What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-19 compared with 2020-11-19 · 142 added, 188 removed, 145 unchanged (69% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Organization Updates

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

and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million.

The acquisition of Krausz was financed with cash on hand.

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

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.

The following discussion should be read in conjunction with the consolidated financial statements and related notes included in Item 8.

“Financial Statements and Supplementary Data” of this Annual Report.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and other factors that may cause actual results to differ materially from those projected in any forward-looking statements, as discussed in “Disclosure Regarding Forward-Looking Statements.” These risks and uncertainties include but are not limited to those set forth in “Item 1A.

RISK FACTORS” .

We operate our business through two segments, Infrastructure and Technologies.

We estimate approximately 60% to 65% of the Company’s 2021 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 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.

In 2021, both Infrastructure and Technologies were impacted by raw material and other cost inflation, supply chain disruptions and labor availability challenges.

We expect the operating environment to continue to be very challenging in 2022, as a result of the uncertainty around the depth and duration of the pandemic.

We may continue to be impacted by raw material and other cost inflation, supply chain disruptions and labor availability challenges.

While we expect that the municipal repair and replacement activity and new residential construction end markets will remain healthy in 2022, we do anticipate that growth will slow down relative to the strong recovery experienced during 2021.

In 2022, we believe that supply chain disruptions could extend overall build cycles for new residential construction, including lot development.

Infrastructure

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

water utilities.

After experiencing challenges in 2020 resulting from the pandemic, municipal spending in 2021 recovered during the fiscal year as compared with the prior year.

According to the United States Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 2021 increased 3.0%.

While the economic effects of the pandemic have impacted revenues for some water utilities in the United States, the economic recovery enabled water utilities to maintain repair and replacement activities.

While uncertainty related to the pandemic continues to impact the operating environment, residential construction activity was very strong in 2021 after recovering in 2020.

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.

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 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.

The strength of the residential construction activity during 2021 was reflected in total housing starts in the United States increasing approximately 18%.

In October 2021, Blue Chip Economic Indicators forecasted a 1.3% decrease in housing starts for the calendar year 2022 compared to the calendar year 2021.

The municipal water market is the key end market for Technologies.

As compared with Infrastructure products, Technologies products and services are primarily project-oriented and often depend on customer adoption of our technology-based products and services.

For our fiscal year 2022, we anticipate that consolidated net sales will be 4% to 8% higher than our fiscal year 2021 driven by the benefits of higher pricing and increased shipment volumes, resulting from modest growth in our end markets and our ability to deliver the backlog at Infrastructure and Technologies.

In 2021, we encountered increased material costs as a result of higher raw material prices, particularly brass ingot and scrap steel, as well as higher freight, labor costs and energy expenses.

In 2022, we anticipate that inflation will continue to lead to higher costs.

Index to Financial Statements

9 unchanged sentences

141.0 26.6 51.2 218.8

Other charges 0.6 0.1 12.3 13.0

129.7 24.9 56.8 211.4

Strategic reorganization and other (benefits) charges (0.3) — 8.3 8.0

Total operating expenses 140.7 26.6 59.5 226.8

Operating income (loss) $ 204.3 $ (13.1) $ (59.5) 131.7

1 unchanged sentence

Interest expense, net 23.4

Walter Energy Accrual 0.2

Loss on early extinguishment of debt 16.7

Income before income taxes 94.9

9 unchanged sentences

129.1 24.8 44.5 198.4

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

Strategic reorganization and other charges 0.6 0.1 12.3 13.0

Total operating expenses 129.7 24.9 56.8 211.4

Operating income (loss)

$ 186.0 $ (12.4) $ (56.8) 116.8

Pension costs other than service 0.4

Pension benefit other than service (3.0)

Interest expense, net 25.5

4 unchanged sentences

Consolidated Analysis

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 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 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.

Net sales for 2021 increased 15.2% to $1,111.0 million from $964.1 million in the prior year primarily as a result of higher shipment volume across most of our product lines and higher pricing.

Additionally, net sales benefited as a result of $6.0 million of Krausz sales from the elimination of the one-month reporting lag.

Gross profit increased $30.3 million to $358.5 million for 2021 compared with $328.2 million in the prior year.

