mwa-20200930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-32892
MUELLER WATER PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
1200 Abernathy Road N.E.
Suite 1200
Atlanta, GA30328
(Address of Principal Executive Offices)
Registrant’s telephone number: (770)206-4200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, par value $0.01 MWA New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒Yes☐No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐Yes ☒No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) ☒Yes☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): ☒Large accelerated filer☐Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant had filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐Yes ☒No
There were 158,102,357 shares of common stock of the registrant outstanding at November 10, 2020. At March 31, 2020, the aggregate market value of the voting and non-voting common stock held by non-affiliates (assuming only for purposes of this computation that directors and executive officers may be affiliates) was $1,248.3 million based on the closing price per share as reported on the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the upcoming 2021 Annual Meeting of Stockholders of the Company are incorporated by reference into Part III of this Form 10-K.
Introductory Note
In this Annual Report on Form 10-K (“annual report”), (1) the “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries (2) “Infrastructure” refers to our Infrastructure segment (3) “Technologies” refers to our Technologies segment (4) “Anvil” refers to our former Anvil segment, which we sold on January 6, 2017; and (5) “U.S. Pipe” refers to our former U.S. Pipe segment, which we sold on April 1, 2012. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed.
Certain of the titles and logos of our products referenced in this annual report are part of our intellectual property. Each trade name, trademark or service mark of any other company appearing in this annual report is the property of its owner.
Unless the context indicates otherwise, whenever we refer in this annual report to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year. We manage our business and report operations through two business segments, Infrastructure and Technologies, based largely on the products they sell and the customers they serve.
Industry and Market Data
In this annual report, we rely on and refer to information and statistics from third-party sources regarding economic conditions and trends, the demand for our water infrastructure, flow control and other products and services and the competitive conditions we face in serving our customers and end users. We believe these sources of information and statistics are reasonably accurate, but we have not independently verified them.
Most of our primary competitors are not publicly traded companies. Only limited current public information is available with respect to the size of our end markets and our relative competitive position. Our statements in this annual report about our end markets and competitive positions are based on our beliefs, studies and judgments concerning industry trends.
Forward-Looking Statements
This annual report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address activities, events or developments that we intend, expect, plan, project, design, believe or anticipate will or may occur in the future are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding our business strategy, capital allocation plans and expectations for net sales and operating income margins, and the outlook for general economic conditions, spending by municipalities and the residential and non-residential construction markets and the impacts of these factors on our business and our expected financial performance.Forward-looking statements are based on certain assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions and expected future developments. Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including regional, national or global political, economic, business, competitive, market and regulatory conditions and the other factors described under the section entitled “RISK FACTORS” in Item 1A of Part I of this annual report.
Undue reliance should not be placed on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements, except as required by law.
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Index to Financial Statements
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS 1
Our Company 1
Business Strategy 1
Description of Products and Services 2
Manufacturing 3
Purchased Components and Raw Materials 4
Patents, Licenses and Trademarks 4
Seasonality 5
Sales, Marketing and Distribution 5
Backlog 6
Competition 6
Research and Development 7
Regulatory and Environmental Matters 7
Employees 7
Geographic Information 8
Securities Exchange Act Reports 8
Item 1A. RISK FACTORS 9
Item 2. PROPERTIES 20
Item 3. LEGAL PROCEEDINGS 21
PART II
Equity Compensation Plan Information 22
Sale of Unregistered Securities 22
Issuer Purchases of Equity Securities 22
Stock Price Performance Graph 22
Item 6. SELECTED FINANCIAL DATA 23
Overview 24
Results of Operations 25
Financial Condition 27
Liquidity and Capital Resources 27
Off-Balance Sheet Arrangements 29
Contractual Obligations 30
Effect of Inflation 30
Seasonality 30
Critical Accounting Policies and Estimates 30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 33
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 34
Item 9A. CONTROLS AND PROCEDURES 35
PART III
Item 10* DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 36
Item 11* EXECUTIVE COMPENSATION 39
Item 14* PRINCIPAL ACCOUNTANT FEES AND SERVICES 40
PART IV
Item 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 41
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Index to Financial Statements
PART I
Item 1.BUSINESS
Our Company
Mueller Water Products, Inc. is a Delaware corporation that was incorporated on September 22, 2005 under the name Mueller Holding Company, Inc.
We are a leading manufacturer and marketer of products and services used in the transmission, distribution and measurement of water in North America. Our products and services are used by municipalities and the residential and non-residential construction industries. Some of our products have leading positions due to their strong brand recognition and reputation for quality, service and innovation. We believe we have one of the largest installed bases of iron gate valves and fire hydrants in the United States. Our iron gate valve or fire hydrant products are specified for use in the largest 100 metropolitan areas in the United States. Our large installed base, broad product range and well-known brands have led to long-standing relationships with the key distributors and end users of our products. Our consolidated net sales were $964.1 million in 2020.
We operate our business through two segments, Infrastructure, formerly referred to as Mueller Co., and Technologies, formerly referred to as Mueller Technologies. Segment sales, operating results and additional financial data and commentary are provided in the Segment Analysis section in Part II, Item 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and in Note 17. of the Notes to Consolidated Financial Statements in Part II, Item 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this annual report.
Infrastructure
Infrastructure manufactures valves for water and gas systems, including iron gate, butterfly, tapping, check, knife, plug, automatic control and ball valves, as well as dry-barrel and wet-barrel fire hydrants and a broad line of pipe repair products, such as clamps and couplings used to repair leaks. Infrastructure’s net sales were $885.5 million in 2020. Sales of Infrastructure products are driven principally by spending on water and wastewater infrastructure upgrade, repair and replacement, and by construction of new water and wastewater infrastructure, which is typically associated with construction of new residential communities. Infrastructure sells its products primarily through waterworks distributors. We believe a majority of Infrastructure’s 2020 net sales were for infrastructure upgrade, repair and replacement. Infrastructure also sells products for pipe repair to natural gas utilities.
Technologies
Technologies offers residential and commercial water metering, water leak detection and pipe condition assessment products, systems and services. Technologies’ net sales were $78.6 million in 2020. Technologies is comprised of the Mueller Systems and Echologics businesses. Mueller Systems sells water metering systems, products, services and software directly to municipalities and to waterworks distributors. Echologics sells water leak detection and pipe condition assessment products and services primarily to municipalities.
Business Strategy
Our business strategy is to capitalize on the large, attractive and growing water infrastructure markets worldwide. Key elements of this strategy are as follows:
Accelerate development of new products.
We plan to continue to increase investments in our product development capabilities, including expanding our engineering staff, to develop and market new products and services. We expect to add new products to our portfolio and offer new products into different end markets. We expect this expansion to come through internal investments as well as acquisitions.
Develop and implement fully-integrated intelligent technology platform for infrastructure testing, monitoring and control.
We have introduced a new software platform, Sentryx, that provides data intelligence to help water utilities make strategic and operational decisions. As our customers seek to use real-time data and analytics to manage and repair their aging infrastructures more efficiently, we believe we are uniquely positioned to help solve their problems given our expertise and the large installed base of our products. This data includes leak detection, pressure monitoring, advanced metering and water quality, which are aggregated and consolidated within the Sentryx platform, providing utilities with critical information regarding their distribution systems.
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Drive operational excellence.
We are bringing best practices focused on Lean manufacturing with an investment mindset to deliver manufacturing productivity improvements. We expect these efforts will facilitate innovation and new product development, helping us drive sales growth and improve product margins. Productivity improvements at our facilities should allow us to drive down costs, which can fund additional manufacturing initiatives and continued investment in product development.
Modernize manufacturing facilities.
We are prioritizing capital investments through 2022 to modernize our manufacturing facilities and processes. We believe this modernization will improve product quality, drive non-price margin expansion and expand our product portfolio. Our large valve manufacturing expansion in Chattanooga began ramping up production in 2020 and we expect to enter full-scale production in early 2021. We are in the process of building out our new facility in Kimball, Tennessee to expand our machining and assembly capabilities in the Chattanooga area. We expect these investments will allow us to capitalize on the growing need for large valves due to the migration to more densely populated, urban areas and an increased focus by customers on products made in America. In addition, we have begun construction of a new brass foundry in Decatur, Illinois.
Continue to seek to acquire and invest in businesses and technologies that expand our existing portfolio of businesses or allow us to enter new markets.
We will continue to evaluate the acquisition of strategic businesses, technologies and product lines that have the potential to strengthen our competitive positions, enhance or expand our existing product and service offerings, expand our technological capabilities, leverage our manufacturing capabilities, provide synergistic opportunities or allow us to enter new markets. As part of this strategy, we may pursue international opportunities, including acquisitions, joint ventures and partnerships, that allow us to expand product or service offerings or enter new markets.
Description of Products and Services
We offer a broad line of water infrastructure, flow control, metrology and leak detection products and services primarily in the United States and Canada. Infrastructure sells water and gas valves, fire hydrants and pipe repair products. Technologies sells water metering products and systems and leak detection and pipe condition assessment products and services. Our products are designed, manufactured and tested in compliance with industry standards, where applicable.
Infrastructure
Infrastructure is comprised of companies that manufacture valves for water and gas systems, as well as fire hydrants and pipe repair products for water distribution.
Infrastructure’s water distribution products are manufactured to meet or exceed American Water Works Association (“AWWA”) Standards and, where applicable, certified to NSF/ANSI Standard 61 for potable water conveyance. In addition, Underwriters Laboratory (“UL”) and FM Approvals (“FM”) have approved many of these products. These products are typically specified by a water utility for use in its system.
Water and Gas Valves and Related Products.Infrastructure manufactures valves for water and gas systems, including iron gate, butterfly, tapping, check, knife, plug, automatic control and ball valves, and sells these products under a variety of brand names, including Mueller, Pratt, U.S. Pipe Valve and Hydrant, and Singer Valve. Water and gas valves and related products, generally made of iron or brass, accounted for $583.2 million, $576.4 million and $569.1 million of our gross sales in 2020, 2019 and 2018, respectively. These valve products are used to control distribution and transmission of potable water, non-potable water or gas. Water valve products typically range in size from 3⁄4 inch to 36 inches in diameter. Infrastructure also manufactures significantly larger valves as custom order work through its Henry Pratt product line. Most of these valves are used in water transmission or distribution, water treatment facilities or industrial applications.
