What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-11-19 compared with 2019-11-20 · 129 added, 100 removed, 204 unchanged (53% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this annual report.

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.

Organization Updates

On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd.

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The results of Krausz are included within our Infrastructure segment for all periods following the acquisition date.

In October 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for a payment of $5.2 million to our joint venture partner.

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.

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We estimate approximately 60% to 65% of the Company’s 2020 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, repair and replacement of water infrastructure, driven by municipal spending, and new water infrastructure installation, driven by residential construction, to grow in the low-single digits in 2020.

We expect the natural gas utilities market to grow in the mid-single digits in 2020.

We expect the operating environment to continue to be very challenging, due to the uncertainty around the depth and duration of the pandemic in fiscal 2021.

We anticipate that growth in the residential construction end market will help offset anticipated challenges in the project-related portion of the municipal end market.

Infrastructure

Municipal spending in 2019 was relatively flat compared with the prior year and economic forecasts predict this trend will continue.

Municipal spending in 2020 was impacted by the pandemic in the second half of our year, and although the industry recovered towards the end of our fiscal year as compared with the prior year, uncertainty remains related to the pandemic.

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.

Bureau of Economic Analysis, state and local tax receipts for the quarter ended September 30, 2020 were down year-over-year primarily due to pandemic conditions.

According to the U.S.

Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 2020 increased 3.3%.

However, water conservation efforts, particularly in areas impacted by recent drought conditions, have resulted in lower overall receipts for some U.S.

However, water conservation efforts and the economic effects of the pandemic have resulted in lower overall receipts for some U.S.

water utilities.

The year-over-year percentage change in housing starts is a key indicator of demand for Infrastructure’s products sold in the residential construction market.

During our fiscal year, housing starts declined 2.2% according to the U.S.

Census Bureau.

In November 2019, Blue Chip Economic Indicators forecasted a 1.3% increase in housing starts for calendar 2020 compared to the prior year.

In October 2020, Blue Chip Economic Indicators forecasted a 4.5% increase in housing starts for calendar 2021 compared to the prior year.

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.

Overall for Mueller Water Products in 2020, we expect year-over-year net sales percentage growth between 3% and 5%.

We expect incremental depreciation expense associated with large projects 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 related 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.

The businesses in Technologies are primarily project-oriented and depend on customer adoption of their technology-based products and services.

We entered 2021 with a backlog of $48.2 million at Mueller Systems, largely for AMI products, some of which will ship in 2022 and beyond.

For our fiscal year 2021, we anticipate that consolidated net sales will be between flat and 3 percent higher than the prior year as we believe that continued strong growth in the residential construction end market will offset any challenges in the project-related areas of our business.

In 2020, we benefited from declining costs for raw materials, particularly brass ingot and scrap steel but we expect inflation in raw material costs in 2021.

Index to Financial Statements

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Year ended September 30, 2020

Infrastructure

Infrastructure Technologies Corporate Total

(in millions)

Net sales $ 885.5 $ 78.6 $ — $ 964.1

Gross profit 316.4 11.8 — $ 328.2

Operating expenses:

Selling, general and administrative

Gain on sale of idle property

Strategic reorganization and other charges

129.1 24.8 44.5 198.4

Other charges 0.6 0.1 12.3 13.0

129.7 24.9 56.8 211.4

Operating income (loss) $ 186.7 $ (13.1) $ (56.8) 116.8

Pension costs other than service

Pension benefit other than service (3.0)

Interest expense, net 25.5

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Income tax expense 22.1

Net income $ 72.0

Year ended September 30, 2019

Infrastructure

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)

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

Loss on early extinguishment of debt

Gain on settlement of interest rate swap contracts

Walter Energy Accrual 22.0

Income before income taxes 82.1

Income tax benefit

Income tax expense 18.3

Net income $ 63.8

Consolidated Analysis

Net sales for 2019 increased 5.7% to $968.0 million from $916.0 million in the prior year due primarily to Krausz net sales and $34.6 million higher pricing across both segments, which were partially offset lower organic volume at Infrastructure.

Net sales for 2020 decreased 0.4% to $964.1 million from $968.0 million in the prior year primarily due to lower volume at both segments, which were impacted by the pandemic, partially offset by $18.2 million higher pricing across both segments and the inclusion of first quarter 2020 net sales of Krausz, which we acquired in December of 2018.

Gross profit was $328.2 million for 2020 and $320.9 million in the prior year and gross margin increased to 34.0% in 2020 from 33.2% 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.

