What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-11-20 compared with 2023-12-14 · 121 added, 126 removed, 184 unchanged (57% of the section changed)

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of our Annual Report on Form 10-K for the year ended September 30, 2023.

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.

We operate our business through two segments, Water Flow Solutions and Water Management Solutions.

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

The Water Management Solutions product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, as well as pressure management and control products and solutions.

In August 2023, Marietta Edmunds Zakas was appointed to Chief Executive Officer and to the Board of Directors.

Zakas formerly served as our Chief Financial Officer.

In May 2024, Paul McAndrew, Chief Operating Officer, was promoted to President and Chief Operating Officer.

In September 2024, we announced that Steven S.

Heinrichs, the Company’s Chief Financial Officer (“CFO”) and Chief Legal and Compliance Officer, will be transitioning from his position effective on or about December 31, 2024.

Heinrichs will continue to serve as CFO and Chief Legal and Compliance Officer until a new CFO has been named.

We estimate approximately 60% to 65% of the Company’s 2024 net sales were associated with the 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 resulting from the COVID-19 pandemic and subsequent supply disruptions in years 2020 through 2023, the seasonality of our business returned to more normalized levels in 2024, supported by municipal spending on repair and replacement projects and new residential construction activity.

According to the United States Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 2024 increased 5.2%.

Total housing starts in fiscal 2024 decreased 1.6% as compared with fiscal 2023, according to the United States Census Bureau, despite a 13% increase in single family housing starts as compared with fiscal 2023.

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.

While we reopened the facility in November 2023, the war has caused supply chain challenges that continue to hinder our ability to most efficiently manufacture our products produced in Israel.

These supply chain disruptions have adversely impacted, and continue to adversely impact, our ability to optimally produce and deliver our products from our facility in Ariel, Israel.

Additionally, production at this facility has been adversely impacted by limited labor availability in the region.

We have made investments in recruiting and training new team members, expanding our suppliers and expediting product shipments to increase production levels and to meet customer delivery times.

The cybersecurity incident in the first quarter of fiscal 2024 consisted of unauthorized access and deployment of ransomware by a third party to a portion of our internal information system infrastructure.

The incident caused temporary disruptions and limitations of access to portions of our business applications supporting certain aspects of our operations including shipping, receiving and payment functions.

Operational delays as well as investigation and remediation costs in connection with the incident adversely impacted our results for the first quarter of fiscal 2024;

however, there was no material impact to our consolidated net sales for the full fiscal 2024.

We have restored the 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.

We completed the replacement of this system during the second quarter of fiscal 2024.

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.

In fiscal 2024, we incurred approximately $1.5 million of expenses related to the cybersecurity incidents.

We continue to address the impacts of the cybersecurity incidents, including making enhancements to our cybersecurity processes and analyzing the data accessed, exfiltrated or otherwise impacted in connection with the cybersecurity incidents.

For fiscal year 2025, we anticipate that consolidated net sales will increase between 1.9% and 3.4% as compared with fiscal 2024.

The external operating environment remains dynamic as we face uncertainties and challenges emanating from the interest rate environment, the Israel-Hamas war and unrest in the Middle East, as well as labor inflation and availability.

We expect these challenges to continue during fiscal 2025.

After our short-cycle channel and customer inventory levels largely normalized during the first quarter of 2024, our orders and shipments reflected a more typical operating environment compared with the high backlog environment we experienced during and after the COVID-19 pandemic.

For fiscal 2025, we assume that we will continue to experience a more normalized operating environment leading to normalized seasonality for consolidated net sales.

Therefore, we anticipate quarterly consolidated net sales as a percentage of fiscal year 2025 consolidated net sales to be the highest in the third quarter and lowest in the first quarter, with a sequential increase in consolidated net sales in the second quarter as the construction season ramps up for the Spring.

We anticipate resilient demand in the municipal repair and replacement end market driven by the aging water infrastructure albeit moderated by budgetary and operational pressures on municipalities.

Additionally, we anticipate that new residential construction activity and new lot and land development will be relatively constrained by the interest rate environment, depending on the geography.

For fiscal 2025, we anticipate that inflation will continue to modestly impact manufacturing costs, primarily due to wage inflation, as well as raw materials and purchased parts.

