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Item 7. Management’s Discussion and Analysis

2023-12-14 compared with 2022-11-18 · 116 added, 172 removed, 194 unchanged (60% of the section changed)

4 unchanged sentences

RISK FACTORS”.

We adopted a new management structure effective October 1, 2021 which resulted in a change to our reportable segments.

Under this new structure, we operate our business through two segments, Water Flow Solutions and Water Management Solutions.

We estimate approximately 60% to 65% of the Company’s 2022 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.

After experiencing challenges in 2020 and 2021 resulting from the pandemic, municipal spending in 2022 recovered during the fiscal year as compared with the prior year.

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussion of year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

of our Annual Report on Form 10-K for the year ended September 30, 2022.

We adopted our current management structure effective October 1, 2021 which resulted in a change to our reportable segments.

Under this structure, we operate our business through two segments, Water Flow Solutions and Water Management Solutions.

Effective August 21, 2023, the Company’s Chief Executive Officer (“CEO”) left his role and Marietta Edmunds Zakas, the Company’s Chief Financial Officer (“CFO”) was named President and CEO.

Heinrichs, the Company’s Chief Legal and Compliance Officer was named CFO and continues to serve as Chief Legal and Compliance Officer.

In addition, certain other management changes occurred.

As a result, the Company incurred transition and retention expense which has been recorded to Strategic reorganization and other charges in our consolidated statements of operations.

We estimate approximately 60% to 65% of the Company’s 2023 net sales were associated with repair and replacement of municipal water infrastructure, approximately 25% to 30% were related to residential construction activity and approximately 10% were related to natural gas utilities and industrial applications.

After experiencing challenges in 2020 and 2021 resulting from the pandemic, municipal spending on repair and replacement projects in 2023 and 2022 returned to more normalized levels.

According to the United States Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 2023 increased 4.6%.

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

We expect the operating environment during fiscal year 2023 to be very challenging as a result of the inflationary environment, labor challenges and potential recession.

We anticipate healthy demand in the municipal repair and replacement market due to favorable budgets, especially at larger municipalities.

While demand from the new residential construction end market has been at healthy levels during fiscal 2022, especially for lot and land development activity, we anticipate that activity levels will slow during fiscal 2023 based on higher interest rates leading to a decrease in demand for new residential housing .

In November 2022, Blue Chip Economic Indicators forecasted a 12.3% de crease in housing starts for the calendar year 2023 compared to the calendar year 2022.

For our fiscal year 2023, we anticipate that consolidated net sales will be 6% to 8% higher t han our fiscal year 2022 primarily driven by the benefits of higher pricing.

In 2022, we encountered increased material costs as a result of higher raw material prices, particularly brass ingot and scrap steel, as well as higher purchased parts, freight, labor costs and energy expenses.

In 2023, we anticipate that inflation will continue to increase material and other costs.

Recent Developments

In October 2023, the Israel-Hamas war caused a temporary shutdown in our facility in Ariel, Israel.

While we have reopened the facility, the war increases the likelihood of supply interruptions and may hinder our ability to acquire the necessary materials we need to make our products.

Supply disruptions from lack of access to materials has impacted, and continues to impact, our ability to produce and deliver our products on time and at favorable pricing from our facility in Ariel, Israel.

As announced on October 28, 2023, we identified a cybersecurity incident impacting certain internal operations and information technology systems.

Based on the information reviewed to date, we believe the unauthorized activity has been contained.

All of our facilities are operational and have substantially returned to normalized operations.

The cybersecurity incident consisted of unauthorized access and deployment of ransomware by a third party to a portion of our internal information infrastructure.

The incident caused temporary disruptions and limitations of access to portions of our business applications supporting aspects of our operations and corporate functions, which limited our ability to take orders and ship products.

Shipping delays and investigation and remediation costs in connection with the incident are expected to adversely impact our results for the first quarter of 2024, and such impact may be material.

We have largely restored the impacted applications and systems, and we continue to execute business continuity and restoration plans for the remaining impacted applications and systems.