This increase was primarily a result of increased shipment volume and higher pricing, partially offset by higher manufacturing costs as a result of inflation, higher labor costs, and a $2.4 million inventory write-off associated with the announcement of our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada.

Gross margin decreased to 32.3% in 2021 as compared with 34.0% in the prior year.

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.

Selling, general and administrative expenses (“SG&A”) increased 10.3% to $218.8 million for 2021 from $198.4 million in the prior year.

As a percentage of net sales, SG&A decreased 90 basis points to 19.7% of net sales from 20.6% in the prior year.

The increase in SG&A was primarily a result of increased personnel-related expenses, including incentive compensation, sales commissions associated with higher net sales and orders, and stock-based compensation.

Additional increases were a result of inflation, new product development and information technology spending.

Fiscal year 2020 SG&A included pandemic-driven benefits from temporarily reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.

Strategic reorganization and other charges for 2021 primarily relate to termination benefits associated with our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada, the June 2021 mass shooting tragedy at our Albertville facility, and certain transaction-related costs, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property.

In 2020, Strategic reorganization and other charges primarily relate to a legal settlement, facility closure costs, transaction costs associated with the acquisition of Krausz, and personnel matters.

Interest expense, net declined $2.1 million in 2021 from the prior year primarily as a result of the retirement of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were replaced with 4.0% Senior Unsecured Notes (“4.0% Senior Notes”) as well as an increase in capitalized interest on our large capital projects, partially offset by lower interest income.

(in millions)

5.5% Senior Notes $ 17.6 $ 24.8

4.0% Senior Notes 6.2 —

Deferred financing costs amortization 1.1 1.2

1 unchanged sentence

Capitalized interest (2.3) (0.3)

Other interest expense (income) 0.3 (0.2)

Other interest expense 0.3 0.3

Total interest expense 23.8 26.6

Interest income (0.4) (1.1)

$ 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.

Total interest expense, net $ 23.4 $ 25.5

Income tax expense of $24.5 million in 2021 included an effective income tax rate of 25.8%, which was higher than the 23.5% rate in the prior year.

Segment Analysis

Infrastructure

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 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.

Net sales for 2021 increased $138.4 million, or15.7%, to $1,022.0 million from $883.6 million in the prior year.

Net sales increased primarily as a result of increased shipment volume, favorable pricing and $6.0 million in Krausz net sales as a result of the elimination of the one-month reporting lag.

We believe the increased shipment volume was a result of strong demand driven by residential construction and municipal repair and replacement activity.

Gross profit for 2021 increased $29.3 million, or 9.3%, to $345.0 million from $315.7 million in the prior year primarily as a result of increased shipment volume, higher sales pricing and the benefit of the elimination of the Krausz one-month reporting lag.

These increases were partially offset by higher material and other costs associated with inflation, specifically related to brass ingot, scrap steel and purchased parts, 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 expenses.

Gross margin was 33.8% in 2021, a 190 basis point decrease compared with 35.7% in the prior year.

SG&A in 2021 increased 9.2% to $141.0 million from $129.1 million in the prior year primarily as a result of increased personnel-related costs including higher sales commissions associated with higher net sales and orders, inflation, information technology spending, and new product development.

Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporarily reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.

SG&A was 13.8% and 14.6% of net sales for 2021 and 2020, respectively.

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 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

Net sales in 2021 increased to $89.0 million from $80.5 million in the prior year primarily as a result of higher shipment volumes and the acquisition of i2O.

Gross profit in 2021 increased $1.0 million to $13.5 million from $12.5 million in the prior year as a result of higher shipment volumes, partially offset by inflation and inventory adjustments.

Gross margin decreased to 15.2% in 2021 from 15.5% in the prior year.

SG&A increased to $26.6 million in 2021 from $24.8 million in the prior year primarily as a result of personnel-related expenses.

SG&A as a percentage of net sales was 29.9% for 2021 and 30.8% in the prior year.

SG&A increased by $6.7 million from $44.5 million in 2020 to $51.2 million in 2021 as a result of increased personnel-related expenses and inflation.

Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporary reductions in travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.

Year Ended September 30, 2020 Compared to Year Ended September 30, 2019

2 unchanged sentences

Cash and cash equivalents were $227.5 million at September 30, 2021 and $208.9 million at September 30, 2020.