We will continue to monitor the market and economic conditions impacting our business and take appropriate actions to address inflationary and other cost pressures by implementing price increases, cost containment measures and supplier management measures, among other actions.

Index to Financial Statements

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Strategic reorganization and other charges 0.2 1.8 13.8 15.8

Goodwill impairment — 16.3 — 16.3

Total operating expenses 92.7 113.1 71.5 277.3

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Interest expense, net 12.7

Other expense 1.6

Income before income taxes 163.4

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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

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Consolidated Analysis

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 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.

Net sales for 2024 were $1,314.7 million as compared with $1,275.7 million in the prior year, an increase of $39.0 million or 3.1%, primarily as a result of higher pricing across most of our product lines, higher volumes at Water Flow Solutions, partially offset by lower volumes at Water Management Solutions which include a negative impact from the Israel-Hamas war of less than 2%.

Index to Financial Statements

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 costs associated with inflation, third-party fees, and insurance, partially offset by lower personnel-related and incentive costs.

Gross profit for 2024 was $459.0 million as compared with $379.5 million in the prior year, an increase of $79.5 million or 20.9%, primarily a result of favorable manufacturing performance related to labor, overhead and logistics efficiencies and favorable price/cost.

This increase was partially offset by negative impacts from the Israel-Hamas war of approximately 4%.

Gross margin increased to 34.9% in 2024 as compared with 29.7% in the prior year.

Selling, general and administrative expenses (“SG&A”) for 2024 were $245.2 million as compared with $241.9 million in the prior year, an increase of $3.3 million or 1.4%, primarily due to higher employee incentives, higher costs associated with approximately 3% inflation and the impact of foreign currency fluctuation, partially offset by a decrease in salary and benefit expense associated with our restructuring activities, third-party fees and engineering materials expense.

As a percentage of net sales, SG&A decreased 30 basis points to 18.7% of net sales from 19.0% in the prior year.

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.

Strategic reorganization and other charges for 2024 of $15.8 million primarily consisted of expenses associated with the leadership transition, certain transaction-related expenses, $1.8 million related to non-cash asset impairment, expenses associated with the cybersecurity incidents and severance.

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

During the year ended September 30, 2024, we incurred a non-cash goodwill impairment charge of $16.3 million within the Water Management Solutions segment.

No goodwill impairment charge was recorded in 2023.

Interest expense, net for 2024 was $12.7 million as compared with $14.7 million in the prior year, a decrease of $2.0 million or 13.6%, primarily as a result of higher interest income.

The components of interest expense, net are provided below.

Year ended September 30,

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Total interest expense, net $ 12.7 $ 14.7

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.

Other expense for 2024 was $1.6 million for the release of an indemnification receivable related to an expired uncertain tax position.

There was no Other expense for 2023.

Income tax expense of $47.5 million in 2024 resulted in an effective income tax rate of 29.1%, which was higher than the 21.6% rate in the prior year primarily as a result of certain non-deductible items, including non-cash goodwill impairment, an increase in the state income tax rate and lesser foreign tax rate benefits.

Segment Analysis

Water Flow Solutions

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 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.

Net sales for 2024 were $755.5 million as compared with $634.4 million in the prior year, an increase of $121.1 million or 19.1%, primarily as a result of higher volumes in iron gate valves and service brass products as well as higher pricing across most of Water Flow Solutions’ product lines.

Gross profit for 2024 was $271.9 million as compared with $164.9 million in the prior year, an increase of $107.0 million or 64.9%, primarily as a result of favorable manufacturing performance driven by labor, overhead and logistic efficiencies, higher volumes and favorable price/cost, partially offset by higher custom duties expense.

Gross margin increased to 36.0% in 2024, as compared with 26.0% in the prior year.

SG&A for 2024 was $92.5 million as compared with $85.3 million in the prior year, an increase of $7.2 million or 8.4%, primarily as a result of higher employee incentives and approximately 3% inflation, partially offset by lower salary and benefit expense associated with our restructuring activities.

SG&A as a percentage of net sales was 12.2% and 13.4% for 2024 and 2023, respectively.

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

No impairment charge was recorded in 2023.

Index to Financial Statements

Water Management Solutions

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.

Net sales for 2024 were $559.2 million as compared with $641.3 million in the prior year, a decrease of $82.1 million or 12.8%, primarily as a result of lower volumes across most product lines, including the impact of the Israel-Hamas war, partially offset by higher pricing across most of Water Management Solutions’ product lines.

Gross profit for 2024 was $187.1 million as compared with $214.6 million in the prior year, a decrease of $27.5 million or 12.8%, primarily as a result of lower volumes including the impact of the Israel-Hamas war, partially offset by favorable price/cost and favorable manufacturing performance.

Gross margin was 33.5% in both 2024 and 2023.

SG&A for 2024 was $95.0 million as compared with $106.9 million in the prior year, a decrease of $11.9 million or 11.1% primarily due to lower salary and benefit expense associated with our restructuring activities and lower third-party fees, partially offset by unfavorable foreign currency fluctuation, higher employee incentives and approximately 3% inflation.

SG&A as a percentage of net sales was 17.0% for 2024 and 16.7% in the prior year.

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.

During the year ended September 30, 2024, Water Management Solution incurred a non-cash goodwill impairment charge of $16.3 million.

No goodwill impairment charge was recorded in 2023.

SG&A for 2024 was $57.7 million as compared with $49.7 million in the prior year, an increase of $8.0 million or 16.1% primarily as a result of higher employee incentives, higher third-party fees, unfavorable foreign currency fluctuation and approximately 3% inflation, partially offset by lower salary and benefit expense associated with our restructuring activities.

Financial Condition

Cash and cash equivalents were $309.9 million at September 30, 2024 and $160.3 million at September 30, 2023.

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.

Cash and cash equivalents increased during 2024 primarily as a result of $238.8 million in cash provided by operating activities, $4.0 million in effect of currency exchange rate changes on cash, partially offset by capital expenditures of $47.4 million, dividend payments of $39.9 million, and $10.0 million in common stock repurchases.

Receivables, net were $208.9 million at September 30, 2024 and $217.1 million at September 30, 2023.

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

This decrease was a result of lower days sales outstanding.

Inventories, net were $301.7 million at September 30, 2024 and $297.9 million at September 30, 2023.

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

Inventories increased during 2024 as a result of higher finished goods and approximately 1% inflation, partially offset by lower raw materials.

Property, plant and equipment, net was $318.8 million at September 30, 2024 and $311.7 million at September 30, 2023.

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.

Property, plant and equipment increased as a result of $47.4 million in capital expenditures primarily associated with our new brass foundry in Decatur, Illinois, partially offset by depreciation expense of $39.1 million.

Depreciation expense increased from $34.4 million in 2023 as a result of accelerated depreciation of certain assets.

Intangible assets were $309.7 million at September 30, 2024 and $334.0 million at September 30, 2023.

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Amortization expense was $27.1 million in 2024 and $28.1 million in 2023.

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.

We expect amortization expense for these assets to be approximately $7 million for 2025, approximately $6 million in fiscal 2026 and fiscal 2027, approximately $5 million in fiscal 2028, and approximately $4 million in fiscal 2029.

The reduction in amortization expense is a result of certain customer relationship intangibles becoming fully amortized.

Indefinite-lived intangible assets, $272.5 million at September 30, 2024, are not amortized but are tested for potential impairment at least annually.

Accounts payable and other current liabilities were $257.2 million at September 30, 2024 and $218.1 million at September 30, 2023.

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.

Accounts payable increased during 2024 primarily as a result of timing and inflation.

Other current liabilities increased during 2024 primarily as a result of higher personnel-related accruals, customer rebates, and product liabilities, partially offset by lower income taxes payable and accrued restructuring costs.

Total outstanding debt was $449.5 million as of September 30, 2024 and $447.4 million as of September 30, 2023.

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 $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.

Total debt increased due to the addition of new financing leases and the amortization of deferred financing costs.

Index to Financial Statements

Deferred income taxes were net liabilities of $55.4 million at September 30, 2024 and $73.8 million at September 30, 2023, primarily related to intangible assets.

The $18.4 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 and an increase in other accrued expenses.