Infrastructure also produces machines and tools for tapping, drilling, extracting, installing and stopping-off, which are designed to work with its water and gas fittings and valves as an integrated system.
Fire Hydrants.Infrastructure manufactures dry-barrel and wet-barrel fire hydrants. Sales of fire hydrants and fire hydrant parts accounted for $201.4 million, $199.7 million and $204.3 million of our gross sales in 2020, 2019 and 2018, respectively. Infrastructure sells fire hydrants for new water infrastructure development, fire protection systems and water infrastructure repair and replacement projects.
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These fire hydrants consist of an upper barrel and nozzle section and a lower barrel and valve section that connects to a water main. In dry-barrel hydrants, the valve connecting the barrel of the hydrant to the water main is located below ground at or below the frost line, which keeps the upper barrel dry. Infrastructure sells dry-barrel fire hydrants under the Mueller and U.S. Pipe Valve and Hydrant brand names in the United States and the Canada Valve brand name in Canada. Infrastructure also makes wet-barrel hydrants, where the valves are located in the hydrant nozzles and the barrel contains water at all times. Wet-barrel hydrants are made for warm weather climates, such as in California and Hawaii, and are sold under the Jones brand name.
Most municipalities have approved a limited number of fire hydrant brands for installation within their systems due to their desires to use the same tools and operating instructions across their systems and to minimize inventories of spare parts. We believe Infrastructure’s large installed base of fire hydrants throughout the United States and Canada, reputation for superior quality and performance and incumbent specification positions have contributed to the leading market position of its fire hydrants. This large installed base also leads to recurring sales of replacement hydrants and hydrant parts.
Repair Products and Services. Infrastructure also sells pipe repair products, such as couplings, grips and clamps used to repair leaks, under the HYMAX, Mueller and Krausz brand names.
Technologies
Technologies is comprised of companies that provide innovative solutions, products and services that actively diagnose, measure and monitor the delivery of water.
Water Metering Products and Systems. Mueller Systems manufactures and sources a variety of water technology products under the Mueller Systems and Hersey brand names that are designed to help water providers accurately measure and control water usage. Mueller Systems offers a complete line of residential, fire line and commercial metering solutions. Residential and commercial water meters are generally classified as either manually read meters or remotely read meters via radio technology. A manually read meter consists of a water meter and a register that gives a visual meter reading display. Meters equipped with radio transmitters (endpoints) use encoder registers to convert the measurement data from the meter (mechanical or static) into an encrypted digital format which is then transmitted via radio frequency to a receiver that collects and formats the data appropriately for water utility billing systems. These remotely read systems are either automatic meter reading (“AMR”) systems or fixed network advanced metering infrastructure (“AMI”) systems. With an AMR system, utility personnel with mobile equipment, including a radio receiver, computer and reading software, collect the data from utilities’ meters. With an AMI system, a network of permanent data collectors or gateway receivers that are always active or listening for the radio transmission from the utilities’ meters gather the data. AMI systems eliminate the need for utility personnel to travel through service territories to collect meter reading data. These systems provide the utilities with more frequent and diverse data at specified intervals from the utilities’ meters and allow for two-way communication. Mueller Systems sells both AMR and AMI systems and related products. Mueller Systems’ remote disconnect water meter enables the water flow to be stopped and started remotely via handheld devices or from a central operating facility.
Sales of water metering products and systems accounted for 79%, 81% and 79% of Technologies’ net sales in 2020, 2019 and 2018, respectively.
Water Leak Detection and Pipe Condition Assessment Products and Services. Echologics develops technologies and offers products and services under the Echologics brand name that can non-invasively (without disrupting service or introducing a foreign object into the water system) detect underground leaks and assess the condition of water mains comprised of a variety of materials. Echologics leverages its proprietary acoustic technology to offer leak detection and condition assessment surveys. Echologics also offers fixed leak detection systems that allow customers to continuously monitor and detect leaks on water distribution and transmission mains. We believe Echologics’ ability to offer leak detection and pipe condition assessment services non-invasively is a key competitive advantage.
Manufacturing
See “Item 2. PROPERTIES” for a description of our principal manufacturing facilities.
We will continue to expand the use of Lean manufacturing and Six Sigma business improvement methodologies where appropriate to safely capture higher levels of quality, service and operational efficiency in our manufacturing facilities in both segments.
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Infrastructure
Infrastructure operates fourteen manufacturing facilities located in the United States, Canada, Israel and China. These manufacturing operations include foundry, machining, fabrication, assembly, testing and painting operations. Not all facilities perform each of these operations. Infrastructure’s existing manufacturing capacity is sufficient for anticipated near-term requirements. However, in order to meet longer-term capacity requirements and modernize some production facilities, Infrastructure has expanded its large valve casting capabilities at its foundry location in Chattanooga, Tennessee, is currently building out its new manufacturing facility in nearby Kimball, Tennessee to insource certain activities and assemble certain large valves, and has started construction of a new brass foundry in Decatur, Illinois that will replace our existing brass foundry located nearby in Decatur.
Infrastructure foundries use both lost foam and green sand casting techniques. Infrastructure uses the lost foam technique for fire hydrant production in its Albertville, Alabama facility and for iron gate valve production in its Chattanooga, Tennessee facility. The lost foam technique has several advantages over the green sand technique for high-volume products, including a reduction in the number of manual finishing operations, lower scrap levels and the ability to reuse some of the materials.
Technologies
Technologies operates one manufacturing facility in the United States and contracts with a manufacturing facility in Mexico. Certain Technologies products are also manufactured in facilities primarily dedicated to Infrastructure products. Technologies designs, manufactures and assembles water metering products in Cleveland, North Carolina, designs and supports AMR and AMI systems in our research and development center of excellence for software and electronics in Atlanta, Georgia, and designs leak detection and condition assessment products in Toronto, Ontario.
Purchased Components and Raw Materials
Our products are made using various purchased components and several basic raw materials, including brass ingot, scrap steel, sand and resin. Purchased parts and raw materials represented approximately 34% and 11%, respectively, of cost of sales in 2020.
Patents, Licenses and Trademarks
We have active patents relating to the design of our products and trademarks for our brands and products. We have filed and continue to file, when appropriate, patent applications used in connection with our business and products. Many of the patents for technology underlying the majority of our products have been in the public domain for many years, and we do not believe third-party patents individually or in the aggregate are material to our business. However, we consider the pool of proprietary information, consisting of expertise and trade secrets relating to the design, manufacture and operation of our products to be particularly important and valuable. We generally own the rights to the products that we manufacture and sell, and we are not dependent in any material way upon any license or franchise to operate. See “Item 1A. RISK FACTORS-Any inability to protect our intellectual property or our failure to effectively defend against intellectual property infringement claims could adversely affect our competitive position.”
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The table below highlights selected brand names by segment.
Infrastructure Technologies
Canada ValveTM Echologics®
Centurion® Echoshore®
Ez-Max® ePulse®
Hydro Gate® HerseyTM
Hydro-Guard® LeakFinderRT®
HYMAX® LeakFinderSTTM
HYMAX VERSA® LeakListener®
Jones® LeakTuner®
Krausz® Mi.Echo®
MillikenTM Mi.Data®
Mueller® Mi.HydrantTM
Pratt® Mi.Net®
Pratt Industrial® Mueller Systems®
Repamax® SentryxTM
Repaflex®
SingerTM
U.S. Pipe Valve and Hydrant, LLC
Seasonality
See “Item 1A. RISK FACTORS-Seasonal demand for certain of our products and services may adversely affect our financial results.” and “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Seasonality.”
Sales, Marketing and Distribution
We sell primarily to distributors. Our distributor relationships are generally non-exclusive, but we attempt to align ourselves with key distributors in the principal markets we serve. We believe “Mueller” is the most recognized brand in the U.S. water infrastructure industry.
Infrastructure
Infrastructure sells its products primarily through waterworks distributors to a wide variety of end user customers, including municipalities, water and wastewater utilities, gas utilities, and fire protection and construction contractors. Sales of our products are heavily influenced by the specifications for the underlying projects. Approximately 7%, 8% and 9% of Infrastructure’s net sales were to Canadian customers in 2020, 2019 and 2018, respectively.
At September 30, 2020, Infrastructure had 75 sales representatives in the field and 132 inside marketing and sales professionals, as well as 113 independent manufacturer’s representatives. In addition to calling on distributors, these representatives call on municipalities, water companies and other end users to ensure the products specified for their projects are our products or comparable to our products.
Infrastructure’s extensive installed base, broad product range and well-known brands have led to many long-standing relationships with the key distributors in the principal markets we serve. Our distribution network covers all of the major locations for our principal products in the United States and Canada. Although we have long-standing relationships with most of our key distributors, we typically do not have long-term contracts with them, including our two largest distributors, which together accounted for approximately 35%, 34% and 35% of Infrastructure’s gross sales in 2020, 2019 and 2018, respectively. The loss of either of these distributors would have a material adverse effect on our business. See “Item 1A. RISK FACTORS-Our business depends on a small group of key customers for a significant portion of our sales.”
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Technologies
Technologies sells its water metering systems, products and services directly to municipalities and to waterworks distributors and sells water leak detection and pipe condition assessment products and services primarily to municipalities and to utilities. At September 30, 2020, Technologies had 36 sales representatives in the field. Technologies’ five largest customers accounted for approximately 45%, 50% and 47% of its gross sales in 2020, 2019 and 2018, respectively. See “Item 1A. RISK FACTORS-Our business depends on a small group of key customers for a significant portion of our sales.”