As reported on November 29, 2023, we identified a separate cybersecurity incident, which primarily related to a system that was at the end of its useful life and was already in the process of being replaced in the ordinary course of business.

Our investigation and remediation efforts remain ongoing, including an analysis of data accessed, exfiltrated or otherwise impacted in connection with the cybersecurity incidents.

We continue to evaluate the business, financial and related impacts of the cybersecurity incidents.

Index to Financial Statements

We expect the operating environment during fiscal 2024 to continue to be challenging as a result of high interest rates, the inflationary environment, labor challenges and a potential recession.

We anticipate lower demand in the municipal repair and replacement end market due to budgetary pressures on municipalities resulting from high interest rates and inflation, especially for smaller municipalities.

Demand from the new residential construction end market decreased in fiscal 2023 reflecting a 12.9% decrease in total housing starts as compared with fiscal 2022 according to Census data.

For fiscal 2024, we anticipate that high interest rates will continue to impact housing starts and new lot and land development .

In November 2023, Blue Chip Economic Indicators forecasted a 2.2% decrease in total housing starts for the calendar year 2024 compared to the calendar year 2023.

For our fiscal year 2024, we anticipate that consolidated net sales will be 3% to 8% lower than our fiscal year 2023 sales primarily driven by a decrease in volumes.

In 2023, material costs rose as a result of an increase in purchased parts costs, primarily driven by higher freight, labor and energy costs.

In 2024, we anticipate that inflation will continue in some areas leading to a modest increase in manufacturing costs.

Additionally, as a result of the cybersecurity incident that occurred subsequent to the end of fiscal 2023, our 2024 operating results will be impacted by the expenses we have incurred and will continue to incur to investigate, assess, and remedy this incident.

We currently are unable to estimate the impact that this will have on our financial results.

Index to Financial Statements

Results of Operations

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Strategic reorganization and other charges — 1.7 8.5 10.2

Goodwill impairment 6.8 — — 6.8

Total operating expenses 85.3 108.6 58.2 252.1

Operating income (loss) $ 79.6 $ 106.0 $ (58.2) 127.4

Pension benefit other than service (3.9)

Pension expense other than service 3.7

Interest expense, net 14.7

11 unchanged sentences

87.1 102.8 48.8 238.7

Strategic reorganization and other charges (benefits) 0.1 (0.4) 8.3 8.0

Strategic reorganization and other charges 0.2 0.4 6.6 7.2

Goodwill impairment 6.8 — — 6.8

Total operating expenses 94.1 103.2 55.4 252.7

3 unchanged sentences

Interest expense, net 16.9

Loss on early extinguishment of debt 16.7

Income before income taxes 98.6

2 unchanged sentences

Consolidated Analysis

Net sales for 2022 increased $136.4 million, or 12.3%, to $1,247.4 million from $1,111.0 million in the prior year primarily as a result of higher pricing across most of our product lines in addition to increased volumes.

Net sales for 2023 increased $28.3 million, or 2.3%, to $1,275.7 million from $1,247.4 million in the prior year primarily as a result of higher pricing across most of our product lines partially offset by lower volumes at Water Flow Solutions.

Gross profit increased $15.2 million, or 4.2%, to $379.5 million for 2023 compared with $364.3 million in the prior year.

This increase was primarily a result of higher pricing and increased volumes which were partially offset by higher cost of sales

This increase was primarily a result of higher pricing which was partially offset by lower volumes, unfavorable manufacturing performance, including labor and material inefficiencies and increased outsourcing, as well as inflation.

Gross margin increased to 29.7% in 2023 as compared with 29.2% in the prior year.

Index to Financial Statements

associated with inflation, unfavorable manufacturing performance, including labor challenges, and supply chain disruptions.

Gross margin decreased to 29.2% in 2022 as compared with 32.3% in the prior year.

Selling, general and administrative expenses (“SG&A”) increased 1.3% to $241.9 million for 2023 from $238.7 million in the prior year.

The increase in SG&A was primarily a result of higher travel and trade show expenditures, higher costs associated with inflation, investments in research and development as well as information technology, and the inclusion of i2O Water, partially offset by lower incentive compensation in personnel-related expenses and foreign exchange gains.