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

Cash and cash equivalents increased during 2021 as a result of $156.7 million in cash provided by operating activities, partially offset by capital expenditures of $62.7 million, dividend payments of $34.8 million, the $19.7 million acquisition of i2O, $12.4 million in debt repayments, net, and $10.0 million in share repurchases.

Receivables, net were $212.2 million at September 30, 2021 and $180.8 million at September 30, 2020.

This increase was primarily a result of the increase in net sales year over year.

Inventories, net were $184.7 million at September 30, 2021 and $162.5 million at September 30, 2020.

Inventories increased during 2021 as a result of increased volume and inflationary costs.

Property, plant and equipment, net was $283.4 million at September 30, 2021 and $253.8 million at September 30, 2020.

Property, plant and equipment increased primarily as a result of our previously-announced capital expansion projects in Kimball, Tennessee and Decatur, Illinois.

Capital expenditures, including software development costs capitalized and capitalized interest, were $62.7 million in 2021.

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

Depreciation expense was $31.4 million in 2021 compared to $29.6 million in 2020 as a result of generally higher level of capital expenditures over the last three years.

Intangible assets were $392.5 million at September 30, 2021 and $408.9 million at September 30, 2020.

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.

Finite-lived intangible assets, net totaling $118.7 million at September 30, 2021, are amortized over their estimated useful lives.

Amortization expense was $28.2 million in both 2021 and 2020.

We expect amortization expense for these assets to range between approximately $27 million and $29 million in each of the next three years with a decrease to approximately $6 million in fiscal 2025 and approximately $5 million in fiscal 2026.

Indefinite-lived intangible assets, $273.8 million at September 30, 2021, are not amortized but are tested for possible impairment at least annually.

Accounts payable and other current liabilities were $219.1 million at September 30, 2021 and $153.9 million at September 30, 2020.

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 $8.4 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.

Payables increased during 2021 as a result of increased production volume and the impact of higher material costs.

Other current liabilities increased during 2021 primarily as a result of personnel-related expenses, including incentive compensation and sales commissions, as well as customer rebates and income taxes.

Total outstanding debt was $446.9 million at September 30, 2021 and $447.6 million at September 30, 2020.

Deferred income taxes were net liabilities of $94.8 million at September 30, 2021 and $96.3 million at September 30, 2020, primarily related to intangible assets.

The $1.5 million decrease in the net liability was primarily the result of an increase in deferred tax assets related to increased inventory reserves partially offset by an increase in deferred tax liabilities related to

Index to Financial Statements

bonus depreciation for plant, property and equipment and the cost basis difference of a foreign subsidiary, net of reductions in deferred tax liabilities related to intangible assets.

Liquidity and Capital Resources

2 unchanged sentences

At September 30, 2021, cash and cash equivalents included $39.2 million, $12.6 million, and $3.5 million in Israel, Canada and China, respectively.

Cash flows from operating activities are categorized below.

(in millions)

Collections from customers $ 956.6 $ 966.6

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

Walter tax matter payment (22.0) —

Interest payments, net (24.3) (22.2)

Income tax payments, net (15.3) (29.1)

Cash provided by operating activities $ 140.3 $ 92.5

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.

Net cash provided by operating activities was $156.7 million for 2021 compared with $140.3 million for 2020 primarily as a result of the Walter tax matter which was paid in 2020 and did not recur in 2021.

Capital expenditures were $62.7 million for 2021 compared with $67.7 million for 2020.

We estimate 2022 capital expenditures will be between $70 million and $80 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, 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 our capital expenditures will be elevated over the next several years as we invest more in our machinery, equipment and facilities for product introductions, enhanced productivity and maintenance.

Additionally, in fiscal year 2021, we completed construction of our large casting foundry in Chattanooga, Tennessee, initiated 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, consolidate other plants and to insource various parts and components.

Income tax payments were higher during 2021 compared with the prior year primarily as a result of the Walter tax matter, which was expensed in 2019 and was deducted for tax purposes in 2020.

This did not recur in 2021.

We expect the effective tax rate in 2022 to be between 25% and 27%.

4 unchanged sentences

At September 30, 2021, we had remaining authorization of $135.0 million to repurchase shares of our common stock.

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 use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations.

At September 30, 2021, we had $15.0 million of letters of credit and $36.7 million of surety bonds outstanding.

We anticipate our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating needs, capital expenditures and debt service obligations as they become due through September 30, 2022.

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.

However, our ability to make these payments will depend largely on our future operating performance, which may be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

ABL Agreement

At September 30, 2020, the ABL Agreement consisted of a revolving credit facility for up to $175 million of revolving credit borrowings, swing line loans and letters of credit.

The ABL Agreement permits us to increase the size of the credit facility by an additional $150 million in certain circumstances.

We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.

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 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.

Prepayments can 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.

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

At September 30, 2021, our asset-based lending agreement (“ABL Agreement”) consisted of a $175.0 million revolving credit facility that includes up to $25.0 million of swing line loans and allows for 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 $150.0 million in certain circumstances subject to adequate borrowing base availability.

Borrowings under the ABL Agreement bear interest at a floating rate equal to the London Inter Bank Offered Rate (“LIBOR”) plus an applicable margin of 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus an applicable margin of 100 to 125 basis points.

At September 30, 2021, the LIBOR-based applicable margin was 200 basis points.

Index to Financial Statements

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.

Prepayments can be made at any time without penalty.

Substantially all of our United States subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings.

Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our United States inventory, accounts receivable, certain cash and other supporting obligations.

The ABL Agreement terminates on July 29, 2025 and includes an annual commitment fee for any unused borrowing capacity of 37.5 basis points.

Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement.

The ABL Agreement contains customary negative covenants and restrictions on our ability to engage in specified activities, such as:

• Limitations on other debt, liens, investments and guarantees;

• Restrictions on dividends and redemptions of our capital stock and prepayments and redemptions of debt;

• Restrictions on mergers and acquisition, sales of assets and transactions with affiliates.

Excess availability based on September 30, 2021 data was $158.7 million, as reduced by $15.0 million of outstanding letters of credit and $1.3 million of accrued fees and expenses.

4.0% Senior Unsecured Notes

On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured Notes (“Notes”), which mature in June 2026 and bear interest at 5.5%, paid semi-annually.

Substantially all of our U.S.

Subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL.

Based on quoted market prices, the outstanding Notes had a fair value of $465.8 million at September 30, 2020.

An indenture securing the Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends, and make investments.

We believe we were compliant with these covenants at September 30, 2020 and expect to remain in compliance through September 30, 2021.

We may redeem some or all of the Notes at any time or from time to time prior to June 15, 2021 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 2021 at specified redemption prices (as set forth in the Indenture).

Additionally, we may redeem up to 40% of the aggregate principal amount of the Notes at any time or from time to time prior to June 15, 2021 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture).

Upon a change of control (as defined in the Indenture), we will be required to make an offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature in June 2029 and bear interest at 4.0%, paid semi-annually in June and December.

We capitalized $5.5 million of financing costs, which are being amortized over the term of the 4.0% Senior Notes using the effective interest rate method.

Proceeds from the 4.0% Senior Notes, along with cash on hand were used to redeem previously existing 5.5% Senior Notes.

Substantially all of our United States subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL Agreement.

An indenture securing the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens.

There are no financial maintenance covenants associated with the Indenture.

We believe we were in compliance with these covenants at September 30, 2021.

As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices.

Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any 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 change of control as defined in the Indenture, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.

5.5% Senior Unsecured Notes

On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually.

We called the 5.5% Senior Notes effective June 17, 2021 and settled with proceeds from the issuance of the 4.0% Senior Notes and cash on hand.

As a result, we incurred $16.7 million in loss on early extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs associated with the retirement of the 5.5% Senior Notes.

Credit Ratings

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ABL Agreement Not rated Not rated Not rated Not rated

Notes Ba3 Ba3 BB BB

4.0% Senior Notes Ba1 N/A BB N/A

5.5% Senior Notes N/A Ba3 N/A BB

Outlook Stable Stable Stable Stable

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In addition, we do not have any undisclosed borrowings or debt or any derivative contracts other than those described in “Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK” or synthetic leases.

Therefore, we are not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.

We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations.

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)

Debt principal payments $ 1.2 $ 1.4 $ 0.1 $ 450.0 $ 452.7

Debt interest payments 24.8 49.6 49.5 24.8 148.7

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.

(2) Consists of obligations for required pension contributions.

Actual payments may differ.

We have not estimated required pension contributions beyond 2021.

Effect of Inflation

We experience changing price levels primarily related to purchased components and raw materials.

Infrastructure experienced a 13% decrease in the average cost per ton of scrap steel and a 9% decrease in the average cost of brass ingot in 2020 compared to 2019.

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.

Infrastructure experienced a 33% increase in the average cost per ton of scrap steel and a 35% increase in the average cost of brass ingot in 2021 compared to 2020.

Technologies was also unfavorably affected by the 35% increase in the average cost of brass ingot.

We anticipate inflation in raw and other material costs in 2022, which may have an adverse effect on our margins to the extent we are unable to pass on such higher costs to our customers.

Material Cash Requirements

We enter into a variety of contractual obligations as part of our normal operations in addition to capital expenditures.

As of September 30, 2021, we have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include cash interest payments of $18.9 million in 2022 and $18.0 million annually thereafter through 2029, (ii) operating and finance lease obligations that total $34.9 million in cash payments through 2033 and $2.3 million thereafter through 2026, respectively, and (iii) purchase obligations for raw materials and other parts within our Infrastructure segment of approximately $122.9 million which we will incur during 2022.

We expect to fund these cash requirements from cash on hand and cash generated from operations.

Our water infrastructure business depends on construction activity.

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.

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RISK FACTORS-Seasonal demand for certain of our products and services may adversely affect our financial results.”

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

These estimates are based upon experience and on various other assumptions we believe to be reasonable under the circumstances.

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We consider an accounting estimate to be critical if changes in the estimate that are reasonably likely to occur over time or the use of reasonably different estimates could have a material impact on our financial condition or results of operations.

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

Our critical accounting estimates include the below items.

Revenue Recognition

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for more information regarding our revenues.

Inventories, net

We record inventories at the lower of first-in, first-out method cost or estimated net realizable value.

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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.

Deferred tax liabilities and assets are determined based on the differences between the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to reverse.

Deferred tax liabilities and assets are determined based on the

Index to Financial Statements

differences between the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to reverse.

A valuation allowance is provided to offset any net deferred tax assets when, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

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The amount of tax benefit recognized for any position that meets the more-likely-than-not threshold is the largest amount of the tax benefit that we believe is greater than 50% likely of being realized.

Accounting for the Impairment of Long-Lived Assets Including Goodwill and Other Intangible Assets

Accounting for the Impairment of Goodwill and Indefinite-lived Intangible Assets

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 performed this annual impairment testing at September 1, 2021, using standard valuation methodologies and rates that we considered reasonable and appropriate.

We evaluated goodwill for impairment using a quantitative analysis.

We performed this annual impairment testing at September 1, and concluded that our goodwill was not impaired.

This analysis is dependent on management’s best estimates of future operating results, including forecasted revenues, earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins and the selection of reasonable discount rates.

We also consider the guideline public company method when estimating the fair value of our reporting units.

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.

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

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.

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.

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Additionally, a significant increase in costs of repair or replacement could require additional warranty expense.

We monitor and analyze our warranty experience and costs periodically and may revise our warranty accrual as necessary.

We monitor and analyze our warranty experience and costs periodically and revise our warranty accrual as necessary.

However, as we cannot predict actual future claims, the potential exists for the difference in any one reporting period to be material.

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Contingencies

We are involved in litigation, investigations and claims arising out of the normal conduct of our business.

We are involved in litigation, investigations and claims arising in the normal course of business.

We estimate and accrue liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements;

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Estimates particularly sensitive to future changes include liabilities recorded for environmental remediation, tax and legal matters.

Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties.

Estimated future environmental remediation costs are subject to change as a result of such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties.

Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

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BUSINESS - Regulatory and Environmental Matters,” “Item 1A.

RISK FACTORS” and “Item 3.

LEGAL PROCEEDINGS”

RISK FACTORS”.

Workers’ Compensation, Defined Benefit Pension Plans, Environmental and Other Long-term Liabilities

We are obligated for various liabilities that will ultimately be determined over what could be very long future time periods.

We are obligated for various liabilities that ultimately will be determined over what could be very long future time periods.

We established the recorded liabilities for such items at September 30, 2021 using estimates for when such amounts will be paid and what the amounts of such payments will be.

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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