Liquidity and Capital Resources

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At September 30, 2024, cash and cash equivalents included $80.7 million, $10.3 million, and $10.0 million in Israel, Canada, and China, respectively.

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 declared a quarterly dividend of $0.067 per common share on October 22, 2024, payable on or about November 20, 2024 to holders of record as of November 8, 2024, which we expect to result in an estimated $10.5 million cash outlay.

We repurchased $10.0 million of our outstanding common stock during the fiscal year ended September 30, 2024 and had $80.0 million remaining under our share repurchase authorization as of September 30, 2024.

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Collections from customers were higher during the fiscal year ended September 30, 2024 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 compared with the prior year period primarily as a result of lower expenditures associated with the new Decatur, Illinois foundry.

Inventories increased during the fiscal year ended September 30, 2024 primarily as a result of inflation and timing of shipments.

Other current liabilities and other noncurrent liabilities increased as a result of higher employee-related accruals, product liabilities, and customer rebates, partially offset by lower income taxes payable and accrued restructuring costs.

Capital expenditures remained fairly constant at $47.4 million for 2024 compared with $47.6 million for 2023.

We estimate 2025 capital expenditures will be between $45.0 million and $50.0 million.

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We repurchased 636,789 and 714,830 shares of our common stock in 2024 and 2023, respectively.

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

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

As of September 30, 2024, we had $12.2 million of letters of credit and $13.8 million of surety bonds outstanding.

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ABL Agreement

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.

Our ABL is provided by a syndicate of banking institutions and consists of a revolving credit facility of $175.0 million in borrowing capacity that matures the earlier of (a) March 16, 2029, which is ninety-one days prior to the stated maturity date of our 4.0% Senior Notes if the Notes are still outstanding on that date or (b) March 28, 2029.

The ABL includes 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.

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.

Index to Financial Statements

In December 2023, we obtained a waiver under our ABL (“ABL Waiver”) to provide for additional time associated with certain reporting requirements that were delayed as a result of the cybersecurity incident announced on October 28, 2023.

Under the ABL Waiver, the maximum aggregate amount of borrowings and other credit extensions under the ABL was temporarily limited to $50.0 million until all of the required reports were delivered.

During our first fiscal quarter of 2024, we delivered the required reports, and on February 6, 2024, the ABL Waiver was terminated.

Accordingly, we are no longer subject to the $50.0 million temporary limit on credit extensions.

On March 28, 2024, we amended our ABL to, among other things, (i) extend the maturity date from July 29, 2025 to the earlier of (a) March 28, 2029 and (b) 91 days prior to the stated maturity date of the Company’s 4.0% Senior Notes due June 15, 2029 (as may be extended from time to time in accordance with the Indenture governing the notes) if the 4.0% Senior Notes are then outstanding, (ii) decrease the grid-based interest rate margins by approximately 50 basis points to 150 basis points for Secured Overnight Financing Rate (“SOFR”) loans and 50 basis points for base rate loans when average availability is greater than 50% of the aggregate revolving commitments, and to 175 basis points for SOFR loans and 75 basis points for base rate loans, when average availability is less than or equal to 50% of the aggregate revolving credit commitments and (iii) replace the previously fixed 37.5 basis point unused commitment fee with a grid-based, quarterly unused commitment fee equal to (a) 37.5 basis points if average daily outstanding credit extensions for such quarter under the ABL (“Total Outstandings”) are less than or equal to 50% of the aggregate revolving credit commitments or (b) 25.0 basis points if Total Outstandings for such quarter are greater than or equal to 50% of the aggregate revolving credit commitments.

We incurred approximately $0.9 million in debt issuance costs in connection with the ABL amendment which were capitalized and are amortized over the term of the ABL.

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 150 to 175 basis points, or a base rate, as defined in the ABL, plus an applicable margin of 50 to 75 basis points.

At September 30, 2024, the applicable margin was 150 basis points for SOFR-based loans and 50 basis points for base rate loans.

Index to Financial Statements

The ABL is subject to mandatory prepayments if total outstanding borrowings under the ABL are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances.

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Prepayments can be made at any time without penalty.

The ABL allows for certain restricted payments such as cash dividends on our common stock up to certain thresholds.