The increase in SG&A was primarily a result of higher costs associated with inflation, third-party fees, and insurance, partially offset by lower personnel-related and incentive costs.

As a percentage of net sales, SG&A decreased 10 basis points to 19.0% of net sales from 19.1% in the prior year.

Strategic reorganization and other charges for 2022 of $7.2 million primarily consisted of certain transaction-related costs, expenses associated with our ongoing restructuring activities, and the Albertville tragedy.

For the fiscal year 2021, Strategic reorganization and other charges of $8.0 million primarily relate to termination benefits associated with our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada, the Albertville tragedy, and certain transaction-related costs, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property.

During the year ended September 30, 2022, we incurred a non-cash impairment charge on our goodwill of $6.8 million within the Water Flow Solutions segment.

Interest expense, net declined $6.5 million in 2022 from the prior year primarily as a result of the retirement of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were replaced with 4.0% Senior Unsecured Notes (“4.0% Senior Notes”) as well as an increase in capitalized interest on our large capital projects, and higher interest income.

Strategic reorganization and other charges for 2023 of $10.2 million primarily consisted of expenses associated with the leadership transition and other restructuring charges related to severance in addition to certain transaction-related expenses.

Strategic reorganization and other charges for 2022 of $7.2 million primarily consisted of certain transaction-related costs, expenses associated with our restructuring activities, and the Albertville tragedy.

During the year ended September 30, 2022, we incurred a non-cash goodwill impairment charge of $6.8 million within the Water Flow Solutions segment.

No impairment charge was recorded in 2023.

Interest expense, net declined $2.2 million in 2023 from the prior year primarily as a result of higher interest income associated with higher interest rates.

The components of net interest expense are provided below.

Year ended September 30,

(in millions)

4.0% Senior Notes $ 18.0 $ 18.0

4.0% Senior Notes 18.0 6.2

Deferred financing costs amortization 1.0 1.0

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Total interest expense, net $ 14.7 $ 16.9

Income tax expense of $22.0 million in 2022 resulted in an effective income tax rate of 22.3%, which was lower than the 25.8% rate in the prior year reflecting benefits from research and development tax credits and lower foreign tax rates.

Income tax expense of $23.5 million in 2023 resulted in an effective income tax rate of 21.6%, which was lower than the 22.3% rate in the prior year reflecting benefits from research and development tax credits and lower effective state tax rates due to state apportionment changes.

Segment Analysis

Water Flow Solutions

Net sales for 2022 increased $96.3 million, or 15.6%, to $714.1 million from $617.8 million in the prior year.

Net sales increased primarily as a result of higher pricing and increased volumes across most of the Water Flow Solutions segment’s product lines.

Gross profit for 2022 increased $9.6 million, or 4.7%, to $212.4 million from $202.8 million in the prior year primarily as a result of higher pricing and increased volumes across most product lines except for service brass products, partially offset by higher cost of sales associated with inflation and unfavorable manufacturing performance, primarily at our brass foundry.

Net sales for 2023 decreased $79.7 million, or 11.2%, to $634.4 million from $714.1 million in the prior year.

Net sales decreased primarily as a result of lower volumes in iron gate valves and service brass products partially offset by higher pricing across most of Water Flow Solutions’ product lines.

Gross profit for 2023 decreased $47.5 million, or 22.4%, to $164.9 million from $212.4 million in the prior year primarily as a result of lower volumes, as well as unfavorable manufacturing performance and inflation partially offset by higher pricing across most product lines.

Gross margin was 26.0% in 2023, as compared with 29.7% in the prior year.

SG&A in 2022 increased 6.5% to $87.1 million from $81.8 million in the prior year primarily as a result of increased travel and trade show expenditures, higher costs associated with inflation, and investments in research and development and information technology.

SG&A as a percentage of net sales was 12.2% and 13.2% for 2022 and 2021, respecti vely.