Index to Financial Statements

These increases were primarily due to Krausz gross profit and higher pricing exceeding cost inflation in the current year.

Current year g ross profit was reduced by $9.5 million due to pandemic-related costs and production inefficiencies and prior year gross profit was reduced by $6.8 million in Krausz inventory amortization costs.

Selling, general and administrative expenses (“SG&A”) increased 8.6% to $198.4 million for 2020 from $182.7 million in the prior year, and increased 170 basis points to 20.6% of net sales from 18.9% of net sales in the prior year.

The increase in SG&A was primarily due to inclusion of Krausz’s SG&A and additional investment in engineering resources, offset by lower personnel-related expenses.

Other charges for 2019 consisted primarily of costs of our previously announced strategic reorganizations, expenses related to the Aurora tragedy, and 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.

Interest expense, net declined $1.1 million in 2019 from the prior year primarily as a result of capitalized interest associated with major capital expenditure projects, partially offset by higher interest expense associated with the 5.5% Senior Notes, which replaced the Term Loan in June 2018.

The increase in SG&A was primarily due to the addition of SG&A of Krausz in the first quarter and increased personnel-related and information technology costs, which were offset by pandemic-driven temporary benefits of $6.8 million resulting from reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.

Index to Financial Statements

Other charges for 2020 consisted primarily of costs related to the settlement of the Siemens litigation, our strategic reorganizations, the retirement of an executive, and the acquisition of Krausz.

In 2019, other charges consisted primarily of costs related to our previously announced strategic reorganizations, the Aurora tragedy and the acquisition of Krausz, net of a gain on sale of an idle property in Quebec, Canada.

Interest expense, net increased $5.7 million in 2020 from the prior year primarily as a result of reduced interest income due to lower interest rates and a non-cash adjustment to capitalized interest in the current year.

The components of interest expense, net are provided below.

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5.5% Senior Notes $ 24.8 $ 24.8

Interest rate swap contracts

Deferred financing costs amortization 1.2 1.2

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Capitalized interest (0.3) (3.0)

Other interest expense

Other interest expense (income) 0.3 (0.2)

Interest income (1.1) (3.5)

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 million and our 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%, which was lower than the 26.2% rate in the prior year primarily due to the change in federal statutory rates described above.

$ 25.5 $ 19.8

Income tax expense of $22.1 million in 2020 was at an effective income tax rate of 23.5%, which was higher than the 22.3% rate in the prior year, which included tax benefits related to the Walter Energy tax matter and U.S.

federal transition tax.

Segment Analysis

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Net sales for 2020 increased 1.7% to $885.5 million from $871.0 million in the prior year.

Net sales increased primarily due to Krausz net sales as well as favorable pricing of $33.7 million , which offset lower organic volume.

Gross profit for 2019 increased 6.4% to $302.9 million from $284.7 million in the prior year primarily due to Krausz gross profit, which was negatively affected by $6.8 million of Krausz inventory fair value step up, and favorable sales pricing.

Gross margin was flat at 34.8% for both 2019 and the prior year.

SG&A in 2019 increased 16.1% to $121.3 million from $104.5 million in the prior year primarily due to the inclusion of Krausz’s SG&A and additional investments in engineering resources.

Net sales increased primarily due to favorable pricing of $16.6 million and inclusion of first quarter 2020 Krausz net sales, which offset lower organic volume.

Gross profit for 2020 increased 4.5% to $316.4 million from $302.9 million in the prior year primarily due to favorable sales pricing and Krausz gross profit, partially offset by $8.0 million due to pandemic-related costs and production inefficiencies.

Gross profit in 2019 was reduced by $6.8 million of Krausz inventory fair value amortization.

Gross margin was 35.7% in 2020, a 90 basis point improvement versus 34.8% in the prior year.

SG&A in 2020 increased 6.4% to $129.1 million from $121.3 million in the prior year primarily due to the inclusion of Krausz SG&A in the first quarter and increased personnel-related and information technology costs, which were partially offset by $5.4 million in temporary pandemic-driven savings resulting from reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.

SG&A was 14.6% and 13.9% of net sales for 2020 and 2019, respectively.

Index to Financial Statements

Net sales in 2019 decreased to $97.0 million from $97.2 million in the prior year primarily due to $1.0 million of lower shipment volumes.

Gross profit in 2019 increased $12.8 million to $18.0 million from $5.2 million in the prior year.

Gross margin increased to 18.6% in 2019 from 5.3% 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 decreased to $26.7 million in 2019 from $29.5 million in the prior year primarily due to reduced personnel costs.

SG&A as a percentage of net sales improved to 27.5% for 2019 from 30.3% in the prior year.

Net sales in 2020 decreased to $78.6 million from $97.0 million in the prior year primarily due to lower shipment volumes at both Echologics and Mueller Systems due to timing of large customer orders in the prior year and the effects of the pandemic, which were partially offset by higher prices.

Gross profit in 2020 decreased $6.2 million to $11.8 million from $18.0 million in the prior year.

Gross margin decreased to 15.0% in 2020 from 18.6% in the prior year.

Gross profit and gross margin were primarily reduced by lower volumes as well as $1.5 million of pandemic-related costs and production inefficiencies.

SG&A decreased to $24.8 million in 2020 from $26.7 million in the prior year primarily due to temporary reduced travel, trade show and event expenses as well as reduced personnel-related expenses.

SG&A as a percentage of net sales was 31.6% for 2020 a nd 27.5% in the prior year.

SG&A was $44.5 million in 2020 and $34.7 million 2019.

SG&A was higher in 2019 due to higher investments in engineering resources, offset by lower personnel-related expenses.

SG&A was higher in 2020 due to increased personnel-related costs and information technology costs, which were offset by pandemic-driven benefits resulting from temporary reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.

Index to Financial Statements

Year Ended September 30, 2019 Compared to Year Ended September 30, 2018

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Cash and cash equivalents were $208.9 million at September 30, 2020 and $176.7 million at September 30, 2019.

Cash and cash equivalents decreased during 2019 due to the purchase 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 million, and cash used in financing activities of $50.9 million , primarily dividend payments and share repurchases, which were offset by 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.

Receivables, net were $172.8 million at September 30, 2019 and $164.3 million at September 30, 2018 .

Receivables at September 30, 2019 and September 30, 2018 represented approximately 63 and 65 days net sales, respectively.

Cash and cash equivalents increased during 2020 due to increased cash from operating activities, which benefited from targeted efforts to reduce inventory levels, cost control measures put in place in response to the pandemic, and pandemic-related savings on travel trade show and event spending.

These increases were partially offset primarily by capital expenditures of $67.7 million, dividend payments of $33.1 million and settlement of the Walter tax matter of $22.0 million.

Receivables were $180.8 million at September 30, 2020 and $172.8 million million at September 30, 2019.

The timing of shipments within each year, primarily within the fourth quarters, primarily caused this increase.

Inventories were $162.5 million at September 30, 2020 and $191.4 million at September 30, 2019.

Inventories increased during 2019 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.

Inventories decreased during 2020 due primarily due to targeted efforts to reduce inventory levels.

Property, plant and equipment, net was $253.8 million at September 30, 2020 and $217.1 million at September 30, 2019, and depreciation expense was $29.6 million in 2020 compared to $26.0 million in 2019.

Property, plant and equipment increased due to higher capital expenditures as well as the purchase of Krausz’s property, plant and equipment .

Property, plant and equipment increased primarily due to our previously-announced capital expansion projects in Chattanooga and Kimball, Tennessee and Decatur, Illinois.

Capital expenditures, including software development costs capitalized and capitalized interest, were $67.7 million in 2020.

Depreciation expense is higher due to the generally higher level of capital expenditures over the last three years.

Intangible assets were $408.9 million at September 30, 2020 and $433.7 million at September 30, 2019.

Finite-lived intangible assets, $162.3 million of net book value at September 30, 2019 , are amortized over their estimated useful lives.

This amortization expense was $27.0 million during 2019 compared to $22.8 million in 2018 and is expected to be approximately $25 million to $29 million in each of the next five years.

Finite-lived intangible assets, $137.2 million of net book value at September 30, 2020, are amortized over their estimated useful lives, with amortization expense of $28.2 million in 2020 compared to $27.0 million in 2019.

We expect amortization expense of these assets will range from approximately $26 million to approximately $28 million in each of the next four years with a decrease to approximately $6 million in fiscal 2025.

Indefinite-lived intangible assets, $271.6 million at September 30, 2020, are not amortized, but tested at least annually for possible impairment.

We recognized $47.7 million in identifiable intangible assets in connection with the acquisition of Krausz.

Accounts payable and other current liabilities were $153.9 million at September 30, 2020 and $177.6 million at September 30, 2019.

Payables increased during 2019 due primarily to the impact of the Walter Tax Accrual and the assumption of Krausz’s payables , partially offset by the timing of payments.

Payables decreased during 2020 due primarily to the settlement of the Walter tax matter and by the timing of other payments.

Outstanding debt was $447.6 million at September 30, 2020 and $446.3 million at September 30, 2019.

Deferred income taxes were net liabilities of $96.3 million at September 30, 2020 and $87.9 million at September 30, 2019.

The $8.7 million increase in the net liability was primarily due to the acquisition of Krausz.

Deferred tax liabilities are primarily related to intangible assets.

Index to Financial Statements

The $8.4 million increase in the net liability was primarily due to reduced deferred tax assets related to inventory and increased deferred tax liabilities related to plant, property and equipment due to tax “bonus depreciation,” net of reductions in deferred tax liabilities related to intangible assets.

Net deferred tax liabilities are primarily related to intangible assets.

Liquidity and Capital Resources

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Disbursements, other than interest and income taxes (754.7) (822.8)

Walter tax matter payment (22.0) —

Interest payments, net (24.3) (22.2)

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Cash provided by operating activities $ 140.3 $ 92.5

We collected $71.1 million more cash from customers in 2019 than in 2018 , which is relatively consistent with the $52.0 million increase in net sales in 2019 compared with 2018 , and which includes collections from Krausz customers.

We disbursed $78.6 million more cash excluding interest and income taxes in 2019 than in 2018 , largely due to increased production costs, increased operating expenses, disbursements of Krausz payables and timing of payments.

Index to Financial Statements

We collected $10.0 million less cash from customers in 2020 than in 2019, which was primarily caused by timing of shipments between years as well as the $3.9 million decrease in net sales in 2020 compared with 2019.

We disbursed $46.1 million less cash excluding interest and income taxes in 2020 than in 2019, largely due to our target efforts to reduce inventory, pandemic-related liquidity preservation and cost containment actions such as deferral of some capital expenditures, reduced travel, trade show and spending, and temporary furloughs and temporary salary reductions.

Capital expenditures were $67.7 million during 2020 and $86.6 million during 2019.

We estimate 2020 capital expenditures will be $80 million to $90 million .

We estimate 2021 capital expenditures will be between $80 million and $90 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 2019 compared to the prior year primarily due to the timing of tax payments in 2019 relative to 2018.

At September 30, 2020, we have completed our large casting foundry in Chattanooga, Tennessee, begun the construction of a new brass foundry in Decatur, Illinois that will replace our existing foundry in Decatur, and are building out our facility in Kimball, Tennessee to leverage our large casting foundry and to insource various parts and components.

Income tax payments were lower during 2020 compared to the prior year primarily because the Walter tax matter, which had been expensed in 2019 for book purposes, was deducted as an expense in determining 2020 taxable income because it was paid in 2020.

We expect the effective tax rate in 2021 to be between 24% and 26%.

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At September 30, 2020, we had remaining authorization of $145.0 million to repurchase shares of our common stock.

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, acquisition payments, capital expenditures and debt service obligations as they become due through September 30, 2020 .

We temporarily suspended the share repurchase program in March due to the pandemic;

however, we announced in November 2020 that we have ended the suspension.

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 needs, capital expenditures and debt service obligations as they become due through September 30, 2021.

However, 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, business and other factors beyond our control.

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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 a margin ranging from 125 to 150 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 25 to 50 basis points.

At July 30, 2020, the maturity of the ABL Agreement was extended to July 29, 2025.

Borrowings under the amended ABL Agreement bear interest at a floating rate equal to LIBOR plus a margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 100 to 125 basis points.

At September 30, 2020, the applicable LIBOR-based margin was 200 basis points.

We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of 25 basis points per annum.

Index to Financial Statements

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.

We pay a commitment fee for any unused borrowing capacity under the amended ABL Agreement of 37.5 basis points annually, on undrawn amounts.

The amended 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.

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inventory, accounts receivable, certain cash and other supporting obligations.

Index to Financial Statements

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.

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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.

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 Notes and cash on hand.

We wrote-off the associated deferred debt issuance costs and recorded a loss on the early extinguishment of debt of $6.2 million.

As described more fully in Note 8.

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.

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

Standard & Poor’s

September 30,

Corporate credit rating

ABL Agreement

Index to Financial Statements

Credit Ratings

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

Moody’s Standard & Poor’s

September 30, September 30,

2020 2019 2020 2019

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

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At September 30, 2020, we had $13.8 million of letters of credit and $42.7 million of surety bonds outstanding.

Index to Financial Statements

Contractual Obligations

Our contractual obligations at September 30, 2020 are presented below.