Backlog
We consider backlog to represent orders placed by customers for which goods or services have yet to be delivered. Backlog is a meaningful indicator for the Pratt product line of Infrastructure and the Mueller Systems business unit of Technologies. Pratt products consist of valves and other parts for large projects that typically require design and build specifications. The delivery lead time for these projects can be longer than one year, and we expect approximately 16% of Pratt’s backlog at the end of 2020 will not be shipped until beyond 2021. Mueller Systems manufactures or sources water meter systems that are sometimes ordered in large quantities with delivery dates over several years, and we expect approximately 52% of Mueller Systems’ backlog will not be shipped until beyond 2021. Backlogs for Pratt and Mueller Systems are presented below.
September 30,
(in millions)
Sales cycles for metering systems can span several years and it is common for customers to place orders throughout the contract period. Although we believe we have a common understanding with our customer as to the total value of a contract when it is awarded, we do not recognize backlog until customer orders are received.
Competition
The U.S. and Canadian markets for water infrastructure and flow control products are very competitive. See “Item 1A. RISK FACTORS-Strong competition could adversely affect prices and demand for our products and services, which would adversely affect our operating results.” There are only a few competitors for most of our product and service offerings. Many of our competitors are well-established companies with products that have strong brand recognition. We consider our installed base, product quality, customer service level, brand recognition, innovation, distribution and technical support to be competitive strengths.
The competitive environment for most of Infrastructure’s valve and hydrant products is mature and many end users are slow to transition to brands other than their historically preferred brand. It is difficult to increase market share in this environment. We believe our fire hydrants and valves enjoy strong competitive positions based primarily on the extent of their installed base, product quality, specified position and brand recognition. Our principal competitors for fire hydrants and iron gate valves are McWane, Inc. and American Cast Iron Pipe Company. The primary competitors for our brass products are The Ford Meter Box Company, Inc. and A.Y. McDonald Mfg. Co. Many brass valves are interchangeable among different manufacturers. With respect to our specialty valve products such as butterfly, plug, and check valves, our principal competitors are mainly DeZURIK, Val-Matic and McWane, Inc.
We believe the market for many of Infrastructure’s repair products is open to product innovation. Our current marketing is primarily focused on repair, joining and restraining of water infrastructure piping systems. The majority of this infrastructure consists of cast iron, ductile iron and plastic pipe, and our repair solutions work well with all of these. We believe our brand names are generally associated with premium products due to our patented technology and features. Our primary competitors in the repair market are: Romac Industries, Smith Blair, Viking Johnson, AVK Group, JCM Industries, and Georg Fisher Ltd..
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The markets for products and services sold by Technologies are very competitive. Mueller Systems sells water metering products and systems, primarily in the United States. We believe a substantial portion of this market is in the process of transitioning from manually read meters to automatically read meters, but we also expect this transition to be relatively slow and that many end users will be reluctant to adopt brands other than their historically preferred brand. Although Mueller Systems’ market position is relatively small, we believe our automatically read meters and associated technology are well positioned to gain a greater share of these markets. Our principal competitors are Sensus, Itron, Inc., Neptune Technology Group Inc., Badger Meter, Inc., and Master Meter, Inc. Echologics sells water leak detection and pipe condition assessment products and services in North America, the United Kingdom and select countries in Europe, Asia and the Middle East, with our primary markets being the United States and Canada. The worldwide market for leak detection and pipe condition assessment is highly fragmented with numerous competitors. Our more significant competitors are Pure Technologies Ltd., Gutermann AG and Syrinix Ltd.
Research and Development
Our primary research and development (“R&D”) facilities are located in Chattanooga, Tennessee and in Ariel, Israel for Infrastructure and in Atlanta, Georgia and Toronto, Ontario for Technologies. The primary focus of these operations is to develop new products, improve and refine existing products and obtain and assure compliance with industry approval certifications or standards (such as AWWA, UL, FM, NSF and The Public Health and Safety Company). At September 30, 2020, we employed 78 people dedicated to R&D activities. R&D expenses were $15.0 million, $14.3 million and $11.6 million during 2020, 2019 and 2018, respectively.
Regulatory and Environmental Matters
Our operations are subject to numerous federal, state and local laws and regulations, both within and outside the United States, in areas such as: competition, government contracts, international trade, labor and employment, tax, licensing, consumer protection, environmental protection, workplace health and safety, and others. These and other laws and regulations impact the manner in which we conduct our business, and changes in legislation or government policies can affect our operations, both favorably and unfavorably. For example, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state laws affect our operations by, among other things, imposing investigation and cleanup requirements for threatened or actual releases of hazardous substances. Under CERCLA, joint and several liability may be imposed on operators, generators, site owners, lessees and others regardless of fault or the legality of the original activity that caused or resulted in the release of the hazardous substances. Thus, we may be subject to liability under CERCLA and similar state laws for properties that (1) we currently own, lease or operate, (2) we, our predecessors, or former subsidiaries previously owned, leased or operated, (3) sites to which we, our predecessors or former subsidiaries sent waste materials, and (4) sites at which hazardous substances from our facilities’ operations have otherwise come to be located. The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under CERCLA in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. For more information regarding this matter as well as others that may affect our business, including our capital expenditures, earnings and competitive position, see “Item 1A. RISK FACTORS,” “Item 3. LEGAL PROCEEDINGS - Environmental,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 18. of the Notes to Consolidated Financial Statements.
Human Capital
We believe our employees are our greatest asset. To ensure their health and well-being, we provide access to benefits and offer programs that support work-life balance and overall well-being including financial, physical and mental health resources. We also provide maternity and paternity benefits for biological and adoptive parents.
Our core values of respect, integrity, trust, safety and inclusion shape our culture and define who we are. They are guiding principles that we live by every day and are evident in everything we do. We strive to attract, develop and retain high performing talent and we support and reward employee performance.
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We are committed to upholding fundamental human rights and believe that all human beings should be treated with dignity, fairness, and respect. We strive to promote inclusion in the workplace, engage with communities to build upon our understanding of potential human rights issues, and encourage our suppliers to treat their employees — and to interact with their communities — in a manner that respects human rights. We condemn human rights abuses and do not condone the use of slave or forced labor, human trafficking, child labor, the degrading treatment of individuals, physical punishment, or unsafe working conditions. All employees are required to understand and obey local laws, to report any suspected violations, and to act in accordance with our Core Values and Code of Conduct.
At September 30, 2020, we employed approximately 3,100 people, of whom 84% work in the United States. At September 30, 2020, 65% of our hourly workforce was represented by collective bargaining agreements.
Our locations with employees covered by such agreements are presented below.
Location Expiration of current agreement(s)
Chattanooga, TN October 2022, January 2023
Decatur, IL June 2025
Albertville, AL October 2025
Aurora, IL September 2021
We believe relations with our employees, including those represented by collective bargaining agreements, are good.
Geographic Information
See Note 17. of the Notes to Consolidated Financial Statements.
Securities Exchange Act Reports
We file annual and quarterly reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”). You may read and print materials that we have filed with the SEC from its website at www.sec.gov. Our SEC filings may also be viewed and copied at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the public reference room.
In addition, certain of our SEC filings, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statements and amendments to them can be viewed and printed free of charge from the investor information section of our website at www.muellerwaterproducts.com. Copies of our filings, specified exhibits and corporate governance materials are also available free of charge by writing us using the address on the cover of this annual report. We are not including the information on our website as a part of, or incorporating it by reference into, this annual report.
Our principal executive offices are located at 1200 Abernathy Road N.E., Suite 1200, Atlanta, Georgia 30328, and our main telephone number at that address is (770) 206-4200.
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Item 1A. RISK FACTORS
Risks related to our industries
A significant portion of our business depends on spending for water and wastewater infrastructure construction activity.
Our primary end markets are repair and replacement of water infrastructure, driven by municipal spending and new water infrastructure installation driven by new residential construction. As a result, a significant portion of our business depends on local, state and federal spending on water and wastewater infrastructure upgrade, repair and replacement. Funds for water and wastewater infrastructure repair and replacement typically come from local taxes, water fees and water rates. State and local governments and private water entities that do not adequately budget for expenditures when setting tax rates, water rates and water fees, as applicable, may be unable to pay for water infrastructure repair and replacement if they do not have access to other funding sources. In addition, reductions or delays in federal spending related to water or wastewater infrastructure could adversely affect state or local projects and may adversely affect our financial results.
Governments and private water entities may have limited abilities to increase taxes, water fees or water rates, as applicable. It is not unusual for water and wastewater projects to be delayed and rescheduled for a number of reasons, including changes in project priorities, increasing interest rates and inflation and difficulties in complying with environmental and other governmental regulations. For example, changes in interest rates and credit markets (including municipal bonds, mortgages, home equity loans and consumer credit) can significantly increase the costs of the projects in which our products are utilized — such as new residential construction and water and wastewater infrastructure upgrade, repair and replacement projects — and lead to such projects being reduced, delayed and/or rescheduled, which could result in a decrease in our revenues and earnings and adversely affect our financial condition. In addition, higher interest rates are often accompanied by inflation. In an inflationary environment, we may be unable to raise the prices of our products sufficiently to keep up with the rate of inflation, which would reduce our profit margins.
Some state and local governments have placed or may place significant restrictions on the use of water by their constituents. These types of water use restrictions may lead to reduced water revenues by private water entities, municipalities or other governmental agencies, which could similarly affect funding decisions for water-related projects.
Poor economic conditions may cause states, municipalities or private water entities to receive lower than anticipated revenues, which may lead to reduced or delayed funding for water infrastructure projects. Even if favorable economic conditions exist, water infrastructure owners may choose not to address deferred infrastructure needs due to a variety of political factors or competing spending priorities.
Low levels of spending for water and wastewater infrastructure construction activity could adversely affect our sales, profitability and cash flows.
Residential construction activity is important to our business and adverse conditions or sustained uncertainty regarding this market could adversely affect our financial results.
New water and wastewater infrastructure spending is heavily dependent upon residential construction. As a result, our financial performance depends significantly on the stability and growth of the residential construction market. This market depends on a variety of factors beyond our control, including household formation, consumer confidence, interest rates, inflation and the availability of mortgage financing, as well as the mix between single and multifamily construction, availability of construction labor and ultimately the extent to which new construction leads to the development of raw land. Adverse conditions or sustained uncertainty regarding the residential construction market could adversely affect our sales, profitability and cash flows, including the risk that one or more of our distributors and/or end use customers decide to delay purchasing, or determine not to purchase, our products or services.
Our business depends on a small group of key customers for a significant portion of our sales.
Infrastructure sells products primarily to distributors and our success depends on these outside parties operating their businesses profitably and effectively. These distributors’ profitability and effectiveness can vary significantly from company to company and from region to region within the same company. Further, our largest distributors generally also carry competing products. We may fail to align our operations with successful distributors in any given market.
Distributors in our industry have experienced consolidation in recent years. If such consolidation continues, our distributors could be acquired by other distributors who have better relationships with our competitors and pricing and profit margin pressure may intensify. Pricing and profit margin pressure or the loss of any one of our key distributors in any market could adversely affect our operating results.
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Technologies primarily sells directly to end users. Some of these customers represent a relatively high concentration of net sales. Over time, expected growth in sales is expected to lessen the significance of individual customers. In the short term, net sales could decline if existing significant customers do not continue to purchase our products or services and new customers are not obtained to replace them.
Strong competition could adversely affect prices and demand for our products and services, which would adversely affect our operating results.
The U.S. and Canadian markets for water infrastructure and flow control products are very competitive. While there are only a few competitors for most of our product and service offerings, many of our competitors are well-established companies with strong brand recognition. We compete on the basis of a variety of factors, including the quality, price and innovation of our products, services and service levels. Our ability to retain our customers in the face of competition depends on our ability to market our products and services to our customers and end users effectively.
The U.S. markets for water metering products and systems are highly competitive. Our primary competitors benefit from strong market positions and many end users are slow to transition to new products or new brands. Our ability to gain customers depends on our technological advancements and ability to market our products and services to our customers and end users effectively.
In addition to competition from North American companies, we face the threat of competition from outside of North America. The intensity of competition from these companies is affected by fluctuations in the value of the U.S. dollar against their local currencies, the cost to ship competitive products into North America and the availability of trade remedies, if any. Competition may also increase as a result of U.S. competitors shifting their operations to lower-cost countries or otherwise reducing their costs.
Our competitors may reduce the prices of their products or services, improve their quality, improve their functionality or enhance their marketing or sales activities. Any of these potential developments could adversely affect our prices and demand for our products and services.
The long-term success of our newer systems and solutions, including the related products, software and services, such as smart metering, leak detection and pipe condition assessment, depends on market acceptance.
Technologies’ smart metering and leak detection and pipe condition assessment products and services have much less market history than many of Infrastructure’s products. Our investments in smart metering have primarily focused on the market for AMI and have been based on our belief that water utilities will transition over time from traditional manually-read meters to automatically-read meters. The market for AMI is relatively new and continues to evolve, and the U.S. markets for water meter products and systems are highly competitive. Water utilities have traditionally been slow adopters of new technology and may not adopt AMI as quickly as we expect, due, in part, to the substantial investment related to installation of AMI systems. The strong market positions of our primary competitors may also slow the adoption of our products. Similarly, the adoption of our leak detection and pipe condition assessment products and services depends on the willingness of our customers to invest in new product and service offerings, and the pace of adoption may be slower than we expect. If the market for AMI develops more slowly than we expect or if our new leak detection and pipe condition assessment products and services fail to gain market acceptance, our opportunity to grow these businesses will be limited.
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Risks related to our business strategy
We may not be able to adequately manage the risks associated with the introduction and deployment of new products and systems, including increased warranty costs.
The success of our new products and systems, such as our recently launched smart hydrant and Sentryx software platform, will depend on our ability to manage the risks associated with their introduction, including the risk that new products and systems may have quality or other defects or deficiencies in their early stages that result in their failure to satisfy performance or reliability requirements. Our success will depend in part on our ability to manage these risks, including costs associated with manufacturing, installation, maintenance and warranties. These challenges can be costly and technologically challenging, and we cannot determine in advance the ultimate effect they may have. For example, during the quarters ended March 30, 2017 and June 30, 2018, we recorded discrete warranty expenses of $9.8 million and $14.1 million, respectively, associated with certain products that Technologies produced prior to 2017, as described more fully in Note 18. to the Notes to the Consolidated Financial Statements. Warranty liabilities and the related reserve estimation process is highly judgmental due to the complex nature of these exposures and the unique circumstances of each claim. Furthermore, once claims are asserted for an alleged product defect by municipalities or other customers, it can be difficult to determine the level of potential exposure or liability related to such allegation to which the assertion of these claims will expand geographically. Although we have obtained insurance for product liability claims, such policies may not be available or adequate to cover the liability for damages, the cost of repairs and/or the expense of litigation. Current and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors. Failure to successfully manage these challenges could result in lost revenue, significant expenses, and harm to our reputation.
Inefficient or ineffective allocation of capital, along with increased capital expenditure levels to modernize our aging facilities and expand our capabilities, could adversely affect our operating results and/or shareholder value, including negatively impacting our available cash reserves and prevent acquisition or other cash-intensive opportunities.
Our goal is to invest capital to generate long-term value for our shareholders. This includes spending on capital projects, such as developing or acquiring strategic businesses, technologies and product lines with the potential to strengthen our industry position, enhancing our existing set of product and service offerings, or entering new markets, as well as periodically returning value to our stockholders through share repurchases and dividends. For example, we have completed the construction of our large valve manufacturing expansion in Chattanooga, Tennessee and made an additional investment in a facility in Kimball, Tennessee to further expand our capabilities in the area and allow us to insource more products and operations. We also expect to make significant progress in fiscal 2021 on the construction of our new brass manufacturing facility in Decatur, Illinois, which we expect to be completed in 2022. To a large degree, capital efficiency reflects how well we manage key risks. The actions taken to address specific risks may affect how well we manage the more general risk of capital efficiency. If we do not properly allocate and manage our capital, we may fail to produce optimal financial results and we may experience a reduction in stockholder value, including increased volatility in our stock price.
We may not realize the expected benefits from our strategic reorganization plans.
During October 2018, we announced the move of our Middleborough, Massachusetts facility to Atlanta, which will allow us to consolidate our resources and accelerate product innovation through creation of a research and development center of excellence for software and electronics in Atlanta, Georgia. As a result of this reorganization, we expect annual cost savings of approximately $1.5 million, which takes into account the hiring and alignment of new engineering talent.
During November 2019, we announced the purchase of a new facility in Kimball, Tennessee, which will allow us to support and enhance our investment in our Chattanooga large casting foundry. As a result of this reorganization, we announced the subsequent closures of our facilities in Hammond, Indiana and Woodland, Washington. We have incurred $2.5 million in charges related to this reorganization in fiscal 2020. We cannot guarantee that the activities under the restructuring and reorganization activities will result in the desired efficiencies and estimated cost savings.
Our business strategy includes developing, acquiring and investing in companies and technologies that broaden our product portfolio or complement our existing business, which could be unsuccessful or consume significant resources and adversely affect our operating results.
As part of our long-term business strategy, we will continue to evaluate the development or acquisition of strategic businesses, technologies and product lines with the potential to strengthen our industry position, enhance and expand our existing set of product and service offerings, or enter new markets. We may be unable to identify or successfully complete suitable acquisitions in the future and completed acquisitions may not be successful.
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Acquisitions and technology investments may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. These types of transactions involve numerous other risks, including:
•Diversion of management time and attention from existing operations;
•Difficulties in integrating acquired businesses, technologies and personnel into our business or into our compliance and control programs, particularly those that involve international operations;
•Working with partners or other ownership structures with shared decision-making authority (our interests and other ownership interests may be inconsistent);
•Difficulties in obtaining and verifying relevant information regarding a business or technology prior to the consummation of the transaction, including the identification and assessment of liabilities, claims or other circumstances, including those relating to intellectual property claims, that could result in litigation or regulatory exposure;
•Assumptions of liabilities that exceed our estimated amounts;
•Verifying the financial statements and other business information of an acquired business;
•Inability to obtain required regulatory approvals and/or required financing on favorable terms;
•Potential loss of key employees, contractual relationships or customers;
•Increased operating expenses related to the acquired businesses or technologies;
•The failure of new technologies, products or services to gain market acceptance with acceptable profit margins;
•Entering new markets in which we have little or no experience or in which competitors may have stronger market positions;
•Dilution of interests of holders of our common shares through the issuance of equity securities or equity-linked securities; and
•Inability to achieve expected synergies or the achievement of such synergies taking longer than expected to realize, including increases in revenue, enhanced efficiencies, or increased market share, or the benefits may ultimately be smaller than we expected.
Any acquisitions or investments may ultimately harm our business or financial condition, as they may not be successful and may ultimately have an adverse effect on our operating results or financial condition and/or result in impairment charges.
Potential international business opportunities may expose us to additional risks, including currency exchange fluctuations.
A part of our growth strategy depends on us expanding internationally. Although net sales outside of the United States and Canada account for a relatively small percentage of our total net sales, we expect to increase our level of business activity outside of the United States and Canada, as illustrated by our acquisition of Krausz Industries, which is based in Tel Aviv, Israel, in December 2018. Some countries that present potential good business opportunities also face political and economic instability and vulnerability to infrastructure and other disruptions. Seeking to expand our business internationally exposes us to additional risks, which include foreign exchange risks and currency fluctuations (as discussed more fully below), political and economic uncertainties, changes in local business conditions and national and international conflicts. A primary risk we face in connection with our export shipments relates to our ability to collect amounts due from customers. We also face the potential risks arising from staffing, monitoring and managing international operations, including the risk such activities may divert our resources and management time.
In addition, compliance with the laws and regulations of multiple international jurisdictions increases our cost of doing business. International operations are subject to anti-corruption laws and anti-competition regulations, among others. For example, the U.S. Foreign Corrupt Practices Act and similar non-U.S. anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials and certain others for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Violations of these laws and regulations could result in criminal and civil sanctions, disrupt our business and adversely affect our brands, international expansion efforts, business and operating results.
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We earn revenues and incur expenses in foreign currencies as part of our operations outside of the United States. Accordingly, fluctuations in currency exchange rates may significantly increase the amount of U.S. dollars required for foreign currency expenses or significantly decrease the U.S. dollars we receive from foreign currency revenues. As a result, changes between the foreign exchange rates and the U.S. dollar affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We expect that our exposure to foreign currency exchange rate fluctuations will grow as the relative contribution of our non-U.S. operations increases through both organic and inorganic growth.
Risks related to our operations
Our reliance on vendors for certain products, some of which are single-source or limited source suppliers, could harm our business by adversely affecting product availability, reliability or cost.
We maintain several single-source or limited-source supplier relationships with manufacturers, including some outside of the United States. If the supply of a critical single- or limited-source product is delayed or curtailed, we may not be able to ship the related products in desired quantities or in a timely manner. Even where multiple sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could harm our operating results.
These relationships reduce our direct control over production. Our reliance on these vendors subjects us to a greater risk of shortages, and reduced control over delivery schedules of products, as well as a greater risk of increases in product costs. In instances where we stock lower levels of product inventories, a disruption in product availability could harm our financial performance and our ability to satisfy customer needs. In addition, defective products from these manufacturers could reduce product reliability and harm our reputation.
A disruption in our supply chain or other factors impacting the distribution of our products could adversely affect our business.
A disruption within our logistics or supply chain network at any of the freight companies that deliver components for our manufacturing operations in the United States or ship our fully-assembled products to our customers could adversely affect our business and result in lost sales or harm to our reputation. Our supply chain is dependent on third party ocean-going container ships, rail, barge and trucking systems and, therefore, disruption in these logistics services because of weather-related problems, strikes, bankruptcies or other events could adversely affect our financial performance and financial condition, negatively impacting sales, profitability and cash flows.
Seasonal demand for certain of our products and services may adversely affect our financial results.
Sales of some of our products, including iron gate valves and fire hydrants, are seasonal, with lower sales in our first and second fiscal quarters when weather conditions throughout most of North America tend to be cold resulting in lower levels of construction activity.This seasonality in demand has resulted in fluctuations in our sales and operating results.To satisfy demand during expected peak periods, we may incur costs associated with building inventory in off-peak periods, and our projections as to future needs may not be accurate.Because many of our expenses are fixed, seasonal trends can cause reductions in our profitability and profit margins and deterioration of our financial condition during periods affected by lower production or sales activity.
Transportation costs are relatively high for most of our products.
Transportation costs can be an important factor in a customer’s purchasing decision. Many of our products are big, bulky and heavy, which tend to increase transportation costs. We also have relatively few manufacturing sites, which tends to increase transportation distances to our customers and costs. High transportation costs could make our products less competitive compared to similar or alternative products offered by competitors.
Our high fixed costs may make it more difficult for us to respond to economic cycles.
A significant portion of our cost structure is fixed, including manufacturing overhead, capital equipment and research and development costs. In a prolonged economic downturn, these fixed costs may cause our gross margins to erode and earnings to decline.
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We may experience difficulties implementing upgrades to our enterprise resource planning system.
We continue to be engaged in a multi-year implementation of upgrades to our enterprise resource planning system (ERP) and other systems. The ERP is designed to accurately maintain the company’s books and records and provide information important to the operation of the business to the company’s management team. These upgrades will require significant investment of human and financial resources. In implementing the ERP upgrade, we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP upgrades could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. While we have invested significant resources in planning and project management, significant implementation issues may arise.
Normal operations at our key manufacturing facilities may be interrupted.
Some of our key products, including fire hydrants and iron gate valves, are manufactured at single or few manufacturing facilities that depend on critical pieces of heavy equipment that cannot be economically moved to other locations. We are therefore limited in our ability to shift production among locations. The operations at our manufacturing facilities may be interrupted or impaired by various operating risks, including, but not limited to:
•Catastrophic events, such as fires, floods, explosions, natural disasters, severe weather or other similar occurrences;
•Terrorist attacks, war, mass shootings or other acts of violence;
•Interruptions in the delivery of raw materials, shortages of equipment or spare parts, or other manufacturing inputs;
•Adverse government regulations;
•Equipment or information systems breakdowns or failures;
•Violations of our permit requirements or revocation of permits;
•Releases of pollutants and hazardous substances to air, soil, surface water or ground water;
•Labor disputes; and
•Cyberattacks and events.
The occurrence of any of these events may impair our production capabilities and adversely affect our sales, profitability and cash flows.
Any inability to protect our intellectual property or our failure to effectively defend against intellectual property infringement claims could adversely affect our competitive position.
Our business depends on our technology and expertise, which were largely developed internally and are not subject to statutory protection. We rely on a combination of patent protection, copyright and trademark laws, trade secrets protection, employee and third-party confidentiality agreements and technical measures to protect our intellectual property rights. The measures that we take to protect our intellectual property rights may not adequately deter infringement, misappropriation or independent development of our technology, and they may not prevent an unauthorized party from obtaining or using information or intellectual property that we regard as proprietary or keep others from using brand names similar to our own. The disclosure, misappropriation or infringement of our intellectual property could harm our competitive position. In addition, our actions to enforce our rights may result in substantial costs and the diversion of management time and other resources. We may also be subject to intellectual property infringement claims from time to time, which may result in additional expenses and diverting resources to respond to these claims. Finally, for those products in our portfolio that rely on patent protection, once a patent has expired the product is more subject to competition. Products under patent protection potentially generate significantly higher revenue and earnings than those not protected by patents. If we fail to successfully enforce our intellectual property rights or register new patents, our competitive position could suffer, which could adversely affect our business, financial condition, results of operations and cash flows.
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If we do not successfully maintain our information and technology networks, including the security of those networks, our operations could be disrupted and unanticipated increases in costs and/or decreases in revenues could result.
We rely on various information technology systems, some of which are controlled by outside service providers, to manage key aspects of our operations. The proper functioning of our information technology systems is important to the successful operation of our business. If critical information technology systems fail, or are otherwise unavailable, our ability to manufacture products, process orders, track credit risk, identify business opportunities, maintain proper levels of inventories, collect accounts receivable, pay expenses and otherwise manage our business would be adversely affected.
We depend on the Internet and our information technology infrastructure for electronic communications among our locations around the world and among our personnel and suppliers and customers. Cyber and other data security breaches of this infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we or our service providers are unable to prevent these breaches, our operations could be disrupted or we may suffer financial, reputational or other harm because of lost or misappropriated information.
We may fail to effectively manage confidential data, which could harm our reputation, result in substantial additional costs and subject us to litigation.
As we grow our Technologies businesses, we continue to accumulate increasing volumes of customer data. In addition, we store personal information in connection with our human resources operations. Our efforts to protect this information may be unsuccessful due to employee errors or malfeasance, technical malfunctions, the actions of third parties (such as cyber attack) or other factors. If our cyber defenses and other countermeasures we deploy are unable to protect personal data, it could be accessed or disclosed improperly, which could expose us to liability, harm our reputation and deter current and potential users from using our products and services. The regulatory environment related to cyber and information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.
Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our reputation.
Cyberthreats are constantly evolving and can take a variety of forms, increasing the difficulty of detecting and successfully defending against them. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our products and services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Inadequate account security practices may also result in unauthorized access to confidential data.
We may have no current capability to detect certain vulnerabilities, which may allow them to persist in the environment over long periods of time. Cyberthreats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers. Breaches of our facilities, network, or data security could disrupt the security of our systems and business applications, impair our ability to provide services to our customers and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our reputation, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improved technologies, or otherwise adversely affect our business.
We may be affected by new governmental legislation and regulations relating to carbon dioxide emissions.
Many of our manufacturing plants use significant amounts of electricity generated by burning fossil fuels, which releases carbon dioxide.Several state courts and administrative agencies are considering the scope and scale of carbon dioxide emission regulation under various laws pertaining to the environment, energy use and development and greenhouse gas emissions.In addition, several states are considering various carbon dioxide registration and reduction programs.The final details and scope of these various legislative, regulatory and policy measures are unclear and their potential impact is still uncertain, so we cannot fully predict the impact on our business.
The potential impacts of climate change on our operations are highly uncertain.Although the financial impact of these potential changes is not reasonably estimable at this time, our operations in certain locations and those of our customers and suppliers could potentially be adversely affected, which could adversely affect our sales, profitability and cash flows.
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We are subject to a variety of claims, investigations and litigation that could adversely affect our results of operations and harm our reputation.
In the normal course of our business, we are subject to claims and lawsuits, including from time to time claims for damages related to product liability and warranties, investigations by governmental agencies, litigation alleging the infringement of intellectual property rights and litigation related to employee matters and commercial disputes. We may also be subject to investigations, claims, litigation and other proceedings outside the ordinary course of business, such as the February 2019 mass shooting event we experienced in our Aurora, Illinois facility. Defending these lawsuits and becoming involved in these investigations may divert our management’s attention, and may cause us to incur significant expenses, even if there is no evidence that our systems or components were the cause of the claim. In addition, we may be required to pay damage awards, penalties or settlements, or become subject to injunctions or other equitable remedies, that could have a material adverse effect on our business, financial condition, results of operations and cash flows. Moreover, any insurance or indemnification rights that we have may be insufficient or unavailable to protect us against potential loss exposures. See “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 3. LEGAL PROCEEDINGS - Environmental,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 18. of the Notes to Consolidated Financial Statements.
We are subject to stringent environmental, health and safety laws and regulations that impose significant compliance costs. Any failure to satisfy these laws and regulations may adversely affect us.
We are subject to stringent laws and regulations relating to the protection of the environment, health and safety and incur significant capital and other expenditures to comply with these requirements. Failure to comply with any environmental, health or safety requirements could result in the assessment of damages, the imposition of penalties, suspension of production, changes to equipment or processes or a cessation of operations at our facilities, any of which could have a material adverse effect on our business. Because these laws are complex, subject to change and may be applied retroactively, we cannot predict with certainty the extent of our future liabilities with respect to environmental, health and safety matters and whether they will be material.
In addition, certain statutes such as CERCLA may impose joint and several liability for the costs of remedial investigations and actions on entities that generated waste, arranged for disposal of waste, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such “potentially responsible parties” (“PRP”) (or any one of them, including us) may be required to bear all of such costs regardless of fault, the legality of the original disposal or ownership of the disposal site. As a result, we may be required to conduct investigations and perform remedial activities at current and former operating and manufacturing sites where we have been, or in the future could be, named a PRP with respect to such environmental liabilities, any of which could require us to incur material costs. The final remediation costs of these environmental sites may exceed current estimated costs, and additional sites in the future may require material remediation expenses. If actual expenditures exceed our estimates, our results of operations and financial position could be materially and adversely affected. See “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 3. LEGAL PROCEEDINGS - Environmental,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 18. of the Notes to Consolidated Financial Statements.
We rely on successors to Tyco to indemnify us for certain liabilities and they may become financially unable or fail to comply with the terms of the indemnity.
Under the terms of the acquisition agreement relating to the August 1999 sale by Tyco of our businesses to a previous owner of these businesses, we are indemnified by certain Tyco entities (“Tyco Indemnitors”) for all liabilities arising in connection with the operation of these businesses prior to their sale by Tyco, including with respect to products manufactured or sold prior to the closing of that transaction, as well as certain environmental liabilities. These indemnities survive indefinitely and are not subject to any dollar limits. In the past, Tyco Indemnitors have made substantial payments and assumed defense of claims in connection with these indemnification obligations. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. The result of these transactions is that the assets of, and control over, Tyco Indemnitors has changed. Should any Tyco Indemnitor become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
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Risks related to our human capital
We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our business may be adversely affected.
Our ability to expand or maintain our business depends on our ability to hire, train and retain employees with the skills necessary to understand and adapt to the continuously developing needs of our customers. The increasing demand for qualified personnel makes it more difficult for us to attract and retain employees with requisite skill sets, particularly employees with specialized technical and trade experience. Changing demographics and labor work force trends also may result in a loss of knowledge and skills as experienced workers retire. If we fail to attract, motivate, train and retain qualified personnel, or if we experience excessive turnover, we may experience declining sales, manufacturing delays or other inefficiencies, increased recruiting, training and relocation costs and other difficulties, and our business, financial condition, results of operations and cash flows could be materially and adversely affected. Competition for qualified personnel is intense and we may not be successful in attracting or retaining qualified personnel, which could negatively impact our business.
Our expenditures for pension obligations could be materially higher than we have predicted.
We provide pension benefits to certain current and former employees. To determine our future payment obligations under the plans, certain rates of return on the plans’ assets, growth rates of certain costs and participant longevity have been estimated. The proportion of the assets held by our U.S. pension plan invested in fixed income securities, instead of equity securities, has increased over historical levels. This shift in asset allocation has resulted in a decrease in the estimated rate of return on plan assets for this plan. Assumed discount rates, expected return on plan assets and participant longevity have significant effects on the amounts reported for the pension obligations and pension expense.
The funded status of our pension plans can also be influenced by regulatory requirements, which can change unexpectedly and impose higher costs if funding levels are below certain thresholds. We may increase contributions to our pension plans to avoid or reduce these higher costs.
Significant adverse changes in credit and capital markets or changes in investments could result in discount rates or actual rates of return on plan assets being materially lower than projected and require us to increase pension contributions in future years to meet funding level requirements. Increasing life spans for plan participants may increase the estimated benefit payments and increase the amounts reported for pension obligations, pension contributions and pension expense. If increased funding requirements are particularly significant and sustained, our overall liquidity could be materially reduced, which could cause us, among other things, to reduce investments and capital expenditures, or restructure or refinance our debt.
Risks related to our international operations
Any failure to satisfy international trade laws and regulations or to otherwise comply with changes or other trade developments may adversely affect us.
Our operations require importing and exporting goods and technology among countries on a regular basis. Thus, the sale and shipment of our products and services across international borders, as well as the purchase of components and products from international sources, subject us to extensive trade laws and regulations. Trade laws and regulations are complex, differ by country, and are enforced by a variety of government agencies. Because we are subject to extensive trade laws and regulations in the countries in which we operate, we are subject to the risk that laws and regulations could change in a way that would expose us to additional costs, penalties or liabilities, and our policies and procedures may not always protect us from actions that would violate international trade laws and regulations. For example, certain federal legislation requires the use of American iron and steel products in certain water projects receiving certain federal appropriations. We have incurred costs in connection with ensuring our ability to certify to these requirements, including those associated with enhancing our assembly operations and sourcing practices. As a result of the varying legal and regulatory requirements to which our cross-border activities are subject, we may not always be in compliance with the trade laws and regulations in all respects. Any improper actions could subject us to civil or criminal penalties, including material monetary fines, or other adverse actions, including denial of import or export privileges, and could harm our reputation and our business prospects.
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If significant tariffs or other restrictions continue to be placed on foreign imports by the United States and related counter-measures are taken by impacted foreign countries, our revenue and results of operations may be harmed.
If significant tariffs or other restrictions continue to be placed on foreign imports by the United States and related counter-measures are taken by impacted foreign countries, our revenue and results of operations may be harmed.The Trump Administration has signaled that it may continue to alter trade agreements and terms between China and the United States, including limiting trade with China and/or imposing additional tariffs on imports from China most recently resulting in a Phase One trade deal in January of 2020.In March 2018, President Trump imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports and announced additional tariffs on goods imported from China specifically, as well as certain other countries.The materials subject to these tariffs to date can impact our raw material costs as well. However, if further tariffs are imposed on a broader range of imports, or if further retaliatory trade measures are taken by China or other countries in response to additional tariffs, we may be required to raise our prices or incur additional expenses, which may result in the loss of customers and harm our operating performance.
The prices of our purchased components and raw materials can be volatile.
Our operations require substantial amounts of purchased components and raw materials, such as scrap steel, sand, resin, brass ingot and steel pipe. We generally purchase components and raw materials at current market prices. The cost and availability of these materials are subject to economic forces largely beyond our control, including North American and international demand, foreign currency exchange rates, freight costs, tariffs and commodity speculation.
We may not be able to pass on the entire cost of price increases for purchased components and raw materials to our customers or offset fully the effects of these higher costs through productivity improvements. In particular, when purchased component or raw material prices increase rapidly or to significantly higher than normal levels, we may not be able to pass cost increases through to our customers on a timely basis, if at all, which would reduce our profitability and cash flows. In addition, if purchased components or raw materials were not available or not available on commercially reasonable terms, our sales, profitability and cash flows would be reduced. Our competitors may secure more reliable sources of purchased components and raw materials or they may obtain these supplies on more favorable terms than we do, which could give them a cost advantage.
Other risks related to our business
The negative impact of the COVID-19 pandemic on our operations may increase
The outbreak of COVID-19 is impacting cities, states and countries around the world and is temporarily changing the way we live and work. The pandemic has also caused a shift in how we manage our business, think about work and how our work gets done. Businesses as well as federal, state and local governments have implemented significant measures to attempt to mitigate this public health crisis and may continue to take additional actions. Although we cannot determine the ultimate severity or duration of the pandemic at this time, the pandemic is having meaningful adverse impacts on our financial condition and results of operations as discussed in PART II, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”. As the impact of the pandemic continues, we may continue to experience additional plant closures, limitations in the ways we operate within our facilities, illness or quarantine of our employees, supply chain disruptions, transportation delays, cost increases, more extensive travel restrictions, closures or disruptions of businesses and facilities, or social, economic, political or labor instability in the affected areas. These same factors may continue to impact our suppliers, customers and distributors and the severity of such impacts could increase. We have implemented significant changes to the way we work in an attempt to enhance and secure the health and safety of our workforce and the communities in which they operate. However, the health implications of the pandemic are extensive and the extent, duration and severity of the pandemic are highly uncertain. It is also uncertain whether the measures we have taken — and additional measures we may undertake in the future — and the actions taken by governmental agencies will be successful. Accordingly, should there be unexpected health implications for our employees, communities or others, we could face litigation or other claims and we could suffer damage to our reputation, brand and operations, which could adversely affect our business.
We have incurred additional costs to address the pandemic as discussed in PART II, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,”, including costs associated with unfavorable volume variances, voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities. We expect to continue to incur such costs, which may be significant, as we continue to implement operational changes in response to this pandemic. All of our facilities were operational and able to fill orders on November 17, 2020, and our teams have worked effectively to address the few temporary closures we have experienced. The pandemic has also caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist for the near term and may worsen until the pandemic abates.
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Continued disruptions in our markets and the global economy may cause us to have to assess impairments of our assets and cause us to incur and record non-cash impairment charges.
Further, our management is focused on mitigating the impact of the pandemic on our operations, which has required, and will continue to require, a large investment of time and resources across our business and may delay other strategic initiatives and large capital projects that are important to the business. Additionally, many of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
The extent to which the pandemic impacts us will depend on a number of factors and developments that we are not able to predict or control, including, among others: the severity of the virus; the duration of the outbreak; governmental, business and other actions (which could include limits on funding for our products or services); the health of and the effect on our workforce; and the potential effects on our internal controls including those over financial reporting and information technology as a result of changes in working environments such as shelter-in-place and similar orders that are applicable to our employees, including management. In addition, if the pandemic continues to create disruptions or turmoil in the credit or financial markets, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted.
We also cannot predict the impact that the pandemic will have on third parties with which we do business, and each of their financial conditions, including their viability and ability to pay for our products and services; however, any material effect on these parties could adversely impact us. The extent of the impact of the pandemic on our operations and financial results depends on future developments and is highly uncertain. The situation is changing rapidly and future impacts may materialize that are not yet known.
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Item 2.PROPERTIES
Our principal properties are listed below.
Location Activity Size (sq. ft.) Owned orleased
Infrastructure:
Albertville, AL Manufacturing 422,000 Owned
Ariel, Israel Manufacturing 221,000 Leased
Aurora, IL Manufacturing 147,000 Owned
Aurora, IL Distribution 84,000 Leased
Barrie, Ontario Distribution 50,000 Leased
Brownsville, TX Manufacturing 50,000 Leased
Calgary, Alberta Distribution 11,000 Leased
Chattanooga, TN Manufacturing 525,000 Owned
Chattanooga, TN General and administration 17,000 Leased
Chattanooga, TN Research and development 22,000 Leased
Cleveland, TN Manufacturing 109,500 Owned
Dallas, TX Distribution 26,000 Leased
Decatur, IL Manufacturing 467,000 Owned
Emporia, KS Manufacturing 28,000 Leased
Hammond, IN Manufacturing 51,000 Owned
Jingmen, China Manufacturing 154,000 Owned
Kimball, TN Manufacturing 233,000 Owned
Ocala, FL Distribution 50,000 Leased
Ontario, CA Distribution 73,000 Leased
Surrey, British Columbia Manufacturing 33,000 Leased
Tai Cang, China Manufacturing 19,000 Leased
Woodland, WA Manufacturing 20,000 Leased
Sharjah, United Arab Emirates Distribution 10,000 Leased
Technologies:
Cleveland, NC Manufacturing 190,000 Owned
Atlanta, GA Research and development 21,000 Leased
Toronto, Ontario Research and development 18,000 Leased
Corporate:
Atlanta, GA Corporate headquarters 25,000 Leased
We consider our facilities to be well maintained and believe we have sufficient capacity to meet our anticipated needs through 2021. Our leased properties have terms expiring at various dates through 2033.
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Item 3.LEGAL PROCEEDINGS
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described elsewhere in this annual report, we do not believe that any of our outstanding litigation would have a material adverse effect on our business or prospects.
See “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 1A. RISK FACTORS - We are subject to increasingly stringent environmental, health and safety laws and regulations that impose significant compliance costs. Any failure to satisfy these laws and regulations may adversely affect us,” “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Contingencies” and Note 18. of the Notes to Consolidated Financial Statements.
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PART II
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the trading symbol MWA.
Covenants contained in certain of the debt instruments described in Note 8. of the Notes to Consolidated Financial Statements restrict the amount we can pay in cash dividends. Future dividends will be declared at the discretion of our board of directors and will depend on our future earnings, financial condition and other factors.
At September 30, 2020, there were 98 stockholders of record for our common stock. This figure does not include stockholders whose shares are held in street name or otherwise beneficially held.
Equity Compensation Plan Information
The information regarding our compensation plans under which equity securities are authorized for issuance is set forth in “Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.”
Sale of Unregistered Securities
We did not issue any unregistered securities within the past three years.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock in the quarter ended September 30, 2020.
Stock Price Performance Graph
The following graph compares the cumulative quarterly stock market performance of our common stock with the Russell 2000 Stock Index (“Russell 2000”) and the Dow Jones U.S. Building Materials & Fixtures Index (“DJ U.S. Building Materials & Fixtures”) since September 30, 2015. Total return values were calculated based on cumulative total return assuming (i) the investment of $100 in our common stock, the Russell 2000 and the DJ U.S. Building Materials & Fixtures on the dates indicated and (ii) reinvestment of all dividends.
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Item 6.SELECTED FINANCIAL DATA
The selected financial and other data presented below should be read in conjunction with, and are qualified by reference to, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the consolidated financial statements and notes thereto included elsewhere in this annual report.
(in millions, except per share data)
Statement of operations data:
Gain on sale of idle property — (2.4) (9.0) — —
Loss on early extinguishment of debt — — 6.5 — —
Walter Energy Accrual 0.2 22.0 — — —
Pension costs (benefit) other than service (3.0) 0.4 1.0 1.4 19.3
Gain on settlement of interest rate swap contracts — — (2.4) — —
Discontinued operations(1) — — — 69.0 18.8
Earnings per basic share:
Discontinued operations(1) — — — 0.43 0.12
Earnings per diluted share:
Discontinued operations(1) — — — 0.42 0.12
Weighted average shares outstanding:
Balance sheet data (at September 30):
Other data (year ended September 30):
(1)In 2017, we sold Anvil. The results of its operations and the gain on the sale of Anvil are classified as discontinued operations for 2016 and 2017, as applicable.
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Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this annual report.
Overview
Organization Updates
On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million. The acquisition of Krausz was financed with cash on hand. The results of Krausz are included within our Infrastructure segment for all periods following the acquisition date.
In October 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for a payment of $5.2 million to our joint venture partner.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.
Business
We operate our business through two segments, Infrastructure and Technologies.
We estimate approximately 60% to 65% of the Company’s 2020 net sales were associated with repair and replacement directly related to municipal water infrastructure spending, approximately 25% to 30% were related to residential construction activity and less than 10% were related to natural gas utilities.
We expect the operating environment to continue to be very challenging, due to the uncertainty around the depth and duration of the pandemic in fiscal 2021. We anticipate that growth in the residential construction end market will help offset anticipated challenges in the project-related portion of the municipal end market.
Infrastructure
Municipal spending in 2020 was impacted by the pandemic in the second half of our year, and although the industry recovered towards the end of our fiscal year as compared with the prior year, uncertainty remains related to the pandemic. According to the U.S. Bureau of Economic Analysis, state and local tax receipts for the quarter ended September 30, 2020 were down year-over-year primarily due to pandemic conditions. According to the U.S. Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 2020 increased 3.3%. However, water conservation efforts and the economic effects of the pandemic have resulted in lower overall receipts for some U.S. water utilities.
The year-over-year percentage change in housing starts is a key indicator of demand for Infrastructure’s products sold in the residential construction market. In October 2020, Blue Chip Economic Indicators forecasted a 4.5% increase in housing starts for calendar 2021 compared to the prior year.
Technologies
The municipal market is the key end market for Technologies. The businesses in Technologies are primarily project-oriented and depend on customer adoption of their technology-based products and services. We entered 2021 with a backlog of $48.2 million at Mueller Systems, largely for AMI products, some of which will ship in 2022 and beyond.
Consolidated
For our fiscal year 2021, we anticipate that consolidated net sales will be between flat and 3 percent higher than the prior year as we believe that continued strong growth in the residential construction end market will offset any challenges in the project-related areas of our business. In 2020, we benefited from declining costs for raw materials, particularly brass ingot and scrap steel but we expect inflation in raw material costs in 2021.
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Results of Operations
Year Ended September 30, 2020 Compared to Year Ended September 30, 2019
Infrastructure Technologies Corporate Total
(in millions)
Operating expenses:
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
Infrastructure Technologies Corporate Total
(in millions)
Operating expenses:
Gain on sale of idle property (2.4) — — (2.4)
Pension costs other than service 0.4
Interest expense, net 19.8
Walter Energy Accrual 22.0
Income before income taxes 82.1
Income tax expense 18.3
Net income $ 63.8
Consolidated Analysis
Net sales for 2020 decreased 0.4% to $964.1 million from $968.0 million in the prior year primarily due to lower volume at both segments, which were impacted by the pandemic, partially offset by $18.2 million higher pricing across both segments and the inclusion of first quarter 2020 net sales of Krausz, which we acquired in December of 2018.
Gross profit was $328.2 million for 2020 and $320.9 million in the prior year and gross margin increased to 34.0% in 2020 from 33.2% in the prior year. These increases were primarily due to Krausz gross profit and higher pricing exceeding cost inflation in the current year. Current year gross profit was reduced by $9.5 million due to pandemic-related costs and production inefficiencies and prior year gross profit was reduced by $6.8 million in Krausz inventory amortization costs.
Selling, general and administrative expenses (“SG&A”) increased 8.6% to $198.4 million for 2020 from $182.7 million in the prior year, and increased 170 basis points to 20.6% of net sales from 18.9% of net sales in the prior year. The increase in SG&A was primarily due to the addition of SG&A of Krausz in the first quarter and increased personnel-related and information technology costs, which were offset by pandemic-driven temporary benefits of $6.8 million resulting from reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.
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Other charges for 2020 consisted primarily of costs related to the settlement of the Siemens litigation, our strategic reorganizations, the retirement of an executive, and the acquisition of Krausz. In 2019, other charges consisted primarily of costs related to our previously announced strategic reorganizations, the Aurora tragedy and the acquisition of Krausz, net of a gain on sale of an idle property in Quebec, Canada.
Interest expense, net increased $5.7 million in 2020 from the prior year primarily as a result of reduced interest income due to lower interest rates and a non-cash adjustment to capitalized interest in the current year. The components of interest expense, net are provided below.
(in millions)
Deferred financing costs amortization 1.2 1.2
ABL Agreement 0.6 0.6
Capitalized interest (0.3) (3.0)
Other interest expense (income) 0.3 (0.2)
Interest income (1.1) (3.5)
Income tax expense of $22.1 million in 2020 was at an effective income tax rate of 23.5%, which was higher than the 22.3% rate in the prior year, which included tax benefits related to the Walter Energy tax matter and U.S. federal transition tax.
Segment Analysis
Infrastructure
Net sales for 2020 increased 1.7% to $885.5 million from $871.0 million in the prior year. Net sales increased primarily due to favorable pricing of $16.6 million and inclusion of first quarter 2020 Krausz net sales, which offset lower organic volume.
Gross profit for 2020 increased 4.5% to $316.4 million from $302.9 million in the prior year primarily due to favorable sales pricing and Krausz gross profit, partially offset by $8.0 million due to pandemic-related costs and production inefficiencies. Gross profit in 2019 was reduced by $6.8 million of Krausz inventory fair value amortization. Gross margin was 35.7% in 2020, a 90 basis point improvement versus 34.8% in the prior year.
SG&A in 2020 increased 6.4% to $129.1 million from $121.3 million in the prior year primarily due to the inclusion of Krausz SG&A in the first quarter and increased personnel-related and information technology costs, which were partially offset by $5.4 million in temporary pandemic-driven savings resulting from reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions. SG&A was 14.6% and 13.9% of net sales for 2020 and 2019, respectively.
Technologies
Net sales in 2020 decreased to $78.6 million from $97.0 million in the prior year primarily due to lower shipment volumes at both Echologics and Mueller Systems due to timing of large customer orders in the prior year and the effects of the pandemic, which were partially offset by higher prices.
Gross profit in 2020 decreased $6.2 million to $11.8 million from $18.0 million in the prior year. Gross margin decreased to 15.0% in 2020 from 18.6% in the prior year. Gross profit and gross margin were primarily reduced by lower volumes as well as $1.5 million of pandemic-related costs and production inefficiencies.
SG&A decreased to $24.8 million in 2020 from $26.7 million in the prior year primarily due to temporary reduced travel, trade show and event expenses as well as reduced personnel-related expenses. SG&A as a percentage of net sales was 31.6% for 2020 and 27.5% in the prior year.
Corporate
SG&A was $44.5 million in 2020 and $34.7 million 2019. SG&A was higher in 2020 due to increased personnel-related costs and information technology costs, which were offset by pandemic-driven benefits resulting from temporary reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.
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Year Ended September 30, 2019 Compared to Year Ended September 30, 2018
Management’s Discussion and Analysis comparing the results for the year ended September 30, 2019 to the results for the year ended September 30, 2018 can be found in our Form 10-K for the year ended September 30, 2019.
Financial Condition
Cash and cash equivalents were $208.9 million at September 30, 2020 and $176.7 million at September 30, 2019. Cash and cash equivalents increased during 2020 due to increased cash from operating activities, which benefited from targeted efforts to reduce inventory levels, cost control measures put in place in response to the pandemic, and pandemic-related savings on travel trade show and event spending. These increases were partially offset primarily by capital expenditures of $67.7 million, dividend payments of $33.1 million and settlement of the Walter tax matter of $22.0 million.
Receivables were $180.8 million at September 30, 2020 and $172.8 million million at September 30, 2019. The timing of shipments within each year, primarily within the fourth quarters, primarily caused this increase.
Inventories were $162.5 million at September 30, 2020 and $191.4 million at September 30, 2019. Inventories decreased during 2020 due primarily due to targeted efforts to reduce inventory levels.
Property, plant and equipment, net was $253.8 million at September 30, 2020 and $217.1 million at September 30, 2019, and depreciation expense was $29.6 million in 2020 compared to $26.0 million in 2019. Property, plant and equipment increased primarily due to our previously-announced capital expansion projects in Chattanooga and Kimball, Tennessee and Decatur, Illinois. Capital expenditures, including software development costs capitalized and capitalized interest, were $67.7 million in 2020. Depreciation expense is higher due to the generally higher level of capital expenditures over the last three years.
Intangible assets were $408.9 million at September 30, 2020 and $433.7 million at September 30, 2019. Finite-lived intangible assets, $137.2 million of net book value at September 30, 2020, are amortized over their estimated useful lives, with amortization expense of $28.2 million in 2020 compared to $27.0 million in 2019. We expect amortization expense of these assets will range from approximately $26 million to approximately $28 million in each of the next four years with a decrease to approximately $6 million in fiscal 2025. Indefinite-lived intangible assets, $271.6 million at September 30, 2020, are not amortized, but tested at least annually for possible impairment.
Accounts payable and other current liabilities were $153.9 million at September 30, 2020 and $177.6 million at September 30, 2019. Payables decreased during 2020 due primarily to the settlement of the Walter tax matter and by the timing of other payments.
Outstanding debt was $447.6 million at September 30, 2020 and $446.3 million at September 30, 2019.
Deferred income taxes were net liabilities of $96.3 million at September 30, 2020 and $87.9 million at September 30, 2019. The $8.4 million increase in the net liability was primarily due to reduced deferred tax assets related to inventory and increased deferred tax liabilities related to plant, property and equipment due to tax “bonus depreciation,” net of reductions in deferred tax liabilities related to intangible assets. Net deferred tax liabilities are primarily related to intangible assets.
Liquidity and Capital Resources
We had cash and cash equivalents of $208.9 million at September 30, 2020 and approximately $134 million of additional borrowing capacity under our ABL Agreement based on September 30, 2020 data. Undistributed earnings from our subsidiaries in Israel, Canada and China are considered to be permanently invested outside of the United States. At September 30, 2020, cash and cash equivalents included $18.8 million, $17.0 million, and $6.4 million in Israel, Canada and China, respectively.
Cash flows from operating activities are categorized below.
(in millions)
Collections from customers $ 956.6 $ 966.6
Disbursements, other than interest and income taxes (754.7) (822.8)
Walter tax matter payment (22.0) —
Interest payments, net (24.3) (22.2)
Income tax payments, net (15.3) (29.1)
Cash provided by operating activities $ 140.3 $ 92.5
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We collected $10.0 million less cash from customers in 2020 than in 2019, which was primarily caused by timing of shipments between years as well as the $3.9 million decrease in net sales in 2020 compared with 2019.
We disbursed $46.1 million less cash excluding interest and income taxes in 2020 than in 2019, largely due to our target efforts to reduce inventory, pandemic-related liquidity preservation and cost containment actions such as deferral of some capital expenditures, reduced travel, trade show and spending, and temporary furloughs and temporary salary reductions.
Capital expenditures were $67.7 million during 2020 and $86.6 million during 2019. We estimate 2021 capital expenditures will be between $80 million and $90 million. We expect our capital expenditures will be higher over the next several years as we invest more in our machinery, equipment and facilities for product introductions, enhanced productivity and maintenance. At September 30, 2020, we have completed our large casting foundry in Chattanooga, Tennessee, begun the construction of a new brass foundry in Decatur, Illinois that will replace our existing foundry in Decatur, and are building out our facility in Kimball, Tennessee to leverage our large casting foundry and to insource various parts and components.
Income tax payments were lower during 2020 compared to the prior year primarily because the Walter tax matter, which had been expensed in 2019 for book purposes, was deducted as an expense in determining 2020 taxable income because it was paid in 2020. We expect the effective tax rate in 2021 to be between 24% and 26%.
In 2015, we announced the authorization of a stock repurchase program for up to $50.0 million of our common stock. 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. In 2017, we announced an increase in the authorization of this program to $250 million. We acquired 418,374 and 1,074,234 shares of our common stock in 2020 and 2019, respectively. At September 30, 2020, we had remaining authorization of $145.0 million to repurchase shares of our common stock. We temporarily suspended the share repurchase program in March due to the pandemic; however, we announced in November 2020 that we have ended the suspension.
We anticipate our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating needs, capital expenditures and debt service obligations as they become due through September 30, 2021. However, our ability to make these payments will depend partly upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.
ABL Agreement
At September 30, 2020, the ABL Agreement consisted of a revolving credit facility for up to $175 million of revolving credit borrowings, swing line loans and letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150 million in certain circumstances. We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.
At July 30, 2020, the maturity of the ABL Agreement was extended to July 29, 2025. Borrowings under the amended ABL Agreement bear interest at a floating rate equal to LIBOR plus a margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 100 to 125 basis points. At September 30, 2020, the applicable LIBOR-based margin was 200 basis points. We pay a commitment fee for any unused borrowing capacity under the amended ABL Agreement of 37.5 basis points annually, on undrawn amounts.
The amended ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of the value of eligible inventory, less certain reserves. Prepayments can be made at any time with no penalty.
Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventory, accounts receivable, certain cash and other supporting obligations.
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Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement. The ABL Agreement contains customary negative covenants and restrictions on our ability to engage in specified activities, such as:
•Limitations on other debt, liens, investments and guarantees;
•Restrictions on dividends and redemptions of our capital stock and prepayments and redemptions of debt; and
•Restrictions on mergers and acquisition, sales of assets and transactions with affiliates.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured Notes (“Notes”), which mature in June 2026 and bear interest at 5.5%, paid semi-annually. Substantially all of our U.S. Subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL. Based on quoted market prices, the outstanding Notes had a fair value of $465.8 million at September 30, 2020.
An indenture securing the Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends, and make investments. We believe we were compliant with these covenants at September 30, 2020 and expect to remain in compliance through September 30, 2021.
We may redeem some or all of the Notes at any time or from time to time prior to June 15, 2021 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or afterJune 15, 2021 at specified redemption prices (as set forth in the Indenture). Additionally, we may redeem up to 40% of the aggregate principal amount of the Notes at any time or from time to time prior to June 15, 2021 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture). Upon a change of control (as defined in the Indenture), we will be required to make an offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.
Credit Ratings
Our corporate credit rating and the credit ratings for our debt and outlook are presented below.
Moody’s Standard & Poor’s
September 30, September 30,
Corporate credit rating Ba2 Ba2 BB BB
ABL Agreement Not rated Not rated Not rated Not rated
Notes Ba3 Ba3 BB BB
Outlook Stable Stable Stable Stable
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt or any derivative contracts other than those described in “Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK” or synthetic leases. Therefore, we are not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At September 30, 2020, we had $13.8 million of letters of credit and $42.7 million of surety bonds outstanding.
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Table of Contents
Index to Financial Statements
Contractual Obligations
Our contractual obligations at September 30, 2020 are presented below.
(in millions)
Unconditional purchase obligations(1) 112.4 0.9 — — 113.3
Other current liabilities(2) — — — — —
(1)Includes contractual obligations for purchases of raw materials and capital expenditures.
(2)Consists of obligations for required pension contributions. Actual payments may differ. We have not estimated required pension contributions beyond 2021.
Effect of Inflation
We experience changing price levels primarily related to purchased components and raw materials. Infrastructure experienced a 13% decrease in the average cost per ton of scrap steel and a 9% decrease in the average cost of brass ingot in 2020 compared to 2019. Technologies was also favorably affected by the 9% decrease in the average cost of brass ingot. We anticipate inflation in raw material costs in 2021.