SG&A in 2023 decreased 2.1% to $85.3 million from $87.1 million in the prior year primarily as a result of lower personnel and incentive related costs partially offset by higher costs associated with inflation, increased third-party fees, and higher insurance expense.

SG&A as a percentage of net sales was 13.4% and 12.2% for 2023 and 2022, respectively.

During the year ended September 30, 2022, Water Flow Solutions incurred a non-cash goodwill impairment charge of $6.8 million.

Index to Financial Statements

Water Management Solutions

Net sales in 2022 increased 8.1% to $533.3 million from $493.2 million in the prior year primarily as a result of higher pricing across most of the Water Management Solutions segment’s product lines and increased volumes for fire hydrants, natural gas, and repair and installation product lines.

Gross profit in 2022 decreased $3.8 million to $151.9 million from $155.7 million in the prior year.

Gross margin decreased to 28.5% in 2022 from 31.6% in the prior year primarily as a result of higher cost of sales associated with inflation, and unfavorable manufacturing performance, partially offset by higher pricing and increased volumes.

SG&A increased 19.8% to $102.8 million in 2022 from $85.8 million in the prior year primarily as a result of investments in research and development, the inclusion of i2O Water, increased travel and trade show expenditures, and higher costs associated with inflation, partially offset by foreign exchange gains.

SG&A as a percentage of net sales was 19.3% for 2022 and 17.4% in the prior year.

SG&A decreased by $2.4 million from $51.2 million in 2021 to $48.8 million in 2022 as a result of lower personnel-related expenses partially offset by higher costs associated with inflation.

Index to Financial Statements

Year Ended September 30, 2021 Compared to Year Ended September 30, 2020

Year ended September 30, 2021

Solutions Water

Solutions Corporate Consolidated

(in millions)

Net sales $ 617.8 $ 493.2 $ — $ 1,111.0

Gross profit $ 202.8 $ 155.7 $ — $ 358.5

Operating expenses:

Selling, general and administrative 81.8 85.8 51.2 218.8

Strategic reorganization and other (benefits) charges 0.1 (0.4) 8.3 8.0

Total operating expenses 81.9 85.4 59.5 226.8

Operating income (loss) $ 120.9 $ 70.3 $ (59.5) 131.7

Pension benefit other than service (3.3)

Interest expense, net 23.4

Loss on early extinguishment of debt 16.7

Income before income taxes 94.9

Income tax expense 24.5

Net income $ 70.4

Year ended September 30, 2020

Solutions Water

Solutions Corporate Consolidated

(in millions)

Net sales $ 532.2 $ 431.9 $ — $ 964.1

Gross profit $ 180.0 $ 148.2 $ — $ 328.2

Operating expenses:

Selling, general and administrative 75.1 78.8 44.5 198.4

Strategic reorganization and other charges — 0.7 12.3 13.0

Total operating expenses 75.1 79.5 56.8 211.4

Operating income (loss) $ 104.9 $ 68.7 $ (56.8) 116.8

Pension benefit other than service (3.0)

Interest expense, net 25.5

Walter Energy accrual 0.2

Income before income taxes 94.1

Income tax expense 22.1

Net income $ 72.0

Consolidated Analysis

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

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

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

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

Index to Financial Statements

Aurora, Illinois and Surrey, British Columbia, Canada.

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

SG&A increased 10.3% to $218.8 million for 2021 from $198.4 million in the prior year.

As a percentage of net sales, SG&A decreased 90 basis points to 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 SG&A increases were a result of inflation, new product development and information technology spending.

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

Strategic reorganization and other charges of $8.0 million for 2021 primarily related to termination benefits associated with our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada, the Albertville tragedy, and certain transaction-related costs, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property.

In 2020, Strategic reorganization and other charges of $13.0 million primarily related 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 an increase in capitalized interest on our large capital projects and 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”), 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

ABL Agreement 0.9 0.6

Capitalized interest (2.3) (0.3)

Other interest expense 0.3 0.3

Total interest expense 23.8 26.6

Interest income (0.4) (1.1)

Total interest expense, net $ 23.4 $ 25.5

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

Segment Analysis

Water Flow Solutions

Net sales for 2021 increased $85.6 million, or 16.1%, to $617.8 million from $532.2 million in the prior year.

Net sales increased primarily as a result of increased volume, and favorable pricing.

The increased volume was a result of strong demand dri ven by both residential construction and municipal repair and replacement activity.

Gross profit for 2021 increased $22.8 million, or 12.7%, to $202.8 million from $180.0 million in the prior year primarily as a result of increased volume.

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 certain expenses related to the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning expenses.

Gross margin was 32.8% in 2021, a 100 basis point decrease compared with 33.8% in the prior year.

SG&A in 2021 increased $6.7 million, or 8.9% to $81.8 million from $75.1 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 13.2% and 14.1% of net sales for 2021 and 2020, respectively.

No impairment charge was recorded in 2023.

Index to Financial Statements

Water Management Solutions

Net sales in 2021 increased 14.2% to $493.2 million from $431.9 million in the prior year primarily as a result of higher volumes , $6.0 million in Krausz net sales as a result of the elimination of the one-month reporting lag, and the acquisition of i2O.

Gross profit in 2021 increased $7.5 million to $155.7 million from $148.2 million in the prior year as a result of higher volum es partially offset by higher inflation.

Gross margin decreased to 31.6% in 2021 from 34.3% in the prior year.

SG&A increased to $85.8 million in 2021 from $78.8 million in the prior year primarily as a result of personnel-related expenses and information technology spending.

Net sales in 2023 increased $108.0 million, or 20.3%, to $641.3 million from $533.3 million in the prior year primarily as a result of higher pricing across most of Water Management Solutions’ product lines and increased volumes, particularly of fire hydrants due to an elevated backlog, as well as across most product lines.

Gross profit in 2023 increased $62.7 million or 41.3%, to $214.6 million from $151.9 million in the prior year.

Gross margin increased to 33.5% in 2023 from 28.5% in the prior year primarily as a result of higher pricing and increased volumes across most product lines partially offset by unfavorable manufacturing performance and inflation.

SG&A increased 4.0% to $106.9 million in 2023 from $102.8 million in the prior year primarily as a result of higher costs associated with inflation, third-party fees, and new product development, partially offset by lower personnel-related and incentive costs.

SG&A as a percentage of net sales was 16.7% for 2023 and 19.3% 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.

SG&A increased $0.9 million from $48.8 million in 2022 to $49.7 million in 2023 as a result of higher costs associated with inflation offset by lower personnel and incentive related costs.

Financial Condition

Cash and cash equivalents were $160.3 million at September 30, 2023 and $146.5 million at September 30, 2022.

Cash and cash equivalents decreased during 2022 as a result of capital expenditures of $54.7 million, dividend payments of $36.5 million, $35.0 million in share repurchases, and $6.4 million in effect of currency exchange rate changes on cash, partially offset by $52.3 million in cash provided by operating activities.

Cash and cash equivalents increased during 2023 as a result of $109.0 million in cash provided by operating activities, partially offset by capital expenditures of $47.6 million, dividend payments of $38.1 million, $10.0 million in common stock repurchases, and $4.3 million in effect of currency exchange rate changes on cash.

Receivables, net were $217.1 million at September 30, 2023 and $228.0 million at September 30, 2022.

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

This decrease was primarily a result of lower sales in the final quarter of the year compared with the prior year.

Inventories, net were $297.9 million at September 30, 2023 and $278.7 million at September 30, 2022.

Inventories increased during 2022 as a result of increased volume, inflationary costs, and inventory management due to supply chain issues.

Inventories increased during 2023 as a result of inflation and select inventory management to meet anticipated orders.

Property, plant and equipment, net was $311.7 million at September 30, 2023 and $301.6 million at September 30, 2022.

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

Capital expenditures were $54.7 million in 2022.

Depreciation expense was $32.0 million in 2022 compared with $31.4 million in 2021 as a result of generally higher level of capital expenditures over the last three years.

Property, plant and equipment increased as a result of $47.6 million in capital expenditures primarily associated with our new foundry in Decatur, Illinois.