2021 2022-2023 2024-2025 After 2025 Total

(in millions)

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Operating leases

5.5 9.1 7.8 12.5 34.9

Unconditional purchase obligations (1)

112.4 0.9 — — 113.3

Other current liabilities (2)

$ 143.9 $ 61.0 $ 57.4 $ 487.3 $ 749.6

(1) Includes contractual obligations for purchases of raw materials and capital expenditures.

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Technologies was also favorably affected by the 9% decrease in the average cost of brass ingot.

We anticipate inflation in raw material costs in 2021.

Our water infrastructure business depends on construction activity, which is seasonal in many areas due to the impact of cold weather conditions on construction.

Net sales and operating income have historically been lowest in the quarters 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.

Generally speaking, 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, though this pattern was disrupted by the pandemic in 2020.

See “Item 1A.

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We consider the accounting topics presented below to include our critical accounting estimates.

Index to Financial Statements

Revenue Recognition

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Significant judgments regarding future events and market conditions must be made when estimating net realizable value.

Index to Financial Statements

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.

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We test indefinite-lived intangible assets and goodwill for impairment annually (or more frequently if events or circumstances indicate possible impairment).

We performed this annual impairment testing at September 1, 2020, using standard valuation methodologies and rates that we considered reasonable, and concluded that our indefinite-lived intangible assets and goodwill were not impaired.

We tested the indefinite-lived intangible assets for impairment using a “royalty savings method,” which is a variation of the discounted cash flow method.

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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 this annual impairment testing at September 1, and concluded that our indefinite-lived intangible assets and goodwill were not impaired.

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.

Significantly different projected operating results could result in different conclusions regarding impairment.

At March 31, 2020, in connection with pandemic-related disruptions on the overall market and our business, we reviewed our indefinite-lived intangible assets and goodwill to determine if possible impairments had been indicated.

As a result of this review, we performed a quantitative goodwill impairment assessment of our Krausz reporting unit.

The Krausz reporting unit had $85.9 million of goodwill at March 31, 2020.

We used a discounted cash flow model to determine the estimated fair value of the reporting unit.

We made estimates and assumptions regarding projected operating results, including future revenue, EBITDA margin and long-term growth rates, as well as the discount rate, to estimate the Krausz reporting unit’s fair value.

These assumptions represented our best estimates and we believe they were reasonable and appropriate.

However, they were forecasts during a complex and still-developing situation with the pandemic, and as such they involved a high degree of uncertainty.

The key assumptions used in the March 31 valuation included:

• Our best estimates of revenue and expenses over a 5-year period, which support estimated EBITDA margins.

• Long-term growth of revenue in the model beyond 2025 was 3 percent.

• Long-term growth of free cash flow in the model beyond 2025 was 5 percent.

• The discount rate in the model, which includes a forecast-risk factor, was 12.8 percent.

The results of the quantitative impairment assessment indicated that the Krausz reporting unit’s fair value exceeded its carrying value, which indicated that goodwill was not impaired.

However, the excess of the estimated fair value over the carrying value was not significant, the use of different key assumptions could result in a materially different outcome, and we cannot provide assurance that our estimates will be realized.

Index to Financial Statements

We performed a substantially similar goodwill impairment test at September 1 on our Krausz reporting unit with revised forecasts reflective of greater insight into the possible effects the pandemic may have on our operations.

The Krausz reporting unit goodwill increased to $87.7 million at September 1, 2020 due to U.S.

dollar-Israeli shekel exchange rate fluctuation.

We also utilized the “guideline public company” method, which involves comparing the reporting unit to similar companies whose stocks are freely traded on organized exchanges.

We weighted the results of the discounted cash flow method and the guideline public company method to conclude on a fair value.

The key assumptions used in the September 1 valuation included:

• Our best estimates of revenue and expenses over a 5-year period, which support estimated EBITDA margins.

• Long-term growth of revenue in the model beyond 2025 was 3 percent.

• Long-term growth of free cash flow in the model beyond 2025 was 5 percent.

• The discount rate in the model, which includes a forecast-risk factor, was 13.5 percent.

The results of the quantitative impairment assessment indicated that the Krausz reporting unit’s fair value exceeded its carrying value, which indicated that goodwill was not impaired.

The continuation of pandemic-related effects on our business and the overall market could potentially materially change the key assumptions and lead to future impairment charges.

Warranty Costs

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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

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These assumptions are forward-looking and could be affected by future economic and market conditions.

Index to Financial Statements

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis