What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-08-05 · 89 added, 216 removed, 106 unchanged (74% of the section changed)

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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 the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, 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 the 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;

All statements that address activities, events or developments that the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, 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, growth strategies, restructuring efficiencies and warranty charges.

Forward-looking statements are based on certain assumptions and assessments made by the Company in light of the Company’s experience and perception of historical trends, current conditions and expected future developments.

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severity of the impact of the pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the Company and 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;

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the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures;

an inability to achieve some or all of our Environmental, Social and Governance (“ESG”) goals ;

as well as other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recently filed Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the pandemic).

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Securities and Exchange Commission.

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”).

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 Mueller, completing our spin-off.

We subsequently sold our U.S.

Pipe and Anvil businesses in 2012 and 2017, respectively.

We estimate approximately 55-60% of our 2021 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 30-35% were related to residential construction activity and less than 10% were related to natural gas utilities spending.

We expect the operating environment during the remainder of our fiscal year 2021 to continue to be very challenging due to the uncertainty around the depth and duration of the 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.

We expect the operating environment during fiscal year 2022 to be very challenging as a result of the uncertainty around the depth and duration of the pandemic which has accelerated and may continue to accelerate, inflation, labor availability and global supply chain disruptions.

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

In January 2022, Blue Chip Economic Indicators forecasted housing starts to be flat for calendar 2022 as compared with the prior year despite robust demand for housing and low inventories.

We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable manufacturing variances, labor shortages, and additional cleaning, including disinfectants and sanitation materials, for our employees and at our facilities.

We expect to continue to incur such costs that 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.

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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.

The municipal market is the key end market for Technologies.

Our Technologies segment is typically project-oriented and dependent on our customers’ adoption of our technology-based products and services.

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 organized under the laws of the United Kingdom.

The purchase agreement provides for customary final adjustments, including a net working capital adjustment, which we expect to occur in 2021.

We announced a new management structure effective October 1, 2021.

The new structure is designed to increase revenue growth, drive operational excellence, accelerate new product development and enhance profitability.

We anticipate the reorganization will strengthen the alignment of products, solutions and services with customer needs, accelerate new product introductions and improve product life cycle management.

The two newly named business units and reportable segments are Water Flow Solutions and Water Management Solutions.

Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products.

Water Flow Solutions represented 56% of our fiscal 2021 net sales.

Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products.

Water Management Solutions represented 44% of our fiscal 2021 net sales.

Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three months ended June 30, 2021

Infrastructure Technologies Corporate Total

Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020

Three months ended December 31, 2021

Water Flow Solutions Water Management Solutions Corporate Total

(in millions)

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Operating income (loss) $ 31.3 $ 11.4 $ (13.8) 28.9

Other expenses (income):

Loss on early extinguishment of debt 16.7

Non-operating expenses:

Pension benefit other than service (1.0)

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Net income $ 19.4

Three months ended June 30, 2020

Infrastructure Technologies Corporate Total

Three months ended December 31, 2020

Water Flow Solutions Water Management Solutions Corporate Total

(in millions)

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$ 23.1 $ 17.0 $ (12.3) 27.8

Other expenses (income):

Pension benefit other than service (0.8)

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Consolidated Analysis

Net sales for the three months ended June 30, 2021 increased $82.0 million or 35.9 percent to $310.5 million from $228.5 million in the comparable prior year period.

This increase was primarily a result of increased shipment volumes at both Infrastructure and Technologies compared to the prior year and higher pricing at Infrastructure.

Gross profit for the three months ended June 30, 2021 increased $29.7 million to $105.4 million from $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 furloughs and temporary pay cuts in the prior year period.

SG&A as a percentage of net sales was 18.9% and 20.6% in the three months ended June 30, 2021 and 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 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 increased $0.7 million in the three months ended June 30, 2021 compared to the prior year 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.

Net sales in the three months ended December 31, 2021 increased $34.9 million or 14.7% to $272.3 million as compared with $237.4 million in the prior period primarily as a result of increased shipment volumes and higher pricing across most of our product lines.

Gross profit in the three months ended December 31, 2021 increased $9.2 million to $87.6 million from $78.4 million in the prior year period, primarily as a result of increased shipment volumes and higher pricing which were partially offset by higher costs of sales associated with inflation, unfavorable manufacturing performance, labor challenges, supply chain disruptions and our restructuring activity.

Gross margin was 32.2% in the three months ended December 31, 2021 as compared with 33.0% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 2021 increased to $56.3 million from $49.2 million in the prior year period primarily as a result of the inclusion of i2O Water, higher travel and trade show expenditures, inflation, increased information technology related activities, and personnel-related costs.

SG&A as a percentage of net sales was 20.7% for both the three months ended December 31, 2021 and 2020.

Strategic reorganization and other charges in the three months ended December 31, 2021 were $2.4 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.

Strategic reorganization and other charges in the three months ended December 31, 2020 were $1.4 million and primarily related to transaction costs as well as legal and professional service expenses.

Interest expense, net declined $1.8 million in the three months ended December 31, 2021 as compared with the prior year period primarily as a result of the refinancing of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”) with the 4.0% Senior Notes.

The components of net interest expense are provided below.

Three months ended

(in millions)

5.5% Notes $ 5.2 $ 6.2

4.0% Notes 1.7 —

5.5% Senior Notes $ — $ 6.2

4.0% Senior Notes 4.5 —

Deferred financing costs amortization 0.2 0.3

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Other interest cost 0.1 0.2

Total interest expense 4.4 6.3

Interest income (0.1) (0.2)

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State income taxes, net of federal benefit 3.9 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 %

Segment Analysis

Infrastructure

Net sales for the three months ended June 30, 2021 increased $77.9 million or 37.2 percent to $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.

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.

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

(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

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 (1.0) (0.6)

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Foreign income tax rate differential (0.7) (0.9)

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)

Valuation allowances 1.4 1.5

Other 0.5 1.1

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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 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 $35.7 million to $261.1 million from $225.4 million in the prior year period primarily due to increased 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.

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-related products.

Gross profit for the nine months ended June 30, 2021 was $11.1 million compared to $8.9 million in the prior year period.

Gross margin percentage was 17.0% and 15.6% in the nine months ended June 30, 2021 and 2020, respectively.

SG&A was $19.9 million and $18.9 million in the current and prior year periods, respectively.

The increase was primarily as a result of new product development.

SG&A as a percentage of net sales was 30.5% and 33.0% for the nine months ended June 30, 2021 and 2020, respectively.

SG&A was $39.0 million and $31.8 million in the nine months ended 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.

Water Flow Solutions

Net sales in the three months ended December 31, 2021 increased 20.3% to $154.9 million as compared with $128.8 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.

Gross profit in the three months ended December 31, 2021 increased 24.3% to $52.1 million from $41.9 million in the prior year period primarily as a result of higher pricing, increased shipment volumes, and favorable manufacturing performance, partially offset by higher costs associated with inflation.

Gross margin was 33.6% in the three months ended December 31, 2021 and 32.5% in the prior year period.

SG&A in the three months ended December 31, 2021 increased to $20.8 million from $18.7 million in the prior year period primarily as a result of increased travel and trade show expenditures, inflation, increased information technology related activities, and higher personnel-related expenses.

SG&A as a percentage of net sales was 13.4% and 14.5% in the three months ended December 31, 2021 and 2020, respectively.

Water Management Solutions

Net sales in the three months ended December 31, 2021 increased 8.1% to $117.4 million as compared with $108.6 million in the prior year period, primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.

Gross profit in the three months ended December 31, 2021 was $35.5 million as compared with $36.5 million in the prior year period.

Gross margin declined to 30.2% in the three months ended December 31, 2021 as compared with 33.6% in the prior year period primarily as a result of higher Cost of sales associated with inflation and unfavorable manufacturing performance which was partially offset by higher pricing and increased shipment volumes.

SG&A increased to $24.0 million from $19.5 million in the prior year period primarily as a result of the inclusion of i2O Water, engineering investments, inflation, increased travel and trade show expenditures, and higher personnel-related expenses.

SG&A as a percentage of net sales was 20.4% and 18.0% in the three months ended December 31, 2021 and 2020, respectively.

SG&A increased to $11.5 million in the three months ended December 31, 2021 as compared with $11.0 million in the three months ended December 31, 2020 primarily as a result of inflation and higher personnel-related expenses.

Liquidity and Capital Resources

We had cash and cash equivalents on hand of $228.6 million at June 30, 2021 and $145.1 million of additional borrowing capacity under our ABL Agreement based on June 30, 2021 data.

We had cash, and cash equivalents on hand of $207.3 million at December 31, 2021 and $133.8 million of additional borrowing capacity under our ABL Agreement based on December 31, 2021 data.

Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States.

At June 30, 2021, cash and cash equivalents included $31.1 million, $11.7 million and $6.3 million in Israel, Canada and China, respectively.

On July 29, 2021, we declared a quarterly dividend of $0.0550 per share, payable on or about August 20, 2021, which will result in an estimated $8.7 million cash outlay.

We did not repurchase any shares of our outstanding common stock under our share repurchase 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 Notes contain customary representations and warranties, covenants and provisions governing an event of default.

At December 31, 2021, cash and cash equivalents included $40.6 million, $24.3 million, and $2.9 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.058 per share on January 27, 2022, payable on February 21, 2022 to holders of record as of February 10, 2022, which will result in an estimated $9.2 million cash outlay.

We repurchased $20.0 million of our outstanding common stock during the three months ended December 31, 2021 and had $115.0 million remaining of our share repurchase authorization.

The ABL Agreement and 4.0% Senior Notes contain customary representations and warranties, covenants and provisions governing an event of default.

The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.

Cash flows from operating activities are categorized below.

Nine months ended

(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

Collections from customers were higher during the nine months ended June 30, 2021 compared to the prior year period primarily due to net sales growth.

Increased disbursements, other than interest and income taxes, during the nine months ended June 30, 2021 primarily relate to higher costs and expenses associated with increased sales.

Additionally, we disbursed $22.0 million related to the final settlement of the Walter tax matter in the prior year period.

Capital expenditures were $46.1 million in the nine months ended June 30, 2021 and $51.2 million in the prior year period.

These expenditures were primarily associated with previously announced large capital projects.

For fiscal 2021, we have provided guidance that our capital expenditures are expected to be between $75.0 million and $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 obligations as they become due through June 30, 2022.

Collections from customers were higher during the three months ended December 31, 2021 as compared with the prior year period primarily as a result of net sales growth between the periods.

Inventory purchases increased during the three months ended December 31, 2021 as compared with the three months ended December 31, 2020 as a result of inflation, increased sales volume and supply change management.

Other current liabilities and other noncurrent liabilities decreased as a result of employee incentive payouts and the repayment of the CARES Act employer payroll tax deferral.

Capital expenditures were $11.0 million in the three months ended December 31, 2021 as compared with $15.6 million in the prior year period.

Capital expenditures decreased as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period.

For fiscal year 2022, we have provided guidance that our capital expenditures are expected to be between $70.0 million and $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, 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 borrowing costs and other costs of capital or otherwise adversely affect our 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.

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 June 30, 2021, the ABL Agreement consisted of a $175.0 million revolving credit facility that includes up to $25.0 million through swing line loans and may have up to $60.0 million of letters of credit.

At December 31, 2021, the ABL Agreement consisted of a $175.0 million revolving credit facility which includes up to $25.0 million 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 $150.0 million in certain circumstances subject to adequate borrowing base availability.

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

At June 30, 2021, the applicable rate was LIBOR plus 200 basis points.

At December 31, 2021, the applicable rate was LIBOR plus 200 basis points.

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 eligible inventories, less certain reserves.

Prepayments may be made at any time with no penalty.

Prepayments can be made at any time with no penalty.

Substantially all of our U.S.

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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.

inventories, accounts receivable, certain cash and other related items.

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 as 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.

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

Excess availability based on December 31, 2021 data was $133.8 million, as reduced by $15.0 million of outstanding letters of credit and $1.4 million of accrued fees and expenses.

4.0% Senior Unsecured Notes

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“Notes”), which mature in December 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 Notes using the effective interest method.

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

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

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

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

Substantially all of our U.S.

subsidiaries guarantee the Notes, which are subordinate to borrowings under our ABL Agreement.

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

subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL Agreement.

Based on quoted market prices, the outstanding 4.0% Senior Notes had a fair value of $456.9 million at December 31, 2021.

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

There are no financial maintenance covenants associated with the Indenture.

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

We may redeem some or all of the Notes 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 change 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.

We believe we were in compliance with these covenants at December 31, 2021.

We may redeem some or all of the 4.0% Senior Notes 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 4.0% Senior 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 change in 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% 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 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.

On June 12, 2018, we privately issued $450.0 million of 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.

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

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Moody’s Standard & Poor’s

June 30, September 30, June 30, September 30,

December 31, September 30, December 31, September 30,

2021 2021 2021 2021

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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

4.0% Senior Notes Ba1 Ba1 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” or “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In addition, at June 30, 2021 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases.

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

In addition, at December 31, 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 June 30, 2021, we had $15.0 million of letters of credit and $36.7 million of surety bonds outstanding.

Our business is seasonal as a result of cold weather conditions.

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

At December 31, 2021, we had $15.0 million of letters of credit and $32.5 million of surety bonds outstanding.

Our business is seasonal as a result of the impact of cold weather conditions.

Net sales and operating income historically have been lowest in the three month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.

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-Q

Item 2. Management’s Discussion and Analysis