Depreciation expense was $34.4 million in 2023 compared with $32.0 million in 2022 as a result of generally higher level of capital expenditures over the last two years.

Intangible assets were $334.0 million at September 30, 2023 and $361.2 million at September 30, 2022.

1 unchanged sentence

Amortization expense was $28.1 million in 2023 and $28.5 million in 2022.

We expect amortization expense for these assets to be approximately $28 million and $27 million in the next two years with a decrease to approximately $8 million in fiscal 2025, approximately $6 million in fiscal 2026 and approximately $5 million in fiscal 2027.

Indefinite-lived intangible assets, $272.7 million at September 30, 2022, are not amortized but are tested for possible impairment at least annually.

We expect amortization expense for these assets to be approximately $27 million for 2024, decreasing to approximately $7 million in fiscal 2025, approximately $6 million in fiscal 2026 and fiscal 2027, and approximately $5 million in fiscal 2028.

Indefinite-lived intangible assets, $272.6 million at September 30, 2023, are not amortized but are tested for potential impairment at least annually.

Accounts payable and other current liabilities were $218.1 million at September 30, 2023 and $240.2 million at September 30, 2022.

Accounts payable increased during 2022 as a result of increased production volume and the impact of higher inventory costs.

Other current liabilities decreased during 2022 primarily as a result of lower personnel-related expenses, including incentive compensation and sales commissions, as well as customer rebates and income taxes.

Total outstanding debt was $446.9 million as of September 30, 2022 and September 30, 2021.

Accounts payable decreased during 2023 as a result of timing and a comparative reduction in the volume of inventory purchases.

Other current liabilities decreased during 2023 primarily as a result of lower personnel-related expenses, including incentive compensation.

Total outstanding debt was $447.4 million as of September 30, 2023 and $446.9 million as of September 30, 2022.

Total debt increased due to the amortization of deferred financing costs.

Deferred income taxes were net liabilities of $73.8 million at September 30, 2023 and $86.3 million at September 30, 2022, primarily related to intangible assets.

The $8.5 million decrease in the net liability was primarily a result of reductions in intangible assets.

The $12.5 million decrease in the net liability was primarily a result of an increase in deferred tax assets related to Internal Revenue Code Section 174 pertaining to the amortization of research and development expenditures which was first applicable to us beginning in our fiscal year 2023.

Index to Financial Statements

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At September 30, 2023, cash and cash equivalents included $66.7 million, $8.7 million, and $10.9 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.061 per share on October 21, 2022, payable on or about November 21, 2022 to holders of record as of November 10, 2022, which will result in an estimated $9.5 million cash outlay.

We declared a quarterly dividend of $0.064 per common share on October 24, 2023, payable on or about November 20, 2023 to holders of record as of November 9, 2023, resulting in an estimated $10.0 million cash outlay.

We repurchased $10.0 million of our outstanding common stock during the fiscal year ended September 30, 2023 and had $90.0 million remaining under our share repurchase authorization as of September 30, 2023.

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

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

Collections from customers were higher during the fiscal year ended September 30, 2022 as compared with the prior year period primarily as a result of net sales growth.

Inventory purchases increased during the fiscal year ended September 30, 2022 as compared with the fiscal year ended September 30, 2021 as a result of inflation, increased sales, and inventory management due to supply chain factors.

Other current liabilities and other noncurrent liabilities decreased as a result of employee incentive payouts, income tax payments, the repayment of the CARES Act employer payroll tax deferral and the payment of customer rebates.

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

Collections from customers were higher during the fiscal year ended September 30, 2023 as compared with the prior year period primarily as a result of higher sales during the comparative periods.

Inventories increased during the fiscal year ended September 30, 2023 as a result of timing and an increased volume of inventory purchases, partially offset by a decrease in inventory backlog.

Other current liabilities and other noncurrent liabilities decreased as a result of employee incentive payouts, operating lease liabilities, and the repayment of the CARES Act employer payroll tax deferral, partially offset by an increase in the warranty accrual and returned goods refund liability.

Capital expenditures were $47.6 million for 2023 compared with $54.7 million for 2022.

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

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

We estimate 2024 capital expenditures will be between $45.0 million and $50.0 million.

Income tax payments were higher during 2022 compared with the prior year primarily as a result of the timing of certain federal and state extension payments.

Income tax payments were higher during 2023 compared with the prior year primarily as a result of higher income before income taxes as well as the timing of certain federal and state extension payments.

We expect the effective tax rate in 2024 to be between 23% and 25%.

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The program does not commit us to any particular timing or quantity of purchases, and we may suspend or discontinue the program at any time.

We acquired 2,654,254 and 651,271 shares of our common stock in 2022 and 2021, respectively.

We repurchased 714,830 and 2,654,254 shares of our common stock in 2023 and 2022, respectively.

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

As of September 30, 2022, we had $14.1 million of letters of credit and $31.1 million of surety bonds outstan ding.

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, income tax payments, capital expenditures and debt service obligations as they become due through September 30, 2023.

As of September 30, 2023, we had $12.4 million of letters of credit and $22.2 million of surety bonds outstanding.

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

Our ABL, as amended, is provided by a consortium of banking institutions and consists of a revolving credit facility that $175.0 million in borrowing that expires in July 29, 2025.

Our ABL, as amended, is provided by a consortium of banking institutions and consists of a revolving credit facility of $175.0 million in borrowing capacity that expires in July 29, 2025.

Included in the ABL is the ability to borrow up to $25.0 million of swing line loans and up to $60.0 million of letters of credit.

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

At September 30, 2022, the applicable margin was 200 basis points for LIBOR-based loans and 100 basis points for base rate loans.

On April 5, 2023, we amended the ABL to replace LIBOR-based loans with Secured Overnight Financing Rate (“SOFR”) based loans plus an adjustment of 10 basis points, among other immaterial modifications.

Borrowings under the ABL bear interest at a floating rate equal to SOFR plus an adjustment of 10 basis points and an applicable margin range of 200 to 225 basis points, or a base rate, as defined in the ABL, plus an applicable margin of 100 to 125 basis points.

At September 30, 2023, the applicable margin was 200 basis points for SOFR-based loans and 100 basis points for base rate loans.

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Excess availability based on September 30, 2023 data was $162.4 million, as reduced by $12.4 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.

In December 2023, we obtained a waiver under our ABL to provide us additional time to deliver to the ABL lenders certain information that was delayed as a result of the cybersecurity incident.

The maximum aggregate of borrowings and other credit extensions under the ABL is limited to $50.0 million at any time outstanding until all of the delayed deliveries required under the ABL have been made.

4.0% Senior Unsecured Notes

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There are no financial maintenance covenants associated with the Indenture.

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

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.

Upon a change of control, as defined, 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

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Outlook Stable Stable Stable Stable

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Effect of Inflation

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

During the fiscal year 2022, we experienced a 40% increase in the average cost per ton of scrap steel and a 20% increase in the average cost of brass as compared to 2021.

We anticipate inflation in raw and other material costs in 2023, which may have an adverse effect on our margins to the extent we are unable to pass on such higher costs to our customers.

Index to Financial Statements

During our fiscal year 2023, we experienced an 8% decrease in the average cost per ton of scrap steel and a 2% decrease in the average cost of brass as compared with our fiscal year 2022.

We anticipate inflation in raw and other material costs in 2024, including on purchased components, which is likely to have an adverse effect on our margins to the extent we are unable to pass on such higher costs to our customers.

During fiscal year 2023, we experienced labor inflation of approximately 4.5%, consistent with the U.S.

Bureau of Labor Statistics for the 12-month period ended September 30, 2023.

Material Cash Requirements

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(ii) cumulative cash obligations of $29.0 million for operating leases through 2033 and $1.4 million for finance leases through 2028;

and (iii) purchase obligations for raw materials and other purchased parts of approximately $155.1 million which we will incur during 2023.

and (iii) purchase obligations for raw materials and other purchased parts of approximately $106.1 million and $1.4 million which we expect to incur during 2024 and 2025, respectively.

Additionally, we will incur costs in 2024 to address and remediate the October 2023 cybersecurity incident, the extent of which is uncertain at this time.

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

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.

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 most of Canada generally face weather conditions that restrict significant construction activity.

For example, prior to the COVID-19 pandemic, net sales for the first half of the fiscal year averaged approximately 45% of consolidated net sales for the five-year period from 2015 to 2019.

See “Item 1A.

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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.

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, sales, 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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Revenue Recognition

We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services.

For the majority of sales, we recognize revenue when control of promised products is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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This evaluation includes such factors as anticipated usage, inventory levels and ultimate product sales value.

If in our judgment persuasive evidence exists that the net realizable value of inventory is lower than its cost, the inventory value is written-down to its estimated net realizable value.

If in our judgment persuasive evidence exists that the net realizable value of

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inventory is lower than its cost, the inventory value is written-down to its estimated net realizable value.

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

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Our deferred tax liabilities and assets are based on our expectations of future operating performance, reversal of taxable temporary differences, tax planning strategies, interpretation of the tax regulations currently enacted and rulings in numerous tax jurisdictions.

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We only record tax benefits for positions that we believe are more likely than not of being sustained under audit examination based solely on the technical merits of the associated tax position.

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

We performed this annual impairment testing at September 1, 2022 , using standard valuation methodologies and rates that we considered reasonable and appropriate.

We perform this annual impairment testing on September 1, using standard valuation methodologies and rates that we considered reasonable and appropriate.

We evaluate goodwill for impairment using a quantitative analysis.

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We weight the income and market approaches in a manner considering the risks of the underlying cash flows.

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

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

There are inherent uncertainties related to the assumptions used and to management's application of these assumptions.

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We performed our annual impairment testing at September 1, 2023.

As a result of this quantitative testing, we recognized a $6.8 million goodwill impairment charge for a reporting unit within our Water Flow Solutions segment as the carrying value exceeded its fair value.

Our determination of the estimated fair value was based on a combination of the discounted cash flow method and the guideline public company method.

Our testing indicated no other impairment.

The results of the testing indicated that the fair value exceeded the carrying value of our reporting units which contain goodwill.

As such, no impairment charge was recorded.

O ur determination of the estimated fair value was based on a combination of the discounted cash flow method and the guideline public company method.

Additionally, w e performed our annual impairment testing of indefinite-lived intangible assets at September 1, 2023 and concluded no impairment losses should be recognized.

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Warranty Cost

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If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product.

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

Additionally, a significant increase in costs to repair or replace could require additional warranty expense.

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

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We believe we have adequately accrued for these potential liabilities;

however, facts and circumstances may change and could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future.

however, facts and circumstances may change and could cause the actual liability to exceed estimates, or may require adjustments to the recorded liability balances in the future.

As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures.

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We established the recorded liabilities for such items at September 30, 2023 using estimates for when such amounts will be paid and what the amounts of such payments will be.

These estimates are subject to change based on numerous factors including, among others, regulatory changes, technology changes, the investment performance of related assets, longevity of participants, the discount rate used and changes to plan designs.

Business Combinations

We recognize assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of purchase price over the estimated fair values of identifiable net assets recorded as goodwill.

Assigning fair values requires us to make significant estimates and assumptions regarding the fair value of identifiable intangible assets.

We may refine these estimates if necessary over a period not to exceed one year by taking into consideration new information that, if known at the acquisition date, would have affected the fair values recognized for assets acquired and liabilities assumed.

Significant estimates and assumptions are used in estimating the value of acquired identifiable intangible assets, including estimating future cash flows based on forecasted revenues and EBITDA margins that we expect to generate following the acquisition, selecting an applicable royalty rate where needed, applying an appropriate discount rate to estimate a present value of those cash flows and determining their useful lives.

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

These estimates are subject to change based on numerous factors including, among others, claim development, regulatory changes, technology changes, the investment performance of related assets, longevity of participants, the discount rate used and changes to plan designs.

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