeasurement benefit, income tax expense was $2.8 million, or 18.3 percent of income before income taxes. For the 2017 first quarter, income tax expense was 28.0 percent of income before income taxes. The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below. | | | | | | | | | | | |
| Three months ended |
| June 30, |
| 2021 | | 2020 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.2 | | | 4.5 | |
Tax credits | (1.7) | | | (1.7) | |
Global Intangible Low-taxed Income | 0.5 | | | (0.2) | |
Foreign income tax rate differential | (0.4) | | | (0.5) | |
Nondeductible compensation | 0.6 | | | 1.0 | |
Basis difference in foreign investment | 1.2 | | | 0.3 | |
Valuation allowance | — | | | (0.3) | |
Reversal of uncertain tax positions | — | | | (2.1) | |
Other | 2.6 | | | 1.3 | |
Effective income tax rate | 28.0 | % | | 23.3 | % |
|
| | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
U.S. federal statutory income tax rate | 24.5 | % | | 35.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.3 |
| | 3.9 |
|
Valuation allowance adjustment related to stock compensation | (5.7 | ) | | — |
|
Excess tax benefits related to stock compensation | (2.8 | ) | | (7.6 | ) |
Domestic production activities deduction | (1.6 | ) | | (3.3 | ) |
Tax credits | (0.9 | ) | | (0.8 | ) |
Other | 0.5 |
| | 0.8 |
|
| 18.3 | % | | 28.0 | % |
Remeasurement of deferred taxes for change in rates | (278.4 | )% | | — | % |
Effective income tax rate | (260.1 | )% | | 28.0 | % |
Also under this legislation, we are subject to a one-time transition tax on undistributed foreign earnings, but the amount of this tax is not reasonably estimable at this time. Accordingly, no provision for this tax has been recorded, but will be recorded later in 2018.
Segment Analysis
Infrastructure
Net sales for the quarterthree months ended December 31, 2017June 30, 2021 increased 9.4%$77.9 million or 37.2 percent to $160.1$287.3 million compared to $209.4 million in the prior year period. This increase was primarily a result of increased shipment volume and higher pricing across most of our Infrastructure product lines.
Gross profit for the three months ended June 30, 2021 increased to $101.1 million from $73.3 million in the prior year period primarily due to increased volumes and higher pricing, which were partially offset by inflation effecting Cost of sales. Gross margin was 35.2% for the three months ended June 30, 2021 and was 35.0% in the prior year period.
SG&A for the three months ended June 30, 2021 increased to $36.9 million from $29.7 million in the prior year period. This increase was primarily the result of higher personnel-related expenses, including sales commissions associated with higher net sales and orders, and incentive compensation, as well as information technology spending. Additionally, travel and entertainment expenses were higher in the current year period, and we benefited from the temporary reduction in personnel expenses due to furloughs and temporary pay reductions in the prior year period. SG&A as a percentage of net sales was 12.8% and 14.2%, respectively, for the three months ended June 30, 2021 and 2020.
Technologies
Net sales for the three months ended June 30, 2021 increased $4.1 million or 21.5% to $23.2 million from $19.1 million in the prior year period, primarily due to increased shipment volumes of our metering products.
Gross profit for the three months ended June 30, 2021 was $4.3 million compared to $2.4 million in the prior year period. Gross margin percentage was 18.5% and 12.6%, in the three months ended June 30, 2021 and 2020, respectively.
SG&A increased to $7.0 million from $6.0 million in the prior year period primarily due to increased new product development costs. SG&A as a percentage of net sales was 30.2% and 31.4% for the three months ended June 30, 2021 and 2020, respectively.
Corporate
SG&A was $14.9 million and $11.4 million in the three months ended June 30, 2021 and 2020, respectively, which was primarily the result of personnel-related expenses including stock-based compensation and incentive compensation. Additionally, travel and entertainment expenses were higher in the current year period as we benefited from the temporary reduction in personnel expenses due to furloughs and temporary pay cuts in the prior year period.
Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended June 30, 2021 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 750.1 | | | $ | 65.3 | | | $ | — | | | $ | 815.4 | |
Gross profit | 261.1 | | | 11.1 | | | — | | | $ | 272.2 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 103.3 | | | 19.9 | | | 39.0 | | | 162.2 | |
Strategic reorganization and other (credits) charges | (0.4) | | | — | | | 6.5 | | | 6.1 | |
Total operating expenses | 102.9 | | | 19.9 | | | 45.5 | | | 168.3 | |
Operating income (loss) | $ | 158.2 | | | $ | (8.8) | | | $ | (45.5) | | | 103.9 | |
Other expenses (income): | | | | | | | |
Loss on early extinguishment of debt | | | | | | | 16.7 | |
Pension benefit other than service | | | | | | | (2.4) | |
Interest expense, net | | | | | | | 19.0 | |
Income before income taxes | | | | | | | 70.6 | |
Income tax expense | | | | | | | 18.6 | |
Net income | | | | | | | $ | 52.0 | |
| | | | | | | |
| Nine months ended June 30, 2020 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 641.6 | | | $ | 57.2 | | | $ | — | | | $ | 698.8 | |
Gross profit | 225.4 | | | 8.9 | | | — | | | $ | 234.3 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 95.6 | | | 18.9 | | | 31.8 | | | 146.3 | |
Strategic reorganization and other charges | 0.4 | | | — | | | 11.5 | | | 11.9 | |
Total operating expenses | 96.0 | | | 18.9 | | | 43.3 | | | 158.2 | |
Operating income (loss) | $ | 129.4 | | | $ | (10.0) | | | $ | (43.3) | | | 76.1 | |
Other expenses (income): | | | | | | | |
Pension benefit other than service | | | | | | | (2.2) | |
Interest expense, net | | | | | | | 19.5 | |
Walter Energy Accrual | | | | | | | 0.2 | |
Income before income taxes | | | | | | | 58.6 | |
Income tax expense | | | | | | | 13.3 | |
Net income | | | | | | | $ | 45.3 | |
Consolidated Analysis
Net sales for the nine months ended June 30, 2021 increased $116.6 million or 16.7 percent to $815.4 million from $698.8 million primarily due to increased shipment volumes across most of our product lines, higher pricing and a result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag.
Gross profit for the nine months ended June 30, 2021 increased $37.9 million to $272.2 million from $234.3 million in the prior year period, primarily due to increased shipment volumes and higher pricing. These increases were partially offset by inflation and lesser expenditures associated with the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees, and a $2.4 million inventory write-off recorded during the nine months ended June 30, 2021 associated with the announcement of our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin was 33.4% for the nine months ended June 30, 2021 compared to 33.5% in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the nine months ended June 30, 2021 increased to $162.2 million from $146.3 million in the prior year period primarily due to an increase in personnel-related expenses, including incentive compensation, an increase in sales commissions associated with higher net sales and orders, and stock-based compensation. Additionally, SG&A increased as a result of inflation and new product development and information technology spending. SG&A as a percentage of net sales was 19.9% and 20.9% in the nine months ended June 30, 2021 and 2020, respectively.
Strategic reorganization and other charges for the nine months ended June 30, 2021 were $6.1 million, which primarily related to the Albertville tragedy, and termination benefits associated with our announced plan closures in Aurora, Illinois and Surrey, British Columbia, Canada, as well as, legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property. Strategic reorganization and other charges for the nine months ended June 30, 2020 were $11.9 million primarily related to a litigation settlement accrual, previously announced facility closures and legal and professional service expenses.
Interest expense, net declined $0.5 million in the nine months ended June 30, 2021 compared to the prior year period primarily due to an increase in capitalized interest, partially offset by an increase in interest expense as a result of the timing of the redemption of the 5.5% Notes and the issuance of the 4.0% Notes, as well as a decline in interest income. The components of net interest expense are provided below.
| | | | | | | | | | | |
| Nine months ended |
| June 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
5.5% Notes | $ | 17.6 | | | $ | 18.6 | |
4.0% Notes | 1.7 | | | — | |
Deferred financing costs amortization | 0.8 | | | 0.9 | |
ABL Agreement | 0.7 | | | 0.4 | |
Capitalized interest | (1.7) | | | 0.2 | |
Other interest cost | 0.3 | | | 0.4 | |
Interest expense | 19.4 | | | 20.5 | |
Interest income | (0.3) | | | (1.0) | |
Interest expense, net | $ | 19.0 | | | $ | 19.5 | |
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
| | | | | | | | | | | |
| Nine months ended |
| June 30, |
| 2021 | | 2020 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.2 | | | 4.5 | |
Excess tax (benefits) related to stock-based compensation | (0.3) | | | (0.6) | |
Tax credits | (1.7) | | | (2.6) | |
Global Intangible Low-taxed Income | 0.5 | | | (0.1) | |
Foreign income tax rate differential | (0.4) | | | (0.6) | |
Nondeductible compensation | 0.6 | | | 0.6 | |
Basis difference in foreign investment | 1.2 | | | — | |
Valuation allowance | 0.7 | | | (0.5) | |
Reversal of uncertain tax positions | — | | | (0.5) | |
Other | 0.5 | | | 1.5 | |
Effective income tax rate | 26.3 | % | | 22.7 | % |
Segment Analysis
Infrastructure
Net sales for the nine months ended June 30, 2021 increased $108.5 million or 16.9 percent to $750.1 million compared to $641.6 million in the prior year period primarily due to higher shipment volumes across most of our product lines, higher pricing and the additionresult of Singer Valve and favorable pricing.$6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag.
Gross profit for the quarternine months ended December 31, 2017June 30, 2021 increased $35.7 million to $52.5$261.1 million from $47.6 million in the prior year period due to increased shipment volumes, improved operating efficiencies and other manufacturing cost savings. Gross margin increased to 32.8% for the quarter ended December 31, 2017 compared to 32.5% in the prior year period.
SG&A for the quarter ended December 31, 2017 increased to $24.4 million from $21.3 million in the prior year period. SG&A was 15.2% and 14.6% of net sales for the quarters ended December 31, 2017 and 2016, respectively. These increases in SG&A were primarily due to higher personnel-related expenses and the additional SG&A of Singer Valve.
Technologies
Net sales in the quarter ended December 31, 2017 declined to $18.2 million from $20.9$225.4 million in the prior year period primarily due to lower AMIincreased shipment volumes, higher pricing, improved manufacturing performance and the benefit from the elimination of the Krausz one-month reporting lag. These increases were partially offset by higher costs associated with inflation, a $2.4 million Inventory write-off associated with the announcement of the closure of our Aurora, Illinois and Surrey, British Columbia, Canada facilities and $2.9 million in expenses related to the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees. Gross margin was 34.8% for the nine months ended June 30, 2021 and was 35.1% in the prior year period.
SG&A for the nine months ended June 30, 2021 increased to $103.3 million from $95.6 million in the prior year period. This increase was primarily a result of an increase in personnel-related expenses, including higher sales commissions as a result of higher net sales and orders, incentive compensation and stock-based compensation. Additionally, SG&A increased as a result of inflation, information technology spending and new product development. Partially offsetting these increases was a temporary expense reduction of $2.9 million related to the pandemic, including reduced travel, trade shows and events. SG&A as a percentage of net sales was 13.8% and 14.9% for the nine months ended June 30, 2021 and 2020, respectively.
Technologies
Net sales for the nine months ended June 30, 2021 increased $8.1 million or 14.2% to $65.3 million from $57.2 million in the prior year period, primarily due to higher shipment volumes of our metering and leak detection sales.detection-related products.
Gross profit infor the quarternine months ended December 31, 2017June 30, 2021 was $2.9$11.1 million compared to $4.2$8.9 million in the prior year period. Gross margin declined to 15.9%percentage was 17.0% and 15.6% in the quarternine months ended December 31, 2017 compared to 20.1% in the prior year period. These declines were primarily due to lower shipment volumes.June 30, 2021 and 2020, respectively.
SG&A increased to $7.5was $19.9 million and $18.9 million in the quarter ended December 31, 2017 compared to $6.4 million in thecurrent and prior year period due to personnel-related expenses.periods, respectively. The increase was primarily as a result of new product development. SG&A increased to 41.2%as a percentage of net sales was 30.5% and 33.0% for the quarternine months ended December 31, 2017 from 30.6% of net sales in the prior year period.June 30, 2021 and 2020, respectively.
Corporate
SG&A was $7.9$39.0 million and $31.8 million in the quarternine months ended December 31, 2017 compared to $8.6 million in the prior year period.June 30, 2021 and 2020, respectively. The increase was primarily as a result of higher personnel-related expenses including incentive compensation and stock-based compensation expense.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $348.3$228.6 million at December 31, 2017June 30, 2021 and $96.3$145.1 million of additional borrowing capacity under our ABL Agreement based on December 31, 2017 data, which, along with cash generated by operations, would be our source of incremental liquidity.June 30, 2021 data. Undistributed earnings from our subsidiaries in Canada, China, and ChinaIsrael are considered to be permanently invested outside the United States. At December 31, 2017,June 30, 2021, cash and cash equivalents included $12.1$31.1 million, $11.7 million and $7.2$6.3 million in Israel, Canada and China, respectively.
We expect the recently enacted tax law changes to benefit our liquidity through reductionOn July 29, 2021, we declared a quarterly dividend of $0.0550 per share, payable on or about August 20, 2021, which will result in overall income tax liability and through provisions allowing immediate deductibility for capital assets placed in service in the next five years. This benefit will be partially offset by payment of the transition tax discussed above. However, the transition tax may be paid over eight years, and we do not expect any payments to have a material liquidity impact in any particular year.an estimated $8.7 million cash outlay.
We repurchaseddid not repurchase any shares of our outstanding common stock for $10 million during the quarter ended December 31, 2017, and we had $180 million remaining onunder our share repurchase authorization at that date.program during the three and nine months ended June 30, 2021 and had $145.0 million remaining under our share repurchase authorization.
The ABL Agreement and Term LoanNotes 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.
Cash flows from operating activities of continuing operations are categorized below. | | | | | | | | | | | |
| Nine months ended |
| June 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
Collections from customers | $ | 797.4 | | | $ | 716.2 | |
Disbursements, other than interest and income taxes | (636.3) | | | (586.0) | |
Walter Energy payment | — | | | (22.2) | |
Interest payments, net | (25.2) | | | (24.3) | |
Income tax payments, net | (12.6) | | | (5.9) | |
Cash provided by operating activities | $ | 123.3 | | | $ | 77.8 | |
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Collections from customers | $ | 216.1 |
| | $ | 194.6 |
|
Disbursements, other than interest and income taxes | (211.3 | ) | | (203.5 | ) |
Interest payments, net | (4.4 | ) | | (5.6 | ) |
Income tax refunds (payments), net | 0.1 |
| | (5.4 | ) |
Cash provided by (used in) operating activities | $ | 0.5 |
| | $ | (19.9 | ) |
Collections from customers were higher during the threenine months ended December 31, 2017June 30, 2021 compared to the prior year period primarily due to the timing of cash receipts and net sales growth.
Increased disbursements, other than interest and income taxes, during the threenine months ended December 31, 2017 reflect higher purchasing activity,June 30, 2021 primarily relate to higher costs for raw materials, and differencesexpenses associated with increased sales. Additionally, we disbursed $22.0 million related to the final settlement of the Walter tax matter in the timing of expenditures.
Income tax payments were lower during the three months ended December 31, 2017 compared to the prior year period because we began the current year quarter with U.S. federal income taxes prepaid.period.
Capital expenditures were $6.4$46.1 million in the threenine months ended December 31, 2017 compared to $4.2June 30, 2021 and $51.2 million in the prior year period. We estimate 2018These expenditures were primarily associated with previously announced large capital projects. For fiscal 2021, we have provided guidance that our capital expenditures willare expected to be between $40$75.0 million and $48 million, although we are also evaluating possibilities for additional capital expenditures in 2018.$80.0 million.
We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through December 31, 2018. However,June 30, 2022.
We believe that additional borrowings through various financing alternatives remain available if required. The future effects of the pandemic cannot be predicted with certainty and may increase our ability to make these payments will depend partly upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, businessborrowing costs and other factors beyondcosts of capital or otherwise adversely affect our control.financial condition and liquidity, and we cannot guarantee that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues in the future.
ABL Agreement
At December 31, 2017,June 30, 2021, the ABL Agreement consisted of a $175.0 million revolving credit facility forthat includes up to $225$25.0 million of revolving credit borrowings,through swing line loans and may have 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 subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR, plus aan applicable margin ranging from 125200 to 150225 basis points, or a base rate, as defined in the ABL Agreement, plus aan applicable margin ranging from 25100 to 50125 basis points. At December 31, 2017,June 30, 2021, the applicable LIBOR-based marginrate was 125LIBOR plus 200 basis points.
The ABL Agreement terminates on July 13, 2021. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of 25 basis points per annum.
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 inventories or (ii) 85% of the net orderly liquidation value of the value of eligible inventories, less certain reserves. Prepayments canmay be made at any time with no penalty.
Substantially all of our U.S. 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. inventories, accounts receivable, certain cash and other supporting obligations.
The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. 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 underas defined in the ABL Agreement. Excess availability based on June 30, 2021 data was $145.1 million, as reduced by $15.0 million of outstanding letters of credit and $1.7 million of accrued fees and expenses.
Term Loan4.0% Senior Unsecured Notes
We had $485.1On May 28, 2021, we privately issued $450.0 million face value outstanding under the Term Loan atof 4.0% Senior Unsecured Notes (“Notes”), which mature in December 31, 2017. Term Loan borrowings accrue2029 and bear interest at a floating rate equal to LIBOR, subject to a floor4.0%, paid semi-annually in June and December. We capitalized $5.5 million of 0.75%, plus 250 basis points. We may voluntarily repay amounts borrowed underfinancing costs, which are being amortized over the Term Loan at any time. The principal amountterm of the Term Loan is requiredNotes using the effective interest method. Proceeds from the Notes, along with cash on hand were used to be repaid in quarterly installments of $1.225 million. The Term Loan matures on November 25, 2021. The Term Loan is guaranteed by substantiallyredeem previously existing 5.5% Notes. Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under our ABL Agreement.
An indenture securing the Notes (“Indenture”) contains customary covenants and secured by essentiallyevents of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at June 30, 2021.
We may redeem some or all of our assets, although the ABL Agreement hasNotes at any time or from time to time prior to June 15, 2024 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 2024 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, 2024 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture). Upon a senior claimchange in control (as defined in the Indenture), we would be required to offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Notes, which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Notes effective June 17, 2021 and settled with proceeds from the issuance of the Notes and cash on certain collateral securing borrowings thereunder.hand. As a result, we incurred $16.7 million in loss on extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs associated with the retirement of the 5.5% Notes.
Our corporate credit rating and the credit rating for our debt are presented below. These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agencies. | | | | | | | | | | | | | | | | | | | | | | | |
| Moody’s | | Standard & Poor’s |
| June 30, | | September 30, | | June 30, | | September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Corporate credit rating | Ba1 | | Ba2 | | BB | | BB |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
4.0% Notes | Ba1 | | N/A | | BB | | N/A |
5.5% Notes | N/A | | Ba3 | | N/A | | BB |
Outlook | Stable | | Stable | | Stable | | Stable |
|
| | | | | | | |
| Moody’s | | Standard & Poor's |
| December 31, | | September 30, | | December 31, | | September 30, |
| 2017 | | 2017 | | 2017 | | 2017 |
Corporate credit rating | Ba3 | | Ba3 | | BB- | | BB- |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
Term Loan | Ba3 | | Ba3 | | BB | | BB |
Outlook | Stable | | Stable | | Stable | | Stable |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance”finance” or “special purpose”purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, at December 31, 2017June 30, 2021 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases. Therefore, we were not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At December 31, 2017,June 30, 2021, we had $17.5$15.0 million of letters of credit and $35.6$36.7 million of surety bonds outstanding.
Seasonality
Our business is dependent upon the construction industry, which is seasonal due to the impactas a result of cold weather conditions. Net sales and operating income have historically been lowest in the quarterlythree month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
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Item 4. | CONTROLS AND PROCEDURES |
Item 4. CONTROLS AND PROCEDURES
During the quarterthree months ended December 31, 2017,June 30, 2021, we continued our multi-year implementation of upgrades to our enterprise resource planning (ERP) system and the implementation of a new information technology system for processing of payroll and employee-related transactions.
Aside from the above, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As a result of the COVID-19 pandemic, many of our employees began working remotely in March 2020 and continued to do so as of the date of this filing. This change to our working environment has not had a material effect on our internal control over financial reporting. We will continue monitoring and assessing any impacts from the pandemic on our internal controls.
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 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 our Chief Financial Officer have concluded, based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to the information provided in Note 11.12. to the Notes to the Condensed Consolidated Financial Statements presented in Item 11. of Part I of this report.
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Item 1A. | Item 1A. RISK FACTORS |
Recent changes in U.S. tax law may have a significant impact on our Company
On December 22, 2017, HR-1, formerly referred to as the Tax Cuts and Jobs Act, (“Act”) was signed into law, significantly impacting several sections of the Internal Revenue Code. The Act, among other things, reduces the corporate tax rate to 21% from 35%, limits the deductibility of interest expense and executive compensation and implements a modified territorial tax system which includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Act requires complex computations to be performed that were not previously required in U.S. tax law, judgments to be made in interpretation of the provisions of the Act and estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. We are continuing to examine the impact of the Act, including certain provisions that will become applicable to us in fiscal year 2019 related to base erosion anti-abuse tax (“BEAT”), global intangible low-taxed income (“GILTI”), and other provisions that could adversely affect our effective tax rate in the future. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation. Furthermore, because there may be additional state income tax implications, we will continue to monitor changes in state and local tax laws to determine if state and local taxing authorities intend to conform or deviate from changes to U.S. federal tax legislation as a result of the Act.
In addition to the risk factor above and other information set forth in this report, you should carefully consider the factors discussed in PART I, “Item 1A. RISK FACTORS” in our Annual Report, each of which could materially affect our business, financial condition or operating results. These described risks are not the only risks facing us. Additional risks and uncertainties not known to us or that we deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
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Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarterthree months ended December 31, 2017, we repurchasedJune 30, 2021, 781 shares of our common stock, including shares repurchased under our existing share repurchase authorization and shareswere surrendered to us to pay the tax withholding obligations of participants in connection with the lapsing of restrictions on restricted stock units, as follows.units.
We did not repurchase any shares of our common stock during the three months ended June 30, 2021, and we had $145.0 million remaining under our share repurchase authorization.