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

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

The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum.

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

The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum when the unused capacity is above 50% of the credit commitments, with a step down to 25.0 basis points per annum when unused capacity is less than or equal to 50% of the credit commitments.

At September 30, 2024, the commitment fee was 37.5 basis points.

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

Excess availability based on September 30, 2024 data was $162.6 million, as reduced by $12.2 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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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.

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

Substantially all of our U.S.

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Based on quoted market prices the outstanding 4.0% Senior Notes had a fair value of $430.2 million at September 30, 2024.

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

We believe we were in compliance with these covenants at September 30, 2023.

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 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, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.

5.5% Senior Unsecured Notes

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

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

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

We believe we were in compliance with these covenants at September 30, 2024.

We may redeem some or all of the 4.0% Senior Notes at any time after June 15, 2024, at specified redemption prices.

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 if there is a Ratings Decline (as defined in the Indenture).

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Credit Ratings

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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 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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and (iii) purchase obligations for raw materials and other purchased parts of approximately $104.8 million and $1.1 million which we expect to incur during 2025 and 2026, 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.

Additionally, we expect to invest to strengthen our systems, cybersecurity training, policies, programs, response plans and other similar measures.

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

Effect of Inflation

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

During our fiscal year 2024, we experienced approximately 1% inflation as compared with our fiscal year 2023 for these inventory items.

We anticipate inflation in raw and other material costs in 2025, 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 2024, we experienced approximately 3% labor inflation, which is slightly lower than the 3.8% released by the U.S.

Bureau of Labor Statistics for the 12-month period ended September 30, 2024.

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 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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Our critical accounting estimates include the below items.

Revenue Recognition

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.

We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.

for more information regarding our revenues.

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Inventories, net

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

We record inventories at standard cost or estimated net realizable value.

Standard cost reasonably approximates cost determined on the first-in, first-out basis.

Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred.

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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

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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.

We recognize deferred tax liabilities and deferred tax assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.

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

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

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.

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.

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

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.

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

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

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

We perform this annual impairment testing on September 1, 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 consider to be reasonable and appropriate.

We evaluate goodwill for impairment using a quantitative analysis.

The carrying value of the reporting unit, including goodwill, is compared with the estimated fair value of the reporting unit utilizing a combination of the income and market approaches.

The carrying value of the reporting unit, including goodwill, is compared with the estimated fair value of the reporting unit utilizing a combination of the income, market and cost approaches as applicable.

The income approach, which is a level 3 fair value measurement, is based on projected debt-free cash flow which is discounted to the present value using discount rates that consider the timing and risk of the cash flows.

The market approach is based on the guideline public company method, which uses market multiples to value our reporting units.

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 sales, earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins and the selection of discount rates.

The cost approach is based on the net aggregate value of the reporting unit’s underlying assets.

The 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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If this estimated fair value exceeds the carrying value, no impairment is indicated.

Conversely, if the estimated fair value is less than the carrying value, impairment is indicated.

This analysis is dependent on management’s best estimates of future operating results and the selection of reasonable discount rates and hypothetical royalty rates.

We performed our annual impairment testing at September 1, 2024.

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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As a result of this quantitative testing, we recognized a $16.3 million non-cash goodwill impairment charge for a reporting unit within our Water Management Solutions segment as the carrying value exceeded its fair value.

Our determination of the estimated fair value was based on our concluded value under the cost approach.

Additionally, we performed our annual impairment testing of indefinite-lived intangible assets at September 1, 2024 and recognized a $0.4 million non-cash impairment charge related to trade names within Water Management Solutions.

Our testing indicated no other impairment.

Warranty Cost

We accrue for warranty expenses that can include customer costs of repair and/or replacement, including labor, materials, equipment, freight and reasonable overhead costs.

We accrue for warranty expenses that may include customer costs of repair and/or replacement, including labor, materials, equipment, freight and reasonable overhead costs.

We accrue for the estimated cost of product warranties at the time of sale if such costs are determined to be reasonably estimable at that time.

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

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Contingencies

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

assessments by counsel of pending or threatened litigation;

assessments by legal counsel of pending or threatened litigation;

and assessments of potential environmental liabilities and remediation costs.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis