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This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with the Company's audited consolidated
financial statements and the related notes thereto for the fiscal years ended
September 30, 2022, 2021, and 2020 included in Item 8. Financial Statements and
Supplementary Data.

The discussion below contains management's comments on our business strategy and
outlook, and such discussions contain forward-looking statements. These
forward-looking statements reflect the expectations, beliefs, plans, and
objectives of management about future financial performance and assumptions
underlying management's judgment concerning the matters discussed, and
accordingly, involve estimates, assumptions, judgments, and uncertainties. Our
actual results could differ materially from those discussed in the
forward-looking statements and the discussion below is not necessarily
indicative of future results. Factors that could cause or contribute to any
differences include, but are not limited to, those discussed below and elsewhere
in this Annual Report on Form 10-K, particularly in Item 1A. Risk Factors and in
"Special Note Regarding Forward-Looking Statements."

Company overview


For an overview of our business, including our business segments and discussion
of the services we provide, see Item 1. Business of this Annual Report on Form
10-K.

Financial Overview

A number of factors affected our fiscal 2022 results, the most significant of which are listed below. More details on these changes are presented below in our “Operating Results” section.


•During fiscal year 2021, we acquired VES Group, Inc. ("VES") and the Federal
Division of Attain, LLC ("Attain"). We acquired Aidvantage at the beginning of
fiscal year 2022. These acquisitions have been supplemented by several smaller
acquisitions in fiscal years 2021 and 2022. In fiscal year 2022, we recognized a
full year of revenue and operating costs from the 2021 acquisitions and
Aidvantage, as well as intangible asset amortization. To fund the acquisition of
VES, we entered into a new credit agreement with JPMorgan Chase N.A. (the Credit
Agreement). The Credit Agreement provides both fixed-term debt and a new
revolving credit facility. The cost of servicing this debt for a full year, as
well as increasing interest rates, have resulted in an increase in our interest
expense.

•In both fiscal years 2021 and 2022, we received benefits from short-term work
assisting governments with their responses to the COVID-19 pandemic. This work
was often profitable and mitigated profit declines on established programs where
transaction volume was reduced. The short-term work declined by approximately
$800 million compared to fiscal year 2021, but the ongoing Public Health
Emergency ("PHE") has meant many of our established U.S. programs continue to
operate at reduced capacity. The timing and nature of the end of the PHE should
have a favorable effect on our business. This could occur in fiscal year 2023.

• Within our Outside the WE Segment, we recorded charges totaling $16.8 million
on a single contract, anticipating a loss of the remaining life of the arrangement. If our current forecast remains unchanged, this project should record a break-even profit over its remaining life.

• Our exterior WE The segment benefited from the UK Restart contract, which started at the end of fiscal 2021. This growing contract compensated for declines within the same segment due to the contraction of our activities in Australia.


•During the fourth quarter of the fiscal year, we completed the sale of our
former headquarters building. This resulted in a gain of $11.0 million and a
cash inflow of $16.4 million.

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Operating results


The following table sets forth, for the fiscal years indicated, information
derived from our statements of operations. In preparing our discussion and
analysis of these results, we focused on the comparison between fiscal years
2022 and 2021. A discussion comparing our results between fiscal years 2021 and
2020 can be found in our Annual Report on Form 10-K for the year ended
September 30, 2021, which we filed with the Securities and Exchange Commission
on November 18, 2021.

MD&A Table 1: Consolidated results of operations

                                                                  For the Year Ended September 30,
                                                                    2022                       2021
                                                           (dollars in thousands, except per share data)
Revenue                                                   $           4,631,018          $    4,254,485
Cost of revenue                                                       3,691,208               3,307,510
Gross profit                                                            939,810                 946,975
Gross profit percentage                                                     20.3 %                  22.3 %
Selling, general, and administrative expenses                           534,493                 494,088

Selling, general and administrative expenses as a percentage of revenue

                                                       11.5 %                  11.6 %
Amortization of intangible assets                                        90,465                  44,357
Gain on sale of land and building                                        11,046                       -
Operating income                                                        325,898                 408,530
Operating margin                                                             7.0 %                   9.6 %
Interest expense                                                         45,965                  14,744
Other expense, net                                                        2,835                  10,105
Income before income taxes                                              277,098                 383,681
Provision for income taxes                                               73,270                  92,481
Effective tax rate                                                          26.4 %                  24.1 %
Net income                                                $             203,828          $      291,200
Earnings per share:
Basic                                                     $                3.30          $         4.69
Diluted                                                   $                3.29          $         4.67


Our business segments have different factors driving revenue fluctuations and
profitability. The sections that follow cover these segments in greater detail.
Our revenue reflects fees earned for services provided. Cost of revenue consists
of direct costs related to labor and related overhead, subcontractor labor,
outside vendors, rent, and other direct costs. The largest component of cost of
revenue, approximately two-thirds, is labor, including subcontracted labor.

MD&A Table 2: Changes in revenue, cost of revenue and gross profit for the year ended September 30, 2022

                                         Revenue                                  Cost of Revenue                                Gross Profit
                             Dollars               % Change                Dollars                % Change              Dollars              % Change
                                                                              (dollars in thousands)
Fiscal year 2021          $ 4,254,485                                 $    3,307,510                                 $  946,975
Organic effect               (249,058)                 (5.9)  %              (65,687)                 (2.0)  %         (183,371)                (19.4)  %
Acquired growth               667,384                  15.7   %              484,552                  14.7   %          182,832                  19.3   %
Currency effect compared
to the prior period           (41,793)                 (1.0)  %              (35,167)                 (1.1)  %           (6,626)                 (0.7)  %
Fiscal year 2022          $ 4,631,018                   8.9   %       $    3,691,208                  11.6   %       $  939,810                  (0.8)  %


Selling, general, and administrative expenses ("SG&A") consist of indirect costs
related to general management, marketing, and administration. It is primarily
composed of labor costs. These costs may be incurred at a segment level, for
dedicated resources that are not client-facing, or at a corporate level.
Corporate costs are allocated to segments on a consistent and rational basis.
Fluctuations in our SG&A are primarily driven by changes in our administrative
cost base, which is not directly driven by changes in our revenue. As part of
our work for the U.S. federal government and many states, we allocate these
costs using a methodology driven by the U.S. Federal Cost Accounting Standards.

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Our SG&A expense has increased year-over-year due primarily to the increased
cost base from our acquisitions. Our SG&A for fiscal year 2021 includes $9.5
million of acquisition expenses, primarily related to the VES and Attain
transactions. In fiscal year 2022, we had a lower level of acquisition activity.
We have also recorded a net benefit of $3.4 million from a reduction in
contingent considerations due to the sellers of our acquired businesses.

Our amortization of intangible assets increased by $46.1 million from fiscal
year 2021 to fiscal year 2022. This is the result of acquisitions in both fiscal
years, partially offset by amortization related to the Census Questionnaire
Assistance contract, which was acquired in November 2018 and fully amortized
through November 2020.

MD&A Table 3: Changes in amortization expense of intangible assets for the year ended September 30, 2022

                                                              Dollars                        % Change
                                                                       (dollars in thousands)
Year Ending September 30, 2021                            $      44,357
VES acquisition                                                  36,889                              83.2 %
Attain acquisition                                                4,375                               9.9 %
Aidvantage acquisition                                            7,432                              16.8 %
Other 2022 acquisitions                                             735                               1.7 %
CQA contract                                                     (2,313)                            (5.2) %
Other, including foreign exchange                                (1,010)                            (2.3) %
Year Ending September 30, 2022                            $      90,465    

$90,465



Our intangible amortization expense is based upon assumptions of the value and
economic life of assets acquired, typically established at the acquisition date.
If these assumptions change, the pattern of future expense may be affected. The
table below shows our results excluding the effects of intangible asset
amortization.

Table MD&A 4: Non-GAAP Adjusted Results Excluding Amortization of Intangible Assets
                                                                 For the Year Ended September 30,
                                                                   2022                       2021
                                                          (dollars in thousands, except per share data)
Operating income                                          $          325,898            $     408,530
Add back: Amortization of intangible assets                           90,465                   44,357

Adjusted operating income excluding amortization of intangible assets (Non-GAAP)

                              $          416,363            $     452,887

Adjusted operating margin excluding amortization of intangible assets (Non-GAAP)

                                          9.0    %                10.6  %

Net income                                                $          203,828            $     291,200
Add back: Amortization of intangible assets, net of tax               66,786                   32,752

Adjusted net income excluding amortization of intangible assets (Non-GAAP)

                                         $          270,614            $     323,952

Diluted earnings per share                                $             3.29            $        4.67

Add back: effect of amortization of intangible assets on diluted earnings per share

                                              1.08                     0.52
Adjusted diluted earnings per share excluding
amortization of intangible assets (Non-GAAP)              $             4.37            $        5.19


Our interest expense increased from $14.7 million in fiscal year 2021 to
$46.0 million in fiscal year 2022. This increase is driven by the costs of our
cash borrowings utilized to acquire VES. As stated in Note 8 - Debt and
Derivatives, our interest rate will vary based upon both prevailing interest
rates and our leverage ratio. Additional details on our borrowings are included
within the "Liquidity and Capital Resources" section.

Our other income and expense relates to miscellaneous expenses which do not
relate to our ongoing operating or financing needs. In fiscal year 2021, we
incurred $8.5 million related to interim financing for the VES acquisition. This
financing was not used and the cost was expensed. Expenses related to the
current credit facilities have been deferred and are being recognized over the
life of the agreement.

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Our effective income tax rate for the year ended September 30, 2022 and 2021,
was 26.4 % and 24.1 %, respectively. The increase in effective tax rate was
mainly due to the decreased value of our restricted stock units at vesting
compared to the value expensed. For fiscal year 2023, we expect the effective
tax rate to be between 24.5% and 25.5%.

WE Federal Services Segment


Our U.S. Federal Services Segment delivers end-to-end solutions that help
various U.S. federal government agencies better deliver on their mission,
including program operations and management, clinical services, and technology
solutions. This also includes appeals and assessments services, system and
application development, IT modernization, and maintenance services. The segment
also contains certain state-based assessments and appeals work that is part of
the segment's heritage within the Medicare Appeals portfolio which continues to
be managed within this segment. Benefited by the Maximus Attain platform, the
segment executes on its digital strategy to deliver technology solutions that
advance agency missions, including the challenge to modernize, provide better
customer experience, and drive process efficiencies. The segment continues to
expand its clinical solutions and manages the clinical evaluation process for
U.S. veterans and service members on behalf of the U.S. Department of Veterans
Affairs. The segment further supports clinical offerings in public health with
new work supporting the U.S. Federal Government's COVID-19 response efforts.
This included expanded work with the Centers for Disease Control and Prevention
("CDC") for their helpline and increased support for the IRS Wage and Investment
Division's response efforts to general inquiries regarding the Coronavirus Aid
Relief & Economic Security ("CARES") Act and Economic Impact Payment Service
Plan.

MD&A Table 5: WE Federal Services Sector – Financial Results

                                                                    For the Year Ended September 30,
                                                                    2022                          2021
                                                                         (dollars in thousands)
Revenue                                                     $     2,259,744                 $   1,893,284
Cost of revenue                                                   1,740,304                     1,460,733
Gross profit                                                        519,440                       432,551
Selling, general, and administrative expenses                       284,509                       243,485
Operating income                                                    234,931                       189,066
Gross profit percentage                                                23.0    %                     22.8   %
Operating margin percentage                                            10.4    %                     10.0   %

Table Management report 6: WE Federal Services Segment – Revenue, Revenue Cost and Gross Profit Trend

                                          Revenue                                  Cost of Revenue                                Gross Profit
                               Amount               % Change                Amount                 % Change              Amount               % Change
                                                                               (dollars in thousands)
Balance for fiscal year
2021                       $ 1,893,284                                 $    1,460,733                                 $  432,551
Organic effect                (274,569)                (14.5)  %             (188,911)                (12.9)  %          (85,658)                (19.8)  %
Acquired growth                641,029                  33.9   %              468,482                  32.1   %          172,547                  39.9   %
Balance for fiscal year
2022                       $ 2,259,744                  19.4   %       $    1,740,304                  19.1   %       $  519,440                  20.1   %

Our WE The size of the federal services segment has increased significantly in fiscal year 2022.


•We received a full year of benefit from the acquisitions of VES (May 2021),
Attain (March 2021), and Aidvantage (October 2021). The VES and Attain work is
also more profitable than our legacy business.

•Fiscal year 2021 included a significant amount of short-term, profitable work
related to the COVID-19 pandemic. Much of this work ceased in late 2021 or early
2022. In addition, fiscal year 2021 includes approximately $67 million of
non-recurring revenue related to the CQA contract, which ended in that year. Our
organic profit margins have been tempered as we accepted a lower return on an
existing contract in exchange for increased funding and anticipated future
revenues.

We anticipate that our U.S. Federal Services business will continue to grow in
fiscal year 2023, driven primarily by additional volumes anticipated in the VES
business. We anticipate operating margins will range between 10% and 11%.



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WE Service sector


Our U.S. Services Segment provides a variety of business process services
("BPS"), such as program administration, appeals and assessments, and related
consulting work for U.S. state and local government programs. These services
support a variety of programs, including the Affordable Care Act ("ACA"),
Medicaid, the Children's Health Insurance Program ("CHIP"), Temporary Assistance
to Needy Families ("TANF"), and child support programs. As part of the
governments' COVID-19 response efforts, the segment supported contact tracing,
disease investigation, and vaccine distribution support services during the peak
of the pandemic. The segment also successfully expanded into the unemployment
insurance market where longer term opportunities have materialized. As part of
the broader strategy to evolve clinically and address societal macro trends such
as aging populations and rising costs, the segment continues to expand its
offerings in public health with new work in in-person assessments.

Table Management report 7: WE Services segment – Financial results

                                                                    For the Year Ended September 30,
                                                                    2022                          2021
                                                                         (dollars in thousands)
Revenue                                                     $     1,607,612                 $   1,662,110
Cost of revenue                                                   1,264,608                     1,254,060
Gross profit                                                        343,004                       408,050
Selling, general, and administrative expenses                       160,902                       153,609
Operating income                                                    182,102                       254,441
Gross profit percentage                                                21.3    %                     24.6   %
Operating margin percentage                                            11.3    %                     15.3   %

Our turnover and our cost of turnover for the financial year ended September 30, 2022decreased 3.3% and 0.8%, respectively, from FY2021. All movements were organic.


As anticipated, our revenue and profit margins have declined in fiscal year 2022
as short-term, COVID-19 related work, which typically earn higher margins, has
slowed but many of our core programs which rely upon transactions are still
running at low volumes due to the ongoing PHE. Our results in fiscal year 2021
include a write-down of approximately $12 million of assets related to a
contract in the start-up phase.

The timing and nature of the end of the PHE, which could occur in fiscal year
2023, will have a significant effect on our results in fiscal year 2023.
Assuming that the PHE does not end, we anticipate operating margins between 8%
and 10% in 2023.

Outside the U.S. Segment

Our Outside the U.S. Segment provides BPS for international governments and
commercial clients, transforming the lives of people around the world. Helping
people find employment, access vital support, and remain healthy, these services
include health and disability assessments, program administration for employment
services, wellbeing solutions, and other job seeker related services. We support
programs and deliver services in the U.K., including the Health Assessment
Advisory Service ("HAAS") and Restart; Australia, including Workforce Australia
(formerly jobactive) and the Disability Employment Service; Canada, including
Health Insurance British Columbia and the Employment Program of British
Columbia; in addition to Italy, Saudi Arabia, Singapore, South Korea, Sweden,
and UAE, where we predominantly provide employment support and job seeker
services.

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MD&A Table 8: Outside of WE Sector – Financial results

                                                                 For the Year Ended September 30,
                                                                   2022                     2021
                                                                      (dollars in thousands)
Revenue                                                     $      763,662            $     699,091
Cost of revenue                                                    686,296                  592,717
Gross profit                                                        77,366                  106,374
Selling, general, and administrative expenses                       92,536                   86,248
Operating (loss)/income                                            (15,170)                  20,126
Gross profit percentage                                               10.1    %                15.2   %
Operating margin percentage                                           (2.0)   %                 2.9   %

MD&A Table 9: Outside the WE Segment – Changes in Revenue, Cost of Revenue and Gross Profit

                                         Revenue                                 Cost of Revenue                               Gross Profit
                              Amount              % Change                Amount                % Change              Amount               % Change
                                                                              (dollars in thousands)
Balance for fiscal year
2021                       $ 699,091                                 $     592,717                                 $  106,374
Organic effect                80,009                  11.4   %             112,676                  19.0   %          (32,667)                (30.7)  %
Acquired growth               26,355                   3.8   %              16,070                   2.7   %           10,285                   9.7   %
Currency effect compared
to the prior period          (41,793)                 (6.0)  %             (35,167)                 (5.9)  %           (6,626)                 (6.2)  %
Balance for fiscal year
2022                       $ 763,662                   9.2   %       $     686,296                  15.8   %       $   77,366                 (27.3)  %

This segment experienced organic revenue and cost growth, as well as earned growth. This benefit was partially offset by significant declines in the value of international currencies against the US dollar.


Organic revenue growth in fiscal year 2022 reflects the benefit of our United
Kingdom Restart contract, which commenced in the fourth quarter of fiscal year
2021, partially offset by declines in our Australian business. The Australian
business reported strong results in fiscal year 2021 as the COVID-19 pandemic
effect declined and opportunities reopened for work placements. Our fiscal year
2022 results initially returned to standard operating levels before a decline in
the level of work following the third quarter. The detriment to our profit
margin was primarily driven by the Australian business, where the reduction in
revenues was not immediately matched with a decline in the cost base; in
addition, some short-term severance costs were incurred. Profit margins were
also tempered by charges totaling $16.8 million related to an implementation of
a software product.

Acquired growth is from Connect Assist Holdings Limited, acquired in September
2021; BZ Bodies Limited, acquired in January 2022; and Stirling Institute of
Australia Pty Ltd, acquired in June 2022.

Much of our revenue growth stems from our employment services contracts, where
we are paid based upon our ability to place individuals in long-term sustained
employment. As a result, changes in our estimates of our ability to place people
in work and the time that this will take can have significant effects on our
revenue. These estimates are based upon our current expectations as to how the
effects of the pandemic, including regulations adopted by governments and
employment practices adopted by employers, will progress. Our estimates are
based upon historical performance, where appropriate and available.

We expect our Non-U.S. segment to experience greater stability in fiscal 2023, with less disruption from residual pandemic factors and supported by our base programs. We expect operating margins to be in the low single digits.

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Back

Backlog represents estimated future revenues from:

•existing signed contracts;

•contracts awarded but not yet signed; and

•priced contractual options not exercised.

From September 30, 2022we estimate to have approximately $19.8 billion backward.

MD&A Table 10: Order book by segment

                            As of September 30,
                            2022            2021
                               (in millions)
U.S. Federal Services   $    13,168      $  4,298
U.S. Services                 5,205         4,865
Outside the U.S.              1,441         2,052
Backlog                 $    19,814      $ 11,215

To September 30, 2022the weighted average remaining life of the contracts in our backlog was approximately 6.8 years, including option periods.


Increases in backlog result from the award of new contracts and the extension or
renewal of existing contracts. Reductions in backlog come from fulfilling
contracts or the early termination of contracts which our experience shows to be
a rare occurrence. See "Risk Factors" in Item 1A of this Annual Report. The
backlog associated with our performance-based contracts is an estimate based
upon management's experience of caseloads and similar transaction volume, which
is subject to revision based upon the latest information available.
Additionally, backlog estimates may be affected by foreign currency
fluctuations.

We believe that comparisons of backlog period-to-period are difficult. We also
believe that it is difficult to predict future revenue solely based on analysis
of backlog. The actual timing of revenue from projects included in backlog will
vary. We also may experience periods in which there is a greater concentration
of rebids, resulting in a comparatively reduced backlog balance until subsequent
award or extension on those contracts.

The longevity of these contracts assists management in predicting revenue,
operating income, and cash flows for the purposes of business planning. We
expect approximately 24% of the backlog balance to be realized as revenue in
fiscal year 2022, which is 90% of the midpoint of fiscal year 2022 revenue
guidance. Our standard forecasting process includes analyzing new work pipelines
and submitted responses to requests for proposals ("RFPs") when predicting
future revenue, operating income, and cash flows.

Cash and capital resources


Our primary sources of liquidity are cash on hand, cash from operations, and
availability under our revolving credit facilities. As of September 30, 2022, we
had $40.7 million in cash and cash equivalents. We believe that our current cash
position, access to our revolvers, and cash flow generated from operations
should be not only sufficient for our operating requirements but also to enable
us to fund required long-term debt repayments, dividends and any share purchases
we might choose to make. See Note 8 to the Consolidated Financial Statements for
a more detailed discussion of our debt financing arrangements.

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Table Management report 11: Net change in cash and cash equivalents and restricted cash

                                                                For the Year Ended September 30,
                                                                  2022                     2021
                                                                         (in thousands)
Operating activities:

Net cash provided by operating activities                 $         289,839          $      517,322
Net cash used in investing activities                               (54,009)             (1,835,480)
Net cash (used in)/provided by financing activities                (248,271)              1,385,693
Effect of foreign exchange rates on cash and cash
equivalents and restricted cash                                      (7,334)                    474

Net change in cash and cash equivalents and restricted cash

                                                      $         

(19,775) $68,009

Net cash from operating activities


Net cash provided by operating activities decreased by $227.5 million in fiscal
year 2022 compared to fiscal year 2021. This decline was driven by a reduction
in profits, the timing of payments from customers, and the timing of our
payments to vendors.

Both years have received the benefit of faster cash collections. Our Days Sales
Outstanding ("DSO") improved from September 30, 2020, when it was 77 days,
through September 30, 2021 (68 days) and September 30, 2022 (62 days). Improved
collections were driven by the recovery of payments delayed during the COVID-19
pandemic and the timing of large payments at the end of fiscal year 2022.

Fiscal year 2021 received cash from up-front payments on contracts, notably in
the United Kingdom, as new projects started. These cash flows did not recur to
the same degree in fiscal year 2022.

The timing of both vendor and employee payments across both years also resulted
in higher cash outflows from operations in fiscal year 2022. Increased interest
payments on our debt, which we held for a full year in fiscal year 2022, were
offset by reduced tax payments.

Net cash used In investment activities


Investing activities for fiscal year 2022 include payments for current-year
acquisitions and the settlement of the VES purchase price. This is offset by
cash received from the sale of our former headquarters building, which was
completed in August 2022. The prior year's cash flows include payments for the
acquisitions of VES, Attain and Connect Assist.

Net cash (Used in)/Provided by fundraising

The main drivers of financing cash flow are the credit agreement, our equity transactions and restricted cash flow when we hold funds on behalf of customers or suppliers.


In fiscal year 2021, we received net cash flows of $1.47 billion, principally
from borrowings and costs for the Credit Agreement. These funds were used to
acquire VES. In fiscal year 2022, we have made net debt repayments of
$155.7 million.

In addition to our dividend, we bought $96.1 million of Maximus common stock in fiscal 2022, compared to $3.4 million during fiscal year 2021.


On certain contracts, we maintain funds within our treasury system which is
owned by our client. We treat this cash as restricted cash and hold a
corresponding liability on our balance sheet reflecting balances to be disbursed
on behalf of our client. Although we do not own these funds, they are within our
control and are considered financing cash flows. In fiscal year 2022, we
received the benefit of the Receivables Purchase Agreement ("RPA") we entered
into with Wells Fargo N.A., under which we can sell certain US-originated
accounts receivable balances. Prior to September 30, 2022, we sold a customer
invoice for $60.4 million. Although we sold these receivables, we maintained
administrative responsibilities over cash collection. Having sold the invoice,
the customer payment was received on September 30, 2022, resulting in excess
cash flow. This cash receipt was treated as restricted cash and remitted to
Wells Fargo in October 2022. We have recorded this transaction as "other" cash
flows from financing activities.



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Cash abroad


We have no requirement to remit funds from our foreign locations to the United
States. We will continue to explore opportunities to remit additional funds,
taking into consideration the working capital requirements and relevant tax
rules in each jurisdiction. When we are unable to remit funds back without
incurring a penalty, we will consider these funds indefinitely reinvested until
such time as these restrictions are changed. As a result, we do not record U.S.
deferred income taxes on any funds held in foreign jurisdictions. We have not
attempted to calculate our potential liability from any transfer of these funds,
as any such transaction might include tax planning strategies that we have not
fully explored. Accordingly, it is not possible to estimate the potential tax
obligations if we were to remit all of our funds from foreign locations to the
United States.

Free Cash Flow

MD&A Table 12: Free Cash Flow

                                                               For the Year Ended September 30,
                                                                  2022                     2021
                                                                        (in thousands)
Net cash provided by operating activities                 $         289,839 

$517,322
Purchases of property, plant and equipment and capitalized software

                                                            (56,145)               (36,565)
Free cash flow                                            $         233,694 

$480,757

Material cash requirements related to contractual obligations

Credit facilities


As of September 30, 2022, we had total outstanding borrowing under our term
loans and subsidiary loan agreements of $1.37 billion and $0.1 million,
respectively. We had no outstanding balances under the Credit Agreement revolver
as of September 30, 2022 and $600 million available. The Credit Agreement has
annual repayment requirements and the balance must be repaid or refinanced at
the termination of the agreements. See Note 8 to the Consolidated Financial
Statements for information regarding the terms of the Credit Agreement,
including obligations by fiscal year.

Leases


As of September 30, 2022, we reported current and long-term operating lease
liabilities of $64.0 million and $86.2 million, respectively. These balances
represent our contractual obligation to make future payments on our leases,
discounted to reflect our cost of borrowing. The majority of these leases are
for real estate. In the event that we vacate a location, we may be obliged to
continue making lease payments. Where possible, we mitigate this risk by
including clauses allowing for the termination of lease agreements if the
contract the location covers is terminated by our customer. See Note 10 to the
Consolidated Financial Statements for information regarding our leases,
including obligations by fiscal year.

Deferred Compensation Plan


As of September 30, 2022, we reported liabilities of $43.1 million related to
our deferred compensation plan. These balances are due to our employees based
upon elections they make at the time of deferring their funds. The timing of
these payments may change based upon factors, including termination of our
employment arrangement with a participant. We maintain a rabbi trust to fund
this liability.

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Significant Accounting Policies and Estimates


The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires us to make estimates and judgments that
affect the amounts reported. We consider the accounting policies below to be the
most important to our financial position and results of operations either
because of the significance of the financial statement item or because of the
need to use significant judgment in recording the balance. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results could differ from those estimates. Our significant accounting policies
are summarized in "Note 2. Significant Accounting Policies" of the Consolidated
Financial Statements included in Item 8 in this Annual Report on Form 10-K.

Revenue recognition

Although much of our revenue is accrued concurrently with billing or over time, some of our revenue requires us to make estimates. These estimates are reviewed quarterly, with any change being recorded as cumulative revenue catch-up.


Some of our performance-based contract revenue is recognized based upon future
outcomes defined in each contract. This is the case in many of our employment
services contracts in the Outside the U.S. Segment, where we are paid as
individuals attain employment goals, which may take many months to achieve. We
recognize revenue on these contracts over the period of performance. Our
estimates vary from contract to contract but may include estimates of the number
of participants reaching employment milestones and the service delivery period
for participants reaching employment milestones. We are required to estimate
these outcome fees ahead of their collection and recognize this estimated fee as
revenue over the period of delivery. In almost all of the jurisdictions in which
we operate, the employment markets have experienced significant changes due to
the COVID-19 pandemic. As the pandemic commenced, many employment opportunities
were terminated. Our volume of new program participants is beginning to increase
as governments shift their focus to addressing the residual impacts of the
pandemic, such as the economy and unemployment, particularly in those countries
where the pandemic has stabilized, and economies are beginning to reopen. During
the year ended September 30, 2022, we recognized revenue from these
performance-based fees of $142.4 million. At September 30, 2022, we recorded
$55.4 million of these estimated outcome fees as unbilled receivables which will
be billed and then collected when we reach the targets we anticipate.

Business combinations and Good will


Our balance sheet as of September 30, 2022, includes $1.78 billion of goodwill
and $804.9 million of net intangible assets. These assets are created through
business acquisitions and their creation and maintenance requires certain
critical estimates.

•During an acquisition, we are required to estimate the fair value of all
acquired tangible and intangible assets, as well as liabilities assumed, in
order to allocate the purchase price. For many assets acquired and liabilities
assumed, the calculation of fair value requires little judgment as balances may
be readily convertible to cash receipts or cash payments or there may be an
active market against which to measure value. For the valuation of intangible
assets, significant judgment is necessary in identifying and valuing such
assets. This valuation will also involve identifying the useful economic life of
this asset. Our estimates of these fair values and useful economic lives are
based upon assumptions we believe to be reasonable and, where appropriate,
include assistance from third-party appraisal firms. The accounting for our
acquisitions included determining the fair value of intangible assets
representing customer relationships, the VES provider network and VES
technology. In making our determination of the fair value of these assets, we
utilized estimates, the most significant of which were forecasts related to
future revenues and profit margins. These assumptions relate to the future
performance of the acquired business, are forward-looking, and could be affected
by future economic and market conditions. The asset values and asset lives
determined at acquisition may change based upon circumstances such as contract
terminations or changes in strategy. When this occurs, we may need to accelerate
our amortization charges. These assets are also subject to impairment if events
indicate that the carrying value of the assets may not be recoverable. For
example, our intangible asset balance includes customer relationship assets
which, if the customer relationship ends, would require evaluation of the
remaining asset life and asset value.

•The excess purchase price over the identified net assets is considered to be
goodwill. Goodwill is recorded at the reporting unit level. The identification
of our reporting units requires judgment based upon the manner in which our
business is operated and the services performed. We believe our reporting units
are consistent with our segments. Where we have acquisitions that provide
services to more than one segment, or where the acquisition provides benefits
across all of our segments, we use judgment to allocate the goodwill balance
based upon the relative value we anticipate that each segment will realize.

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•Goodwill is not amortized but is subject to impairment testing on an annual
basis, or more frequently if impairment indicators arise. Impairment testing is
performed at the reporting unit level. This process requires judgment in
assessing the fair value of these reporting units. As of July 1, 2022, the
Company performed its annual impairment test and determined that there was no
impairment of goodwill. In performing this assessment, we utilized a
quantitative approach. In all cases, we determined that the fair value of our
reporting units was significantly in excess of our carrying value to the extent
that a 25% decline in fair value in any reporting unit would not have resulted
in an impairment charge.

Contingencies

From time to time, we are involved in legal proceedings, including contract and
employment claims, in the ordinary course of business. We assess the likelihood
of any adverse judgments or outcomes to these contingencies, as well as
potential ranges of probable losses and establish reserves accordingly. The
amount of reserves required may change in future periods due to new developments
or changes in approach to a matter, such as a change in settlement strategy. We
are also subject to audits by our government clients on many of our contracts
based upon measures such as costs incurred or transactions processed. These
audits may take place several years after a contract has been completed. We
maintain reserves where we are able to estimate any potential liability that is
updated as audits are completed.

Non-GAAP and Other Measures


We utilize non-GAAP measures where we believe it will assist users of our
financial statements in understanding our business. The presentation of these
measures is meant to complement, but not replace, other financial measures in
this document. The presentation of non-GAAP numbers is not meant to be
considered in isolation, nor as an alternative to revenue growth, cash flows
from operating activities, net income, or earnings per share as measures of
performance. These non-GAAP measures, as determined and presented by us, may not
be comparable to related or similarly titled measures presented by other
companies.

In fiscal 2022, 16% of our revenue was generated outside of WE We believe that users of our financial statements want to understand the performance of our overseas operations using a methodology that excludes the effect of exchange rate fluctuations from year to year. To calculate year-over-year currency movement, we determine the current year results for all foreign companies using the previous year’s exchange rates.


In recent years, we have made a number of acquisitions. We believe users of our
financial statements wish to evaluate the performance of our operations,
excluding changes that have arisen due to businesses acquired or disposed of. We
identify acquired revenue and cost of revenue by showing these results for
periods for which no comparative results exist within our financial statements.
We identify revenue and cost of revenue that has been disposed of in a similar
manner. This information is supplemented by our calculations of organic growth.
To calculate organic growth, we compare current fiscal year results excluding
transactions from acquisitions or disposals, to our prior fiscal year results.

Our recent acquisitions have resulted in significant intangible assets which are
amortized over their estimated useful lives. We believe users of our financial
statements wish to understand the performance of the business by using a
methodology that excludes the amortization of our intangible assets.
Accordingly, we have calculated our operating profit, net income, and earnings
per share, excluding the effect of the amortization of intangible assets. We
have included a table showing our reconciliation of these income measures to
their corresponding GAAP measures.

In order to sustain our cash flows from operations, we regularly refresh our
fixed assets and technology. We believe that users of our financial statements
wish to understand the cash flows that directly correspond with our operations
and the investments we must make in those operations using a methodology that
combines operating cash flows and capital expenditures. We provide free cash
flow to complement our statement of cash flows. Free cash flow shows the effects
of our operations and replacement capital expenditures and excludes the cash
flow effects of acquisitions, purchases of our common stock, dividend payments,
and other financing transactions. We have provided a reconciliation of cash
flows from operations to free cash flow in "Liquidity and Capital Resources."

To sustain our operations, our principal source of financing comes from
receiving payments from our customers. We believe that users of our financial
statements wish to evaluate our efficiency in converting revenue into cash
receipts. Accordingly, we provide DSO, which we calculate by dividing billed and
unbilled receivable balances at the end of each quarter by revenue per day for
the period. Revenue per day for a quarter is determined by dividing total
revenue by 91 days. Where our DSO is affected by acquisitions, such as the
Connect Assist acquisition in September 2021, we will perform the DSO
calculation on a pro forma basis, including the acquired revenue for the fiscal
quarter.

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Our Credit Agreement includes the defined term Consolidated EBITDA and our
calculation of Adjusted EBITDA conforms to the Credit Agreement. We believe our
investors appreciate the opportunity to understand the possible restrictions
which arise from our Credit Agreement.

•Adjusted EBITDA is also a useful measure of performance that focuses on the
cash generating capacity of the business as it excludes the non-cash expenses of
depreciation and amortization, and makes for easier comparisons between the
operating performance of companies with different capital structures by
excluding interest expense and therefore, the impacts of financing costs.

•The measure of Adjusted EBITA is a step in calculating Adjusted EBITDA and
facilitates comparisons to similar businesses as it isolates the amortization
effect of business combinations.

•The Credit Agreement requires us to calculate Adjusted EBITDA on a pro forma
basis, as though we had owned any significant acquired business for a full
twelve months. Accordingly, we have included the effects of VES and Attain in
the table below. The Credit Agreement also requires us to adjust for unusual,
non-recurring expenses, certain non-cash adjustments and estimated synergies
from acquisitions.

We have provided a reconciliation of net income to non-GAAP Adjusted EBITA, non-GAAP Adjusted EBITDA and pro forma non-GAAP Adjusted EBITDA as shown below.

MD&A Table 13: Reconciliation of Net Earnings to Non-GAAP Adjusted EBITDA, Non-GAAP Adjusted EBITDA and Non-GAAP Pro Forma Adjusted EBITDA

                                                                     For 

the year has ended September 30,

                                                                        2022                     2021
                                                                              (in thousands)
Net income                                                      $         203,828          $     291,200
Adjustments:
Interest expense                                                           45,965                 14,744
Other expense                                                               2,835                 10,105
Provision for income taxes                                                 73,270                 92,481
Amortization of intangibles                                                90,465                 44,357
Stock compensation expense                                                 30,476                 28,554
Acquisition-related expenses                                                  332                 10,820
Gain on sale of land and building                                         (11,046)                     -
Adjusted EBITA - Non-GAAP measure                                         436,125                492,261

Depreciation of property, plant and equipment and capitalized software

                                                       42,330                 46,361
Adjusted EBITDA - Non-GAAP measure                                        

478 455 $538,622
Pro forma and other adjustments permitted by our credit agreement – Non-GAAP measure

                                               30,032                 92,398
Pro forma adjusted EBITDA - Non-GAAP measure                    $         

508 487 $631,020

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© Edgar Online, source Previews

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MUELLER WATER PRODUCTS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K) https://eventplaner.net/mueller-water-products-inc-management-report-and-analysis-of-financial-position-and-operating-results-form-10-k/ Fri, 18 Nov 2022 22:21:05 +0000 https://eventplaner.net/mueller-water-products-inc-management-report-and-analysis-of-financial-position-and-operating-results-form-10-k/
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included in Item 8. "Financial Statements
and Supplementary Data" of this Annual Report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and other
factors that may cause actual results to differ materially from those projected
in any forward-looking statements, as discussed in "Disclosure Regarding
Forward-Looking Statements." These risks and uncertainties include but are not
limited to those set forth in "Item 1A. RISK FACTORS".

Insight

Company


We adopted a new management structure effective October 1, 2021 which resulted
in a change to our reportable segments. Under this new structure, we operate our
business through two segments, Water Flow Solutions and Water Management
Solutions.

We estimate that approximately 60% to 65% of the Company’s net sales in 2022 were associated with repair and replacement directly related to municipal water infrastructure expenditures, approximately 25% to 30% were related to the business residential construction and less than 10% were related to natural gas. utilities.


After experiencing challenges in 2020 and 2021 resulting from the pandemic,
municipal spending in 2022 recovered during the fiscal year as compared with the
prior year. According to the United States Department of Labor, the trailing
twelve-month average consumer price index for water and sewerage rates at
September 30, 2022 increased 4.7%. While the economic effects of the pandemic
have impacted revenues for some water utilities in the United States, water
utilities were generally able to maintain repair and replacement activities.

We expect the operating environment during fiscal year 2023 to be very
challenging as a result of the inflationary environment, labor challenges and
potential recession. We anticipate healthy demand in the municipal repair and
replacement market due to favorable budgets, especially at larger
municipalities. While demand from the new residential construction end market
has been at healthy levels during fiscal 2022, especially for lot and land
development activity, we anticipate that activity levels will slow during fiscal
2023 based on higher interest rates leading to a decrease in demand for new
residential housing. In November 2022, Blue Chip Economic Indicators forecasted
a 12.3% decrease in housing starts for the calendar year 2023 compared to the
calendar year 2022.

Consolidated

For our fiscal year 2023, we anticipate that consolidated net sales will be 6%
to 8% higher than our fiscal year 2022 primarily driven by the benefits of
higher pricing. In 2022, we encountered increased material costs as a result of
higher raw material prices, particularly brass ingot and scrap steel, as well as
higher purchased parts, freight, labor costs and energy expenses. In 2023, we
anticipate that inflation will continue to increase material and other costs.

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Financial statement index




Results of Operations

Year ended September 30, 2022 Compared to the year ended September 30, 2021

                                                       Year ended September 30, 2022
                                                          Water
                                      Water Flow       Management
                                       Solutions        Solutions       Corporate       Consolidated
                                                               (in millions)
Net sales                            $     714.1      $     533.3      $        -      $     1,247.4
Gross profit                               212.4            151.9               -      $       364.3
Operating expenses:
Selling, general and administrative         87.1            102.8            48.8              238.7
Strategic reorganization and other
charges                                      0.2              0.4             6.6                7.2
Goodwill impairment                          6.8                -               -                6.8
Total operating expenses                    94.1            103.2            55.4              252.7
Operating income (loss)              $     118.3      $      48.7      $    (55.4)             111.6
Pension benefit other than service                                                              (3.9)
Interest expense, net                                                                           16.9
Income before income taxes                                                                      98.6
Income tax expense                                                                              22.0
Net income                                                                             $        76.6

                                                       Year ended September 30, 2021
                                                          Water
                                      Water Flow       Management
                                       Solutions        Solutions       Corporate       Consolidated
                                                               (in millions)
Net sales                            $     617.8      $     493.2      $        -      $     1,111.0
Gross profit                         $     202.8      $     155.7      $        -      $       358.5
Operating expenses:
Selling, general and administrative         81.8             85.8            51.2              218.8
Strategic reorganization and other
charges (benefits)                           0.1             (0.4)            8.3                8.0
Total operating expenses                    81.9             85.4            59.5              226.8
Operating income (loss)              $     120.9      $      70.3      $    (59.5)             131.7
Pension benefit other than service                                                              (3.3)
Interest expense, net                                                                           23.4
Loss on early extinguishment of debt                                                            16.7
Income before income taxes                                                                      94.9
Income tax expense                                                                              24.5
Net income                                                                             $        70.4



Consolidated Analysis

Net sales for 2022 increased $136.4 millioni.e. 12.3%, at $1,247.4 million of
$1,111.0 million the previous year, mainly due to higher prices in most of our product lines, in addition to increased volumes.


Gross profit increased $5.8 million, or 1.6%, to $364.3 million for 2022
compared with $358.5 million in the prior year. This increase was primarily a
result of higher pricing and increased volumes which were partially offset by
higher cost of sales

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associated with inflation, adverse manufacturing performance including labor issues and supply chain disruptions. Gross margin decreased to 29.2% in 2022 from 32.3% the previous year.


Selling, general and administrative expenses ("SG&A") increased 9.1% to $238.7
million for 2022 from $218.8 million in the prior year. The increase in SG&A was
primarily a result of higher travel and trade show expenditures, higher costs
associated with inflation, investments in research and development as well as
information technology, and the inclusion of i2O Water, partially offset by
lower incentive compensation in personnel-related expenses and foreign exchange
gains. As a percentage of net sales, SG&A decreased 60 basis points to 19.1% of
net sales from 19.7% in the prior year.

Strategic reorganization and other charges for 2022 of $7.2 million primarily
consisted of certain transaction-related costs, expenses associated with our
ongoing restructuring activities, and the Albertville tragedy. For the fiscal
year 2021, Strategic reorganization and other charges of $8.0 million primarily
relate to termination benefits associated with our plant closures in Aurora,
Illinois and Surrey, British Columbia, Canada, the Albertville tragedy, and
certain transaction-related costs, partially offset by a one-time settlement
gain in connection with an indemnification of a previously owned property.

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

Interest expense, net down $6.5 million in 2022 compared to the prior year primarily due to the repayment of our 5.5% senior unsecured notes (“5.5% Senior Notes”), which were replaced by unsecured notes 4.0% Senior Notes (“4.0% Senior Notes”) as well as increased capitalized interest on our major capital projects and increased interest income.


                                            2022         2021
                                              (in millions)
5.5% Senior Notes                         $     -      $ 17.6
4.0% Senior Notes                            18.0         6.2
Deferred financing costs amortization         1.0         1.1
ABL Agreement                                 0.9         0.9
Capitalized interest                         (2.6)       (2.3)
Other interest expense                        0.3         0.3
Total interest expense                       17.6        23.8
Interest income                              (0.7)       (0.4)
Total interest expense, net               $  16.9      $ 23.4



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

Segment Analysis

Water Flow Solutions

Net sales for 2022 increased $96.3 million, or 15.6%, to $714.1 million from
$617.8 million in the prior year. Net sales increased primarily as a result of
higher pricing and increased volumes across most of the Water Flow Solutions
segment's product lines.

Gross profit for 2022 increased $9.6 million, or 4.7%, to $212.4 million from
$202.8 million in the prior year primarily as a result of higher pricing and
increased volumes across most product lines except for service brass products,
partially offset by higher cost of sales associated with inflation and
unfavorable manufacturing performance, primarily at our brass foundry. Gross
margin was 29.7% in 2022, as compared with 32.8% in the prior year.

SG&A in 2022 increased 6.5% to $87.1 million from $81.8 million in the prior
year primarily as a result of increased travel and trade show expenditures,
higher costs associated with inflation, and investments in research and
development and information technology. SG&A as a percentage of net sales was
12.2% and 13.2% for 2022 and 2021, respectively.

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

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Water Management Solutions

Net sales in 2022 increased by 8.1% to reach $533.3 million of $493.2 million in the prior year, primarily due to higher pricing across most of the Water Management Solutions product lines and higher volumes for hydrants, natural gas and repair and installation product lines.


Gross profit in 2022 decreased $3.8 million to $151.9 million from $155.7
million in the prior year. Gross margin decreased to 28.5% in 2022 from 31.6% in
the prior year primarily as a result of higher cost of sales associated with
inflation, and unfavorable manufacturing performance, partially offset by higher
pricing and increased volumes.

SG&A increased 19.8% to $102.8 million in 2022 from $85.8 million in the prior
year primarily as a result of investments in research and development, the
inclusion of i2O Water, increased travel and trade show expenditures, and higher
costs associated with inflation, partially offset by foreign exchange gains.
SG&A as a percentage of net sales was 19.3% for 2022 and 17.4% in the prior
year.

Company


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


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Financial statement index

Year ended September 30, 2021 Compared to the year ended September 30, 2020


                                                       Year ended September 30, 2021
                                                          Water
                                      Water Flow       Management
                                       Solutions        Solutions       Corporate       Consolidated
                                                               (in millions)
Net sales                            $     617.8      $     493.2      $        -      $     1,111.0
Gross profit                         $     202.8      $     155.7      $        -      $       358.5
Operating expenses:
Selling, general and administrative         81.8             85.8            51.2              218.8
Strategic reorganization and other
(benefits) charges                           0.1             (0.4)            8.3                8.0
Total operating expenses                    81.9             85.4            59.5              226.8
Operating income (loss)              $     120.9      $      70.3      $    (59.5)             131.7
Pension benefit other than service                                                              (3.3)
Interest expense, net                                                                           23.4
Loss on early extinguishment of debt                                                            16.7
Income before income taxes                                                                      94.9
Income tax expense                                                                              24.5
Net income                                                                             $        70.4

                                                       Year ended September 30, 2020
                                                          Water
                                      Water Flow       Management
                                       Solutions        Solutions       Corporate       Consolidated
                                                               (in millions)
Net sales                            $     532.2      $     431.9      $        -      $       964.1
Gross profit                         $     180.0      $     148.2      $        -      $       328.2
Operating expenses:
Selling, general and administrative         75.1             78.8            44.5              198.4
Strategic reorganization and other
charges                                        -              0.7            12.3               13.0
Total operating expenses                    75.1             79.5            56.8              211.4
Operating income (loss)              $     104.9      $      68.7      $    (56.8)             116.8
Pension benefit other than service                                                              (3.0)
Interest expense, net                                                                           25.5
Walter Energy accrual                                                                            0.2
Income before income taxes                                                                      94.1
Income tax expense                                                                              22.1
Net income                                                                             $        72.0



Consolidated Analysis

Net sales for 2021 increased 15.2% to $1,111.0 million from $964.1 million in
the prior year primarily as a result of higher volume across most of our product
lines and higher pricing. Additionally, net sales benefited as a result of $6.0
million of Krausz sales from the elimination of the one-month reporting lag.

Gross profit increased $30.3 million to $358.5 million for 2021 compared with
$328.2 million in the prior year. This increase was primarily a result of
increased volume and higher pricing, partially offset by higher manufacturing
costs as a result of inflation, higher labor costs, and a $2.4 million inventory
write-off associated with the announcement of our plant closures in

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Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin decreased to 32.3% in 2021 from 34.0% the previous year.


SG&A increased 10.3% to $218.8 million for 2021 from $198.4 million in the prior
year. As a percentage of net sales, SG&A decreased 90 basis points to 19.7% of
net sales from 20.6% in the prior year. The increase in SG&A was primarily a
result of increased personnel-related expenses, including incentive
compensation, sales commissions associated with higher net sales and orders, and
stock-based compensation. Additional SG&A increases were a result of inflation,
new product development and information technology spending. Fiscal year 2020
SG&A included pandemic-driven benefits from temporarily reduced travel, trade
show and event spending as well as temporary employee furloughs and temporary
salary reductions.

Strategic reorganization and other charges of $8.0 million for 2021 primarily
related to termination benefits associated with our plant closures in Aurora,
Illinois and Surrey, British Columbia, Canada, the Albertville tragedy, and
certain transaction-related costs, partially offset by a one-time settlement
gain in connection with an indemnification of a previously owned property. In
2020, Strategic reorganization and other charges of $13.0 million primarily
related to a legal settlement, facility closure costs, transaction costs
associated with the acquisition of Krausz, and personnel matters.

Interest expense, net down $2.1 million in 2021 compared to the prior year, primarily due to an increase in capitalized interest on our large capital projects and the repayment of our 5.5% senior unsecured notes (“Senior 5.5%”), which were replaced by 4.0% senior unsecured notes (“4.0% Senior Notes”), partially offset by lower interest income.


                                            2021         2020
                                              (in millions)
5.5% Senior Notes                         $  17.6      $ 24.8
4.0% Senior Notes                             6.2           -
Deferred financing costs amortization         1.1         1.2
ABL Agreement                                 0.9         0.6
Capitalized interest                         (2.3)       (0.3)
Other interest expense                        0.3         0.3
Total interest expense                       23.8        26.6
Interest income                              (0.4)       (1.1)
Total interest expense, net               $  23.4      $ 25.5


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

Sector analysis

Waterflow Solutions


Net sales for 2021 increased $85.6 million, or 16.1%, to $617.8 million from
$532.2 million in the prior year. Net sales increased primarily as a result of
increased volume, and favorable pricing. The increased volume was a result of
strong demand driven by both residential construction and municipal repair and
replacement activity.

Gross profit for 2021 increased $22.8 million, or 12.7%, to $202.8 million from
$180.0 million in the prior year primarily as a result of increased volume.
These increases were partially offset by higher material and other costs
associated with inflation, specifically related to brass ingot, scrap steel and
purchased parts, a $2.4 million inventory write-off associated with the
announcement of the closure of our Aurora, Illinois and Surrey, British
Columbia, Canada facilities and certain expenses related to the pandemic,
including voluntary emergency paid leave and other employee costs as well as
additional sanitation and cleaning expenses. Gross margin was 32.8% in 2021, a
100 basis point decrease compared with 33.8% in the prior year.

SG&A in 2021 increased $6.7 million, or 8.9% to $81.8 million from $75.1 million
in the prior year primarily as a result of increased personnel-related costs
including higher sales commissions associated with higher net sales and orders,
inflation, information technology spending, and new product development. Fiscal
year 2020 SG&A included pandemic-driven benefits resulting from temporarily
reduced travel, trade show and event spending as well as temporary employee
furloughs and temporary salary reductions. SG&A was 13.2% and 14.1% of net sales
for 2021 and 2020, respectively.

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Water Management Solutions

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

Gross profit in 2021 increased $7.5 million at $155.7 million of $148.2 million the previous year due to higher volumes partially offset by higher inflation. Gross margin decreased to 31.6% in 2021 from 34.3% the previous year.


SG&A increased to $85.8 million in 2021 from $78.8 million in the prior year
primarily as a result of personnel-related expenses and information technology
spending. Fiscal year 2020 SG&A included pandemic-driven benefits resulting from
temporarily reduced travel, trade show and event spending as well as temporary
employee furloughs and temporary salary reductions. SG&A as a percentage of net
sales was 17.4% for 2021 and 18.2% in the prior year.

Company


SG&A increased by $6.7 million from $44.5 million in 2020 to $51.2 million in
2021 as a result of increased personnel-related expenses and inflation. Fiscal
year 2020 SG&A included pandemic-driven benefits resulting from temporary
reductions in travel, trade show and event spending as well as temporary
employee furloughs and temporary salary reductions.


Financial condition


Cash and cash equivalents were $146.5 million at September 30, 2022 and $227.5
million at September 30, 2021. Cash and cash equivalents decreased during 2022
as a result of capital expenditures of $54.7 million, dividend payments of $36.5
million, $35.0 million in share repurchases, and $6.4 million in effect of
currency exchange rate changes on cash, partially offset by $52.3 million in
cash provided by operating activities.

Receivables, net were $228.0 million at September 30, 2022 and $212.2 million at
September 30, 2021. This increase was primarily a result of the increase in net
sales year over year.

Inventories, net were $278.7 million at September 30, 2022 and $184.7 million at
September 30, 2021. Inventories increased during 2022 as a result of increased
volume, inflationary costs, and inventory management due to supply chain issues.

Property, plant and equipment, net was $301.6 million at September 30, 2022 and
$283.4 million at September 30, 2021. Property, plant and equipment increased
primarily as a result of our previously-announced capital expansion projects in
Kimball, Tennessee and Decatur, Illinois. Capital expenditures were $54.7
million in 2022. Depreciation expense was $32.0 million in 2022 compared with
$31.4 million in 2021 as a result of generally higher level of capital
expenditures over the last three years.

Intangible assets were $361.2 million at September 30, 2022 and $392.5 million
at September 30, 2021. Finite-lived intangible assets, net totaling $88.5
million at September 30, 2022, are amortized over their estimated useful lives.
Amortization expense was $28.5 million in 2022 and $28.2 million in 2021. We
expect amortization expense for these assets to be approximately $28 million and
$27 million in the next two years with a decrease to approximately $8 million in
fiscal 2025, approximately $6 million in fiscal 2026 and approximately $5
million in fiscal 2027. Indefinite-lived intangible assets, $272.7 million at
September 30, 2022, are not amortized but are tested for possible impairment at
least annually.

Accounts payable and other current liabilities were $240.2 million at September
30, 2022 and $219.1 million at September 30, 2021. Accounts payable increased
during 2022 as a result of increased production volume and the impact of higher
inventory costs. Other current liabilities decreased during 2022 primarily as a
result of lower personnel-related expenses, including incentive compensation and
sales commissions, as well as customer rebates and income taxes.

The total outstanding debt was $446.9 million of the September 30, 2022 and
September 30, 2021.


Deferred income taxes were net liabilities of $86.3 million at September 30,
2022 and $94.8 million at September 30, 2021, primarily related to intangible
assets. The $8.5 million decrease in the net liability was primarily a result of
reductions in intangible assets.

                                       32

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Cash and capital resources


We had cash and cash equivalents of $146.5 million at September 30, 2022 and
approximately $160.7 million of additional borrowing capacity under our
asset-based lending arrangement (the "ABL") based on September 30, 2022 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, 2022, cash and cash equivalents included $40.5 million, $18.9 million, and
$5.2 million in Israel, Canada and China, respectively.

We declared a quarterly dividend of $0.061 per share on October 21, 2022payable on or about November 21, 2022 to file holders from November 10, 2022which will result in an estimate $9.5 million cash disbursement.


We repurchased $35.0 million of our outstanding common stock during the fiscal
year ended September 30, 2022 and had $100.0 million remaining under our share
repurchase authorization as of September 30, 2022.

The ABL and 4.0% Senior Notes contain customary representations and warranties,
covenants and provisions governing an event of default. The covenants restrict
our ability to engage in certain specified activities including, but not limited
to, the payment of dividends and the redemption of our common stock.

Collections from customers were higher during the fiscal year ended September
30, 2022 as compared with the prior year period primarily as a result of net
sales growth. Inventory purchases increased during the fiscal year ended
September 30, 2022 as compared with the fiscal year ended September 30, 2021 as
a result of inflation, increased sales, and inventory management due to supply
chain factors. Other current liabilities and other noncurrent liabilities
decreased as a result of employee incentive payouts, income tax payments, the
repayment of the CARES Act employer payroll tax deferral and the payment of
customer rebates.

Capital expenditures were $54.7 million for 2022 compared with $62.7 million for
2021. Capital expenditures decreased primarily as a result of lower expenditures
associated with the new Decatur foundry as compared with the prior year period.
We estimate 2023 capital expenditures will be between $70.0 million and $80.0
million.

Income tax payments were higher in 2022 compared to the prior year, primarily due to the timing of certain federal and state extension payments. We expect the effective tax rate in 2023 to be between 23% and 25%.


Our stock repurchase program allows us to repurchase up to $250.0 million of our
common stock, of which we had remaining authorization of $100.0 million as of
September 30, 2022. The program does not commit us to any particular timing or
quantity of purchases, and we may suspend or discontinue the program at any
time. We acquired 2,654,254 and 651,271 shares of our common stock in 2022 and
2021, respectively.

We use letters of credit and surety bonds in the ordinary course of business to
ensure the performance of contractual obligations. As of September 30, 2022, we
had $14.1 million of letters of credit and $31.1 million of surety bonds
outstanding.

We anticipate our existing cash, cash equivalents and borrowing capacity
combined with our expected operating cash flows will be sufficient to meet our
anticipated operating needs, income tax payments, capital expenditures and debt
service obligations as they become due through September 30, 2023. However, our
ability to make these payments will depend largely on our future operating
performance, which may be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors beyond our control.

ABL agreement


Our ABL, as amended, is provided by a consortium of banking institutions and
consists of a revolving credit facility that $175.0 million in borrowing that
expires in July 29, 2025. Included in the ABL is the ability to borrow up to
$25.0 million of swing line loans and up to $60.0 million of letters of credit.
The ABL permits us to increase the size of the credit facility by an additional
$150.0 million in certain circumstances subject to adequate borrowing base
availability.

Borrowings under the ABL bear interest at a floating rate equal to the London
Inter Bank Offered Rate ("LIBOR") plus an applicable margin range of 200 to 225
basis points, or a base rate, as defined in the ABL, plus an applicable margin
of 100 to 125 basis points. At September 30, 2022, the applicable margin was 200
basis points for LIBOR-based loans and 100 basis points for base rate loans.

                                       33

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The ABL is subject to mandatory prepayments if total outstanding borrowings
under the ABL are greater than the aggregate commitments under the revolving
credit facility or if we dispose of overdue accounts receivable in certain
circumstances. The borrowing base under the ABL 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 eligible inventory, less certain reserves. Prepayments can be made at any
time without penalty.

Substantially all of our United States subsidiaries are borrowers under the ABL
and are jointly and severally liable for any outstanding borrowings. Our
obligations under the ABL are secured by a first-priority perfected lien on all
of our United States inventory, accounts receivable, certain cash balances and
other supporting obligations.

The ABL includes a commitment fee for any unused borrowing capacity of 37.5
basis points per annum. Borrowings are not subject to any financial maintenance
covenants unless excess availability is less than the greater of $17.5 million
and 10% of the Loan Cap as defined in the ABL. Excess availability based on
September 30, 2022 data was $160.7 million, as reduced by $14.1 million of
outstanding letters of credit and $0.2 million of accrued fees and expenses.

4.0% Senior Unsecured Notes


On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured
Notes ("4.0% Senior Notes"), which mature on June 15, 2029 and bear interest at
4.0%, paid semi-annually in June and December. We capitalized $5.5 million of
financing costs, which are being amortized over the term of the 4.0% Senior
Notes using the effective interest method. Proceeds from the 4.0% Senior Notes,
along with cash on hand were used to redeem previously existing 5.5% Senior
Notes. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior
Notes, which are subordinate to borrowings under our ABL. Based on quoted market
prices the outstanding 4.0% Senior Notes had a fair value of $382.1 million at
September 30, 2022.

An indenture securing the 4.0% Senior Notes ("Indenture") contains customary
covenants and events of default, including covenants that limit our ability to
incur certain debt and liens. We believe we were in compliance with these
covenants at September 30, 2022. There are no financial maintenance covenants
associated with the Indenture.

As set forth in the Indenture, we may redeem some or all of the 4.0% Senior
Notes at any time prior to June 15, 2024, at certain "make-whole" redemption
prices and on or after June 15, 2024 at specified redemption prices.
Additionally, we may redeem up to 40% of the aggregate principal amount of the
4.0% Senior Notes at any time prior to June 15, 2024, with the net proceeds of
specified equity offerings at specified redemption prices as set forth in the
Indenture. Upon a change of control as defined in the Indenture, we would be
required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of
the outstanding principal amount of the 4.0% Senior Notes.

5.5% Senior Unsecured Notes


On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured
Notes ("5.5% Senior Notes"), which were set to mature in 2026 and bore interest
at 5.5%, paid semi-annually. We called the 5.5% Senior Notes effective June 17,
2021 and settled with proceeds from the issuance of the 4.0% Senior Notes and
cash on hand. As a result, we incurred $16.7 million in loss on early
extinguishment of debt, comprised of a $12.4 million call premium and a $4.3
million write-off of the remaining deferred debt issuance costs associated with
the retirement of the 5.5% Senior Notes.

Credit ratings


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,
                             2022                 2021           2022                 2021
Corporate credit rating       Ba1                  Ba1            BB                   BB
ABL Agreement              Not rated            Not rated      Not rated            Not rated
4.0% Senior Notes             Ba1                  Ba1            BB                   BB
Outlook                     Stable               Stable         Stable               Stable



Effect of Inflation

We experience changing price levels primarily related to purchased components
and raw materials. During the fiscal year 2022, we experienced a 40% increase in
the average cost per ton of scrap steel and a 20% increase in the average cost
of brass as compared to 2021. We anticipate inflation in raw and other material
costs in 2023, which may have an adverse effect on our margins to the extent we
are unable to pass on such higher costs to our customers.

                                       34

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Material Cash Requirements

We enter into a variety of contractual obligations as part of our normal
operations in addition to capital expenditures. As of September 30, 2022, we
have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which
mature in 2029 and include cash interest payments of $18.0 million in 2023
annually through 2029; (ii) cumulative cash obligations of $32.6 million for
operating leases through 2033 and $1.7 million for finance leases through 2026;
and (iii) purchase obligations for raw materials and other purchased parts of
approximately $155.1 million which we will incur during 2023. We expect to fund
these cash requirements from cash on hand and cash generated from operations.


Seasonality

Our business is seasonal as a result of the impact of cold weather conditions.
Net sales and operating income historically have been lowest in the three month
periods ending December 31 and March 31 when the northern United States and all
of Canada generally face weather conditions that restrict significant
construction activity. See "Item 1A. RISK FACTORS-Seasonal demand for certain of
our products and services may adversely affect our financial results."


Critical accounting estimates


The preparation of financial statements in accordance with accounting principles
generally accepted in the United States ("GAAP") requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. These
estimates are based upon experience and on various other assumptions we believe
to be reasonable under the circumstances. Actual results may differ from these
estimates. We consider an accounting estimate to be critical if changes in the
estimate that are reasonably likely to occur over time or the use of reasonably
different estimates could have a material impact on our financial condition or
results of operations. Our critical accounting estimates include the below
items.

Revenue recognition


We recognize revenue when control of promised products or services is
transferred to our customers, in amounts that reflect the consideration to which
we expect to be entitled in exchange for those products or services. We account
for a contract when it has approval and commitment from both parties, the rights
of the parties are identified, the payment terms are identified, the contract
has commercial substance and collectability of consideration is probable. We
determine the appropriate revenue recognition for our contracts with customers
by analyzing the type, terms and conditions of each contract or arrangement with
a customer. See Note 3. for more information regarding our revenues.

Inventories, net


We record inventories at the lower of first-in, first-out method cost or
estimated net realizable value. Inventory cost includes an overhead component
that can be affected by levels of production and actual costs incurred. We
evaluate the need to record adjustments for impairment of inventory at least
quarterly. This evaluation includes such factors as anticipated usage, inventory
levels and ultimate product sales value. If in our judgment persuasive evidence
exists that the net realizable value of inventory is lower than its cost, the
inventory value is written-down to its estimated net realizable value.
Significant judgments regarding future events and market conditions must be made
when estimating net realizable value.

Income taxes


We recognize deferred tax liabilities and deferred tax assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the differences between the financial statements and the tax basis of
assets and liabilities, using enacted tax rates in effect for the years in which
the differences are expected to reverse. A valuation allowance is provided to
offset any net deferred tax assets when, based upon the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. Our deferred tax liabilities and assets are based on our expectations
of future operating performance, reversal of taxable temporary differences, tax
planning strategies, interpretation of the tax regulations currently enacted and
rulings in numerous tax jurisdictions.

                                       35

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Index to Financial Statements



We only record tax benefits for positions that we believe are more likely than
not of being sustained under audit examination based solely on the technical
merits of the associated tax position. The amount of tax benefit recognized for
any position that meets the more-likely-than-not threshold is the largest amount
of the tax benefit that we believe is greater than 50% likely of being realized.

Recognition of the impairment of Good will and Indefinite life intangible assets


We test goodwill and indefinite-lived intangible assets for impairment annually
or more frequently if events or circumstances indicate possible impairment. We
performed this annual impairment testing at September 1, 2022, using standard
valuation methodologies and rates that we considered reasonable and appropriate.

We evaluate goodwill for impairment using a quantitative analysis. The carrying
value of the reporting unit, including goodwill, is compared with the estimated
fair value of the reporting unit utilizing a combination of the income and
market approaches. The income approach, which is a level 3 fair value
measurement, is based on projected debt-free cash flow which is discounted to
the present value using discount rates that consider the timing and risk of the
cash flows. The market approach is based on the guideline public company method,
which uses market multiples to value our reporting units. We weight the income
and market approaches in a manner considering the risks of the underlying cash
flows.

This income approach is dependent on management's best estimates of future
operating results, including forecasted revenues, earnings before interest,
taxes, depreciation and amortization ("EBITDA") margins and the selection of
discount rates. There are inherent uncertainties related to the assumptions used
and to management's application of these assumptions.

We test our trade name indefinite-lived intangible assets for impairment using a
"royalty savings method," which is a variation of the discounted cash flow
method. This method estimates a fair value by calculating an estimated
discounted future cash flow stream from the hypothetical licensing of the
indefinite-lived intangible assets. If this estimated fair value exceeds the
carrying value, no impairment is indicated. This analysis is dependent on
management's best estimates of future operating results and the selection of
reasonable discount rates and hypothetical royalty rates.

We performed our annual impairment testing at September 1, 2022. As a result of
this quantitative testing, we recognized a $6.8 million goodwill impairment
charge for a reporting unit within our Water Flow Solutions segment as the
carrying value exceeded its fair value. Our determination of the estimated fair
value was based on a combination of the discounted cash flow method and the
guideline public company method. Our testing indicated no other impairment.

Warranty cost


We accrue for warranty expenses that can include customer costs of repair and/or
replacement, including labor, materials, equipment, freight and reasonable
overhead costs. We accrue for the estimated cost of product warranties at the
time of sale if such costs are determined to be reasonably estimable at that
time. Warranty cost estimates are revised throughout applicable warranty periods
as better information regarding warranty costs becomes available. Critical
factors in our analyses include warranty terms, specific claim situations,
general incurred and projected failure rates, the nature of product failures,
product and labor costs, and general business conditions. These estimates are
inherently uncertain as they are based on historical data. If warranty claims
are made in the current period for issues that have not historically been the
subject of warranty claims and were not taken into consideration in establishing
the accrual or if claims for issues already considered in establishing the
accrual exceed expectations, warranty expense may exceed the accrual for that
particular product. Additionally, a significant increase in costs of repair or
replacement could require additional warranty expense. We monitor and analyze
our warranty experience and costs periodically and revise our warranty accrual
as necessary. However, as we cannot predict actual future claims, the potential
exists for the difference in any one reporting period to be material.


                                       36

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Contents

Financial statement index

Contingencies


We are involved in litigation, investigations and claims arising in the normal
course of business. We estimate and accrue liabilities resulting from such
matters based on a variety of factors, including outstanding legal claims and
proposed settlements; assessments by counsel of pending or threatened
litigation; and assessments of potential environmental liabilities and
remediation costs. We believe we have adequately accrued for these potential
liabilities; however, facts and circumstances may change and could cause the
actual liability to exceed the estimates, or may require adjustments to the
recorded liability balances in the future. As we learn new facts concerning
contingencies, we reassess our position both with respect to accrued liabilities
and other potential exposures. Estimates particularly sensitive to future
changes include liabilities recorded for environmental remediation, tax and
legal matters. Estimated future environmental remediation costs are subject to
change as a result of such factors as the uncertain magnitude of cleanup costs,
the unknown time and extent of such remedial actions that may be required, and
the determination of our liability in proportion to that of other responsible
parties. Estimated future costs related to tax and legal matters are subject to
change as events evolve and as additional information becomes available during
the administrative and litigation processes. For more information on these and
other contingencies, see Note 17. of the Notes to Consolidated Financial
Statements. See also "Item 1. BUSINESS - Regulatory and Environmental Matters,"
"Item 1A. RISK FACTORS".

Workers’ compensation, defined benefit pension plans, environmental liability and other long-term liabilities


We are obligated for various liabilities that ultimately will be determined over
what could be very long future time periods. We established the recorded
liabilities for such items at September 30, 2022 using estimates for when such
amounts will be paid and what the amounts of such payments will be. These
estimates are subject to change based on numerous factors including, among
others, regulatory changes, technology changes, the investment performance of
related assets, longevity of participants, the discount rate used and changes to
plan designs.

Business Combinations

We recognize assets acquired and liabilities assumed at their estimated
acquisition date fair values, with the excess of purchase price over the
estimated fair values of identifiable net assets recorded as goodwill. Assigning
fair values requires us to make significant estimates and assumptions regarding
the fair value of identifiable intangible assets. We may refine these estimates
if necessary over a period not to exceed one year by taking into consideration
new information that, if known at the acquisition date, would have affected the
fair values recognized for assets acquired and liabilities assumed.

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

© Edgar Online, source Previews

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Easing Wholesale Pricing Won’t Increase Profit Margins https://eventplaner.net/easing-wholesale-pricing-wont-increase-profit-margins/ Tue, 15 Nov 2022 22:57:51 +0000 https://eventplaner.net/easing-wholesale-pricing-wont-increase-profit-margins/

Comment

Wholesale price inflation as measured by the producer price index hit its slowest pace in more than a year in October, data showed on Tuesday. But investors hoping that translates into higher profit margins for the S&P 500 index shouldn’t hold their breath: Margins are likely to remain tight for several quarters and possibly longer.

First, consider the counterintuitively positive relationship between PPI and profit margins. As it has done at other times in recent history, inflation has provided many companies with a hedge to ride out price increases beyond their wholesale costs. During peak inflation, politicians portrayed this as a sign of unchecked corporate greed (and, certainly, there is a case for that, but I’ll be a bit more charitable here). Companies were trying to line their pockets one last time — in C-suite parlance, they were fulfilling their fiduciary duties to protect shareholder interests — in an overheated economy that many suspected was heading into recession. Those record margins that companies have been posting lately may well turn out to be a last hurrah.

It turns out that the relationship between PPI and gross margins is almost always positive, as researchers at the Federal Reserve Bank of New York recently found. When producer prices go down, profit margins usually go down too, and that’s not shocking when you really think about it: both tend to go down during recessions. Therein lies the half-empty interpretation of recent improvements in the final demand PPI, which was up 8% from a year ago and just 0.2% from the previous month. . The decline partly reflects the unraveling of supply chains, but it also hints at a weakening in underlying demand. Excluding the volatile components of food and energy, the PPI remained stable from September to October.

It is also important to remember where the expansion of margins has come from in recent decades. When people think about the impact of lower wholesale prices, they probably have in mind businesses that sell physical goods, like retailers or automakers, which typically have low margins and can benefit from some additional flexibility through lower producer price inflation and even some deflation in the cost of inputs. If retail consumption remains buoyant – a big “if” – they can choose to pass on these lower costs or keep the extra margin to increase profits. But at the index level, it’s not retail that drives the big margins on the S&P 500; they are big tech companies. Over the past two decades, technology has consistently lifted index operating margins to new highs, pushing them to around 16% during the pandemic. At least in the short term, tech margins are set to suffer from wage inflation and rising energy costs in Europe, where many companies operate data centers for their cloud products. “The majority of expenses are personnel-related for a lot of these companies,” my colleague Anurag Rana, Bloomberg Intelligence’s senior analyst for technology, told me. That’s why some tech companies are quick to lay off workers; they know they have to choose their poison between preserving margins and protecting jobs.

The emergence of tech giants hasn’t been the only driver of higher margins over the past few decades, but the other drivers don’t look very good either. Globalization, which has reduced material and labor costs, appears to be taking a step backwards amid growing geopolitical tensions. And corporate interest rates on debt are likely to be higher for the foreseeable future – unless something breaks in the global economy, in which case corporations are in bigger trouble. That means the improved PPI — while good news for inflation fighters at the Federal Reserve — may not be as much of a win for corporate America. In the short term at least, the outlook is likely to deteriorate before it improves.

More from Bloomberg Opinion:

• Keynesian economics offers little value these days: Tyler Cowen

• Central banks have a break but cannot rest: Mohamed El-Erian

• Inflation doves want it both ways with CPI Quirk: Jonathan Levin

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

More stories like this are available at bloomberg.com/opinion

]]> Matterport: Still too early to hunt (NASDAQ:MTTR) https://eventplaner.net/matterport-still-too-early-to-hunt-nasdaqmttr/ Sun, 13 Nov 2022 10:13:00 +0000 https://eventplaner.net/matterport-still-too-early-to-hunt-nasdaqmttr/

courtneyk/E+ via Getty Images

Matterport (NASDAQ: MTTR) has a bright future in spatial data reshaping the commercial real estate industry, but the company is still struggling to grow subscriptions significantly. Stock Traded Too Cheap In The $2s, But Big Earnings gains in the last quarter were attributable to an acquisition. My investment thesis is still neutral on the stock after Matterport fell significantly from the previous call at $6.

Subscription struggles

Matterport leverages capturing a digital twin in the real estate market to drive recurring subscriptions by providing customers with online spaces featuring virtual tours, security, and space management. The company has struggled for most of the past year to provide the cameras needed to capture these digital spaces, which has slowed its growth.

The company reported in the third quarter of 2022 that revenue jumped to $38.0 million, but the sharp increase in revenue was primarily due to the acquisition of VHT Studios. The company is helping Matterport expand its efforts around capturing digital spaces for customers who don’t want or can’t use Pro 3D cameras or smartphone apps.

Services revenue tripled to $10.0 million, but the total was only up $5.0 million from the second quarter level. The acquisition of VHT Studios generated $4.5 million in additional revenue for the quarter, accounting for the vast majority of the revenue gain in Q3’22. Major subscription revenue increased only slightly sequentially, from $18.4 million to $19.0 million. Additionally, Matterport only guided Q4’22 subscription revenue mostly flat at $19.1 million in Q4’22.

Subscription slide

Source: Matterport Q3’22 presentation

The frustrating part about the company is that the CFO described services growth on the Q3 2022 earnings call as extraordinary without properly highlighting the VHT impact:

Services revenue for the third quarter reached a record $10 million, a extraordinary 204% increase year on year. Our services revenue continued to grow in the quarter, exceeding our expectations and the acquisition of VHT, which met our expectations, provided strength in this revenue line.

The subscription business has gross margins of 77% while services and products (cameras) have margins below 40%. Cameras are mostly sold at cost, with Products only offering 13% gross margins in the last quarter, while Services have a decent 35% gross margins. Typically, however, the focus is on services and products to help customers onboard, resulting in faster subscription starts and higher recurring revenue.

Matterport continues to have a strong funnel with 657,000 subscribers using the platform for basic space management, but the company only has 63,000 paying subscribers. During the year, the funnel grew by 50%, but the actual number of paying subscribers only increased by about 17% from last quarter’s 54,000 subscribers. As a result, the company only guided a 20% growth in subscription revenue in the fourth quarter.

Subscription slide

Source: Matterport Q3’22 presentation

Valuation struggles

Although Matterport has a lot of promise when it comes to managing digital spaces, the company spends a lot compared to the actual gross profit. Matterport produced just $16.4 million in third-quarter gross profit, up slightly from the $14.2 million it produced last year.

The digital space company posted a non-GAAP loss of $26.8 million due to operating expenses of $75.4 million and $45.4 million excluding stock-based compensation . The huge disconnect is problematic in valuing Matterport well above the current market capitalization.

After the big 25% rally after Q3’22 results, the stock now has a market capitalization reaching $1.1 billion. Matterport has a revenue rate of just $152 million, and nearly half of that revenue is from low-margin business.

The company has $495 million in cash without any debt. The stock had traded toward the cash balance, but deep losses will burn through much of that cash before the company reaches cash flow positive, making any inclusion of cash in the equation a careless assessment.

The company guided fourth-quarter revenue to around $40 million, with most of the sequential revenue gains coming from product and service categories providing no real financial benefit to the company.

Carry

The main investor takeaway is that Matterport has a promising business opportunity, but the company can’t generate the subscription growth needed to invest in the stock. Investors should continue to side-watch a return of stocks to $2 or so until signs exist for faster subscription growth to reduce operating losses.

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PAYMENTUS HOLDINGS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q) https://eventplaner.net/paymentus-holdings-inc-management-report-and-analysis-of-the-financial-situation-and-operating-results-form-10-q/ Thu, 10 Nov 2022 22:34:12 +0000 https://eventplaner.net/paymentus-holdings-inc-management-report-and-analysis-of-the-financial-situation-and-operating-results-form-10-q/

Insight


We are a leading provider of cloud-based bill payment technology and solutions.
We deliver our next-generation product suite through a modern technology stack
to more than 1,700 biller business and financial institution clients. Our
platform was used by approximately 21 million consumers and businesses in North
America in December 2021 to pay their bills, make money movements and engage
with our clients. We serve billers of all sizes that primarily provide
non-discretionary services across a variety of industry verticals, including
utilities, financial services, insurance, government, telecommunications and
healthcare. We also serve financial institutions by providing them with a modern
platform that their customers use for bill payment, account-to-account transfers
and person-to-person transfers. By powering this comprehensive network of
billers and financial institutions, each with their own set of bill payment
requirements, we believe we have created an enviable feedback loop that enables
us to continuously drive innovation, grow our business and uniquely improve the
electronic bill payment experience for participants in the bill payment
ecosystem.

Our platform provides our clients with easy-to-use, flexible and secure
electronic bill payment experiences powered by an omni-channel payment
infrastructure that allows consumers to pay their bills using their preferred
payment type and channel. Because our biller platform is developed on a single
code base and leverages a SaaS infrastructure, we can rapidly deploy new
features and tools to our entire biller base simultaneously. Through a single
point of integration to our billers' core financial and operating systems, our
mission-critical solutions provide our billers with a payments operating system
that helps them collect revenue faster and more profitably and empower their
consumers with the information and transparency needed to control their
finances.

We generate substantially all of our revenue from payment transaction fees and
have achieved significant growth through our capital efficient model. We rely on
a diversified go-to-market strategy to reach new billers. We acquire new billers
through direct sales channels, software and strategic partnerships and our
Instant Payment Network, or IPN, which together promote rapid adoption of our
platform through partnerships with leading business networks. Through these
channels, our platform reaches millions of consumers, driving transaction
growth.

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We believe our revenue is highly visible. We derive the majority of our revenue
from a fee paid per transaction by the consumer, the biller or a combination of
both. Our usage-based monetization strategy aligns our economic success with the
success of our billers and partners. Since we benefit from increased
transactional volume, we do not charge separate license fees or implementation
fees. In addition, our modern platform architecture generally allows us to
provide integration, implementation, maintenance and system upgrades at no
additional cost to billers.

                   Impact of Economic and Inflationary Trends

In 2022, the United States economy has experienced inflationary conditions,
increased interest rates and two consecutive quarters of decreased gross
domestic product. While we believe our business is resilient and can generally
weather unusual levels of inflation, the economic uncertainty and continuing
inflationary pressures, which has been particularly acute in the utility sector,
have had some impact on our expected 2022 financial performance and will likely
have some impact on our 2023 performance. For example, some of our clients have
deferred anticipated 2022 implementations into 2023 or are reevaluating the
development of technology resources, which will delay expected revenue
recognition. Furthermore, inflationary pressure is resulting in higher average
bills, particularly in the utility sector, and increased interchange fees. While
we are seeking to adjust our prices to address the inflationary pressures, our
ability to do so typically lags behind the impact of inflation on our clients,
the increase in average bill amounts and increased interchange fees. We intend
to continue to manage through this uncertain economic environment by working
closely with clients on implementations and price adjustments. In addition,
although we are focused on prudent expense management, we are seeing ongoing
wage pressure in our current workforce due to the levels of inflation, which is
also putting some short-term pressure on our EBITDA margins.

                        Impact of the COVID-19 Pandemic

The COVID-19 pandemic, including its variants, and efforts to control its spread
have at times significantly curtailed the movement of people, goods and services
in the United States, where we generate substantially all of our revenue, and
worldwide, where we are targeting future growth. It has also caused extreme
societal, economic and financial market volatility, resulting in business
shutdowns and a global economic downturn. The magnitude and duration of the
COVID-19 pandemic and the magnitude and duration of its effect on business
activity cannot be predicted with any certainty.

In light of the uncertainty relating to the spread of COVID-19, we have taken
precautionary measures intended to reduce the risk of the virus spreading to our
employees, billers and partners, and we may take further precautionary measures.
In particular, governmental authorities have at times instituted, and in the
future may institute, shelter-in-place policies and other restrictions in many
jurisdictions in which we operate or maintain significant operations, which
policies and restrictions have at times required our employees to work remotely.
Even though many of the shelter-in-place policies or other governmental
restrictions have been lifted, we are taking, and expect to continue to take, a
measured and careful approach to having employees return to offices and travel
for business. To the extent our employees are required to work from our offices,
we may experience turnover from employees unwilling to return to the office.
These precautionary measures and policies could negatively impact employee
productivity, training and collaboration or otherwise disrupt our business
operations. In addition, such restrictions impact certain of our sales efforts,
marketing efforts and implementations, adversely affecting the effectiveness of
such efforts in some cases, delaying potential revenue recognition and
potentially inhibiting future growth.

In addition, the COVID-19 pandemic has disrupted and may continue to disrupt the
operations of our billers and partners for an indefinite period of time, which
in turn could negatively impact our business and operating results. Widespread
remote work arrangements may also negatively impact our billers' and partners'
operations, and the operations of third-party service providers who perform
critical services for us, and, by extension, our operations.

We will continue to assess the nature and extent of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.


                      Components of Results of Operations

Revenue

We generate substantially all of our revenue from payment transaction fees.
Transaction fees are fees collected for each transaction processed through our
platform, on either a fixed basis or variable basis based on the transaction
value, with the actual fees dependent on type of transaction, payment or
transaction channel and industry vertical. However, irrespective of these
factors, the transaction fees that we receive are generally consistent across
transaction types, payment and transaction channels and industry verticals. We
receive such transaction fees directly from billers, financial institutions,
partners or, in some cases, from consumers as a convenience fee.

Cost of revenue, gross profit and gross margin

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Cost of revenue consists of certain direct costs that are directly attributed to
processing transactions on our platform. This includes interchange, assessment
and network expenses incurred for processing payments as well as costs of
servicing our clients through product support, implementations and customer
care. Cost of revenue also includes an allocation of hosting and data center
costs for our infrastructure and platform environment, telecommunication
expenses used by sales and customer support teams and a portion of amortization
of capitalized internal-use software development costs and a portion of
amortization of intangible assets, including amortization of intangible assets
acquired as part of our acquisitions of other businesses. We expect that cost of
revenue will increase in absolute dollars, but it may fluctuate as a percentage
of revenue from period to period, as our transaction mix changes and we continue
to invest in growing our business across all geographical segments, including
through the acquisition of other businesses.

There are external factors that impact interchange fees, such as the average
transaction amount in a particular month or quarter. For example, hot summers
and cold winters tend to increase utility bills, and property taxes result in
two larger payments per year, each of which increases our interchange cost.

Gross profit is equal to our revenue less cost of revenue. Gross profit as a
percentage of our revenue is referred to as gross margin. Our gross margin has
been and will continue to be affected by a number of factors, including average
transaction value, payment type and payments and transactions through our IPN.

Operating Expenses

Research and Development

Research and development expenses consist of personnel-related expenses,
including stock-based compensation expenses, incurred in developing new products
or enhancing existing products and are expensed as incurred, unless they qualify
as internal-use software development costs, which are capitalized and amortized.
We expect our research and development expenses to increase in absolute dollars,
but they may fluctuate as a percentage of revenue from period to period as we
expand our research and development team to develop new products and product
enhancements. Over the longer term, we expect research and development expenses
to decrease as a percentage of revenue as we leverage the scale of our business.

Sales and Marketing


Sales and marketing expenses consist primarily of personnel-related expenses,
including stock-based compensation expenses for sales and marketing personnel,
sales commissions, partner fees, marketing program expenses, travel-related
expenses and costs to market and promote our platform through advertisements,
marketing events, partnership arrangements and direct biller acquisition as well
as amortization of intangible assets acquired as part of our acquisitions of
other businesses. We expect our sales and marketing expenses to increase in
absolute dollars, but they may fluctuate as a percentage of revenue from period
to period.

General and Administrative

General and administrative expenses consist primarily of personnel-related
expenses, including stock-based compensation expenses for finance, risk
management, legal and compliance, human resources, information technology and
facilities personnel. General and administrative expenses also include costs
incurred for external professional services and other corporate expenses. We
expect to incur additional general and administrative expenses as a result of
operating as a public company, and to support the growth in our business. We
expect that our general and administrative expenses will increase in absolute
dollars, but they may fluctuate as a percentage of revenue from period to
period. Over the longer term, we expect general and administrative expenses to
decrease as a percentage of revenue as we leverage the scale of our business.

                       Factors Affecting Our Performance

The discussion below includes a number of forward-looking statements regarding
our future performance. For a discussion of important factors, including the
continuing development of our business and other factors which could cause
actual results to differ materially from matters referred to below, see the
discussions under "Risk Factors" and "Special Note Regarding Forward-Looking
Statements" herein and in our Form 10-K for the year ended December 31, 2021 or
the "2021 Form 10-K".

Increased adoption of electronic bill payment solutions


As the number of financial transactions online continues to increase, electronic
bill payment is becoming a greater share of the bill payment market. We have
observed that consumers demand a frictionless electronic bill payment experience
and increasingly prefer more flexible and innovative digital payment options. We
expect this trend to continue, providing us with a greater opportunity to
provide next-generation bill and digital payment technology and power more
transactions, further fueling our growth.

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Acquire new billers and maintain existing financial institutions


Our future growth depends on the continued adoption of our platform by new
billers and financial institutions, as well as maintaining our existing billers
and financial institutions. We intend to continue investing in our efficient
go-to-market strategies, increasing brand awareness and driving adoption of our
platform and products. We had more than 1,700 billers and financial institution
clients as of December 31, 2021, including billers of all sizes and across
numerous vertical markets and financial institutions of all sizes. Our ability
to attract new, and maintain existing, billers and financial institutions and
drive adoption of our platform will depend on a number of factors, including the
effectiveness and pricing of our products, offerings of our competitors and the
effectiveness of our marketing efforts. Our growth and performance also depends
on our ability to promptly implement and begin recognizing revenues from our new
billers and financial institutions.

Expand the use of our platform with existing billers and financial institutions


We believe our large base of existing billers and financial institutions
represents a significant opportunity for further consumption of our platform. We
believe our solutions create a superior experience for consumers and accelerate
revenue realization for billers, which drives increased usage of our platform.
We intend to continue investing in this value proposition. Leveraging our
platform to capture more transactions from our existing biller and financial
institution base is expected to organically drive transaction growth at lower
cost.

Growing Our Partner Base

We believe there is a significant opportunity to increase the transactions on
our platform through expanding our base of software, strategic and IPN partners.
While revenue derived from or through our IPN partnerships has not been
significant historically, we expect that the revenue contribution from our IPN
will grow over time. As our IPN partner base expands, and new partners use our
platform to power bill payment experiences within their ecosystems, we expect to
organically expand the reach of our platform to millions of new consumers and
thereby drive new, revenue-generating transactions to our platform. We intend to
invest in the expansion of our partner base, including the addition of new IPN
partners, because our ability to secure new partners will have a direct impact
on our transaction growth.

Invest in sales and marketing


We will continue to expand efforts to market our platform through our
diversified sales and marketing strategy. We intend to invest in sales and
marketing strategies that we believe will drive further brand awareness and
preference among our billers, financial institutions, partners and consumers.
Given the nature of our biller, financial institution and partner base, our
investment in sales and marketing in a given period may not impact results until
subsequent periods. We approach sales and marketing spend strategically to
maintain efficient biller and partner acquisition.

Innovation and improvement of our platform


We will continue to invest in our platform and IPN to maintain our position as a
leading provider of biller communication and payments. To drive adoption and
increase penetration of our platform, we intend to continue to introduce new
products and features. We believe that investment in research and development
will contribute to our long-term growth, but may also negatively impact our
short-term profitability. We will continue to leverage emerging technologies and
invest in the development of more features and better functionality for
consumers.

                     Key Performance and Non-GAAP Measures

We use the following metrics to measure our performance, identify trends
affecting our business, prepare financial projections and make strategic
decisions. We believe that these key performance and non-GAAP measures provide
meaningful supplemental information for management and investors in assessing
our historical and future operating performance. The calculation of the key
performance and non-GAAP measures discussed below may differ from other
similarly titled metrics used by other companies, securities analysts or
investors.

Transactions Processed


                                       Three Months Ended September 30,                 Nine Months Ended September 30,
                                    2022             2021           % Growth         2022              2021          % Growth
                                        (in millions)                                     (in millions)
Transactions processed                 92.2             70.6             30.6 %         269.6             197.2           36.7 %


We define transactions processed as the number of revenue generating payment
transactions, such as checks, credit card and debit card transactions, automated
clearing house, or ACH, items and emerging payment types, which are initiated
and generally processed through our platform during a period. The number of
transactions also includes

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account-to-account and person-to-person transfers. The number of transactions
processed during the three and nine months ended September 30, 2022 increased
approximately 30.6% and 36.7%, respectively, as compared to the same periods in
2021. The increase was primarily driven by the addition of new billers and
financial institutions and increased transactions from our existing billers and
financial institutions.

Non-GAAP Measures

We use supplemental measures of our performance that are derived from our
consolidated financial information but which are not presented in our
consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. These supplemental non-GAAP measures
include contribution profit, adjusted gross profit, adjusted EBITDA and free
cash flow.

Contribution Profit

We calculate contribution profit as gross profit plus other cost of revenue.
Other cost of revenue equals cost of revenue less interchange and assessment
fees paid by us to our payment processors.

Adjusted gross profit

We calculate adjusted gross margin as gross margin adjusted for non-cash items, primarily stock-based compensation and amortization.

Adjusted EBITDA


We calculate adjusted EBITDA as net income before other income (expense) (which
consists of interest income (expense), net and foreign exchange gain (loss)),
depreciation and amortization, income taxes, adjusted to exclude the effects of
stock-based compensation expense and certain nonrecurring expenses that
management believes are not indicative of ongoing operations, consisting
primarily of professional fees and other indirect charges associated with our
IPO.

Free Cash Flow

We calculate free cash flow as net cash provided by (used in) operating activities less capital expenditures and capitalized internal-use software and software development costs.


How we use Non-GAAP Measures

We use non-GAAP measures to supplement financial information presented on a GAAP
basis. We believe that excluding certain items from our GAAP results allows
management and our board of directors to more fully understand our consolidated
financial performance from period to period and helps management project our
future consolidated financial performance as forecasts are developed at a level
of detail different from that used to prepare GAAP-based financial measures.
Moreover, we believe these non-GAAP measures provide our investors with useful
information to help them evaluate our operating results by facilitating an
enhanced understanding of our operating performance and enabling them to make
more meaningful period-to-period comparisons. In particular, we exclude
interchange and assessment fees in the presentation of contribution profit
because we believe inclusion is less directly reflective of our operating
performance as we do not control the payment channel used by consumers, which is
the primary determinant of the amount of interchange and assessment fees. We use
contribution profit to measure the amount available to fund our operations after
interchange and assessment fees, which are directly linked to the number of
transactions we process and thus our revenue and gross profit. There are
limitations to the use of the non-GAAP measures presented in this report. Our
non-GAAP measures may not be comparable to similarly titled measures of other
companies; other companies, including companies in our industry, may calculate
non-GAAP measures differently than we do, limiting the usefulness of those
measures for comparative purposes. These non-GAAP measures should not be
considered in isolation from or as a substitute for financial measures prepared
in accordance with GAAP.

We also urge you to review the reconciliation of these non-GAAP financial
measures included below. To properly and prudently evaluate our business, we
encourage you to review the condensed consolidated financial statements and
related notes included elsewhere in this report and to not rely on any single
financial measure to evaluate our business.

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Contribution Benefit

                                                                                    Nine Months Ended September
                                            Three Months Ended September 30,                    30,
                                               2022                  2021              2022             2021
                                                                     (in thousands)
Gross profit                              $        37,857       $        31,164     $  108,539       $   87,639
Plus: other cost of revenue                        13,277                 9,488         38,704           25,563
Contribution profit                       $        51,134       $        40,652     $  147,243       $  113,202


In general, contribution profit is driven by the number of transactions we
process offset by network fees associated with processing those transactions.
The amount of contribution profit per transaction may vary due to a variety of
factors including client size, type and industry as well as whether the client
is a biller, financial institution or other partner. Contribution profit for the
three and nine months ended September 30, 2022 increased approximately 26.0% and
30.1%, respectively, as compared to the same periods in 2021. The increase was
primarily driven by the addition of new billers and financial institutions and
increased transactions from our existing billers and financial institutions. For
the three and nine months ended September 30, 2022, contribution profit
increased at a slower rate than transactions due to a continued mix shift to
larger, high volume clients.

Adjusted Gross Profit
                                            Three Months Ended September 30,        Nine Months Ended September 30,
                                               2022                  2021              2022               2021
                                                                       (in thousands)
Gross profit                              $        37,857       $        31,164     $  108,539       $       87,639
Stock-based compensation                                -                     -              -                    -
Amortization                                        3,186                 1,398          8,575                3,610
Adjusted gross profit                     $        41,043       $        32,562     $  117,114       $       91,249


Adjusted gross profit for the three and nine months ended September 30, 2022
increased approximately 26.0% and 28.3%, respectively, as compared to the same
periods in 2021. Adjusted gross profit is driven primarily by the same factors
that impact gross profit with the exception of excluding the amortization in
cost of revenue. The percentage increase in adjusted gross profit is lower than
the percentage increase in contribution profit due to additional other cost of
revenue recorded related to the PayVeris, LLC or Payveris, and Finovera, Inc.,
or Finovera, acquisitions. The increase in amortization was driven by additional
capitalization of software costs as well as amortization of acquired intangibles
associated with our acquisitions of Payveris and Finovera.

Adjusted EBITDA

                                              Three Months Ended September 30,             Nine Months Ended September 30,
                                                2022                     2021                2022                  2021
                                                                            (in thousands)
Net (loss) income                         $           (737 )       $            422     $        (1,470 )     $         4,635
Excluding
Interest income, net                                  (504 )                    (11 )              (594 )                  (4 )
Provision for (benefit from) income taxes              296                      701              (2,397 )               5,423
Depreciation and amortization                        6,158                    3,647              17,518                 8,587
Foreign exchange (gain) loss                            28                       16                 (52 )                   8
Stock-based compensation                             2,002                      754               4,622                 1,885
Other nonrecurring expenses(1)                         769                        -                 769                 2,711
Adjusted EBITDA                           $          8,012         $          5,529     $        18,396       $        23,245


(1)
Other nonrecurring expenses consist of indirect costs incurred associated with
our IPO in the nine months ended September 30, 2021 and an estimated liability
booked in the three months ended September 30, 2022 related to the potential
costs of terminating a commercial contract.

As adjusted EBITDA is a measure of profitability, it would generally be expected
to move in line with revenue, contribution profit, gross profit and adjusted
gross profit. Adjusted EBITDA decreased in the nine months ended September 30,
2022 as compared to the same period in 2021 due to our investment in sales and
marketing and research and development in order to drive future growth of the
business as well as the increased costs associated with being a public company
and the impact of the Payveris and Finovera acquisitions.

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Free Cash Flow
                                              Three Months Ended          Nine Months Ended September
                                                 September 30,                        30,
                                             2022             2021           2022             2021
                                                                (in thousands)

Net cash flow generated by operating activities $(1,949) $6,600 $

    5,143       $   19,357
Purchases of property and equipment and
software                                        (368 )           (261 )       (1,163 )           (825 )
Other intangible assets acquired                (125 )             --           (248 )             --
Capitalized internal-use software
development costs                             (7,793 )         (4,737 )      (22,257 )        (13,473 )
Free cash flow                            $  (10,235 )     $    1,602     $  (18,525 )     $    5,059
Net cash used in investing activities(1)  $   (8,286 )     $  (62,118 )   $  (23,668 )     $  (71,418 )
Net cash provided by financing activities $   18,722       $    4,724     $ 

42,940 $220,948

(1)

Net cash used in investing activities includes payments for purchases of property, plant and equipment and software and capitalized internal-use software development costs, which are also included in our calculation of free cash flow.


                             Results of Operations

The following table sets forth our condensed consolidated statements of earnings for the periods presented:

                                                Three Months Ended          Nine Months Ended September
                                                   September 30,                        30,
                                               2022             2021           2022             2021
                                                                  (in thousands)

Revenue                                     $  128,152       $  101,676     $  364,825       $  287,393
Cost of revenue(1)                              90,295           70,512        256,286          199,754
Gross profit                                    37,857           31,164        108,539           87,639
Operating expenses
Research and development(1)                     10,350            8,818         30,925           24,469
Sales and marketing(1)                          19,048           11,314         53,089           29,041
General and administrative(1)                    9,376            9,904         29,038           24,067
Total operating expenses                        38,774           30,036        113,052           77,577
(Loss) income from operations                     (917 )          1,128         (4,513 )         10,062
Other income (expense)
Interest income (expense), net                     504               11            594                4
Foreign exchange gain (loss)                       (28 )            (16 )           52               (8 )
(Loss) income before income taxes                 (441 )          1,123         (3,867 )         10,058
(Provision for) benefit from income taxes         (296 )           (701 )        2,397           (5,423 )
Net (loss) income                           $     (737 )     $      422     $   (1,470 )     $    4,635


(1)

Stock-based compensation expense has been allocated to cost of products and operating expenses as follows:


                                         Three Months Ended September 30,          Nine Months Ended September 30,
                                            2022                 2021               2022                     2021
                                                                         (in thousands)
Cost of revenue                          $         -         $          -     $              -         $              -
Research and development                         507                  110                1,080                      141
Sales and marketing                              612                   56                1,062                       92
General and administrative                       883                  588                2,480                    1,652
Total stock-based compensation           $     2,002         $        754     $          4,622         $          1,885




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The following table presents the components of our condensed consolidated
statements of operations for the periods presented as a percentage of revenue:

                                                Three Months Ended September 30,               Nine Months Ended September 30,
                                                 2022                      2021                2022                      2021

Revenue                                               100.0 %                   100.0 %             100.0 %                   100.0 %
Cost of revenue                                        70.5                      69.3                70.2                      69.5
Gross profit                                           29.5                      30.7                29.8                      30.5
Operating expenses
Research and development                                8.1                       8.7                 8.5                       8.5
Sales and marketing                                    14.9                      11.1                14.6                      10.1
General and administrative                              7.3                       9.7                 8.0                       8.4
Total operating expenses                               30.3                      29.6                31.0                      26.9
(Loss) income from operations                          (0.7 )                     1.1                (1.2 )                     3.6
Other income (expense)
Interest income (expense), net                          0.4                         -                 0.2                         -
Foreign exchange gain (loss)                              -                         -                   -                         -
(Loss) income before income taxes                      (0.3 )                     1.1                (1.1 )                     3.5
(Provision for) benefit from income taxes              (0.2 )                    (0.7 )               0.7                      (1.9 )
Net (loss) income                                      (0.6 %)                    0.4 %              (0.4 %)                    1.6 %

Comparison of the three months ended September 30, 2022 and 2021

Revenue
             Three Months Ended September 30,               Change
                2022                   2021            Amount        %
                              (dollars in thousands)
Revenue   $        128,152       $        101,676     $ 26,476       26.0


The increase in revenue was primarily due to an increase in the number of
transactions processed, which was driven by the implementation of new billers,
increased transactions from our existing billers and additional transactions as
a result of the Payveris and Finovera acquisitions, offset by the decrease in
revenue we received per transaction on a blended basis.

Cost of revenue, gross profit and gross margin


                    Three Months Ended September 30,              Change
                       2022                  2021            Amount        %
                                     (dollars in thousands)
Cost of revenue   $        90,295       $        70,512     $ 19,783       28.1
Gross profit      $        37,857       $        31,164     $  6,693       21.5
Gross margin                 29.5 %                30.6 %

The increase in the cost of revenue is explained by the increase in revenue and transactions processed, as it consists mainly of interchange fees and processing costs, driven by higher average billing amounts mainly due to inflation, as well as other direct and indirect costs associated with making our platform available to our billers.


Gross margin decreased for the three months ended September 30, 2022 due to an
increase in amortization expense included in cost of revenue associated with the
Payveris and Finovera acquisitions.


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Operating Expenses
                                Three Months Ended September 30,              Change
                                   2022                  2021           Amount        %
                                                 (dollars in thousands)
Operating expenses
Research and development      $        10,350       $         8,818     $ 1,532       17.4
Sales and marketing                    19,048                11,314       7,734       68.4
General and administrative              9,376                 9,904        (528 )     (5.3 )
Total operating expenses      $        38,774       $        30,036     $ 8,738
Percentage of total revenue
Research and development                  8.1 %                 8.7 %
Sales and marketing                      14.9 %                11.1 %
General and administrative                7.3 %                 9.7 %

Research and development costs


The increase in research and development expenses was primarily due to an
increase in employee-related costs, including benefits due to an increase in
headcount as we continued to invest in building and adding additional features
and functionality to our platform. Additionally, we incurred increased hosting
costs as we transitioned from data center to the cloud and an increase in
stock-based compensation expense associated with routine grants.

Sales and marketing expenses


The increase in sales and marketing expenses was primarily due to an increase in
employee-related costs, including benefits, as we continued to expand our sales
and marketing efforts with additional headcount in order to continue to drive
our growth. In addition, we incurred amortization expense related to the
identifiable intangible assets from the Payveris and Finovera acquisitions as
well as increased stock-based compensation associated with routine grants.

General and administrative expenses


The decrease in general and administrative expenses was primarily due to lower
costs for our directors and officers insurance and corporate premiums, a
reduction in lease cost and a decreases in employee-related costs, primarily
from a reduction in executive salaries and our bonus accrual.

Other Income (Loss)
                            Three Months Ended September 30,                Change
                             2022                      2021            Amount        %
                                             (dollars in thousands)
Interest income, net    $           504           $            11     $    493        n/m
Foreign exchange loss               (28 )                     (16 )        (12 )     75.0


___________
n/m - not meaningful

The changes in interest income, net was primarily due to the increase in the
federal reserve rates which had a positive impact on our included government
issued securities, which are included in cash and cash equivalents on the
balance sheet. The changes in foreign exchange loss were immaterial.

Income Taxes
                                Three Months Ended September 30,                Change
                                  2022                    2021            Amount         %
                                                  (dollars in thousands)

Provision for income taxes (296) $ (701) $

405 (57.8)



The change in provision for income taxes for the three months ended September
30, 2022 as compared to the same period in the prior year, was primarily due to
changes in pre-tax (loss) and income and the result of excess tax benefits on
stock-based compensation, state taxes, foreign income taxed at different rates
and permanent tax adjustments related to nondeductible executive compensation,
in addition to a valuation allowance recorded against the net deferred tax
assets.

Comparison of the nine months ended September 30, 2022 and 2021

Revenue

                                       31
--------------------------------------------------------------------------------
              Nine Months Ended September 30,               Change
                2022                   2021            Amount        %
                              (dollars in thousands)
Revenue   $        364,825       $        287,393     $ 77,432       26.9


The increase in revenue was primarily due to an increase in the number of
transactions processed, which was driven by the implementation of new billers,
increased transactions from our existing billers and additional transactions as
a result of the Payveris and Finovera acquisitions, offset by the decrease in
revenue we received per transaction on a blended basis.

Cost of revenue, gross profit and gross margin




                      Nine Months Ended September 30,               Change
                        2022                   2021            Amount        %
                                 (dollars in thousands)
Cost of revenue   $        256,286       $        199,754     $ 56,532       28.3
Gross profit      $        108,539       $         87,639     $ 20,900       23.8
Gross margin                  29.8 %                 30.5 %

The increase in the cost of revenue is explained by the increase in revenue and transactions processed, as it consists mainly of interchange fees and processing costs, driven by higher average billing amounts mainly due to inflation, as well as other direct and indirect costs associated with making our platform available to our billers.


Gross margin decreased for the nine months ended September 30, 2022 due to an
increase in amortization expense included in cost of revenue associated with the
Payveris and Finovera acquisitions.


                                       32
--------------------------------------------------------------------------------

Operating Expenses
                                 Nine Months Ended September 30,              Change
                                    2022                  2021           Amount        %
                                                 (dollars in thousands)
Operating expenses
Research and development      $         30,925       $       24,469     $  6,456       26.4
Sales and marketing                     53,089               29,041       24,048       82.8
General and administrative              29,038               24,067        4,971       20.7
Total operating expenses      $        113,052       $       77,577     $ 35,475
Percentage of total revenue
Research and development                   8.5 %                8.5 %
Sales and marketing                       14.6 %               10.1 %
General and administrative                 8.0 %                8.4 %

Research and development costs


The increase in research and development expenses was primarily due to an
increase in employee-related costs, including benefits due to an increase in
headcount as we continued to invest in building and adding additional features
and functionality to our platform. Additionally, we incurred increased hosting
costs as we transitioned from data center to the cloud and an increase in
stock-based compensation expense associated with routine grants.

Sales and marketing expenses


The increase in sales and marketing expenses was primarily due to an increase in
employee-related costs, including benefits, as we continued to expand our sales
and marketing efforts with additional headcount in order to continue to drive
our growth. In addition, we incurred amortization expense related to the
identifiable intangible assets from the Payveris and Finovera acquisitions as
well as increased stock-based compensation associated with routine grants.

General and administrative expenses


The increase in general and administrative expenses was primarily due to
increased costs of operating as a public company, including significant
increases in our directors and officers insurance premiums, and increases in
employee-related costs, including benefits and stock-based compensation, due to
an increase in general and administrative headcount.

Other Income (Loss)
                                   Nine Months Ended September 30,              Change
                                     2022                     2021          Amount       %
                                                  (dollars in thousands)
Interest income, net           $            594           $          4     $    590     n/m
Foreign exchange gain (loss)                 52                     (8 )         60     n/m



___________
n/m - not meaningful

The changes in interest income (expense), net and foreign exchange gain were
immaterial.

Income Taxes
                                 Nine Months Ended September 30,                     Change
                                 2022                     2021               Amount             %
                                                      (dollars in thousands)
Benefit from (provision
for) income taxes           $         2,397         $          (5,423 )   $      7,820           (144.2 )


The change in benefit from (provision for) income taxes for the nine months
ended September 30, 2022 as compared to the same period in the prior year, was
primarily due to changes in pre-tax (loss) and income and the result of excess
tax benefits on stock-based compensation, state taxes, foreign income taxed at
different rates and permanent tax adjustments related to nondeductible executive
compensation, in addition to a valuation allowance recorded against the net
deferred tax assets.

                                       33
--------------------------------------------------------------------------------


                        Liquidity and Capital Resources

Sources and uses of funds


As of September 30, 2022, we had $148.3 million of unrestricted cash and cash
equivalents. We believe that existing unrestricted cash and cash equivalents
will be sufficient to support our working capital and capital expenditure
requirements for at least the next 12 months. Since inception, we have financed
operations primarily through the sale of equity securities and revenue from
payment transaction fees and subscriptions. Our principal uses of cash are
funding operations and capital expenditures.

From time to time, we may explore additional financing sources and means to
lower our cost of capital, which could include equity, equity-linked and debt
financing. We cannot assure you that any additional financing will be available
to us on acceptable terms, or at all. The inability to raise capital would
adversely affect our ability to achieve our business objectives. If we raise
additional funds by issuing equity or equity-linked securities, the ownership of
our existing stockholders will be diluted. If we raise additional financing by
the incurrence of indebtedness, we may be subject to increased fixed payment
obligations and could be subject to additional restrictive covenants, such as
limitations on our ability to incur additional debt, and other operating
restrictions that could adversely impact our ability to conduct our business or
execute our growth strategy. Any future indebtedness we incur may result in
terms that could be unfavorable to equity investors.

Historical cash flows

The following table summarizes our condensed consolidated cash flows.

                                                             Nine Months Ended September 30,
                                                               2022                   2021
                                                                     (in thousands)
Net cash provided by (used in)
Operating activities                                     $          5,143       $         19,357
Investing activities                                              (23,668 )              (71,418 )
Financing activities                                               42,940                220,948
Effects of foreign exchange on cash                                  (329 )                   24
Net increase in cash, cash equivalents and
restricted cash                                          $         24,086   

$168,911

Net cash from operating activities


Our primary source of operating cash is revenue from payment transaction fees.
Our primary uses of operating cash are personnel-related costs, payments to
third parties to fulfill our payment transactions and payments to sales and
marketing partners. Net cash provided by operating activities mainly consists of
our net income adjusted for certain non-cash items, including depreciation and
amortization, stock-based compensation, other non-cash income and expense items,
and net changes in operating assets and liabilities.

Net cash provided by operating activities for the nine months ended September
30, 2022 was $5.1 million. Net loss was $1.5 million, adjusted for non-cash
charges of $22.0 million consisting primarily of depreciation and amortization,
stock-based compensation, and non-cash lease expense, which contributed
positively to operating activities. This was offset by net cash outflows of
$15.4 million provided by changes in our operating assets and liabilities.

Net cash provided by operating activities for the nine months ended September
30, 2021 was $19.4 million. Net income was $4.6 million, adjusted for non-cash
charges of $15.7 million consisting primarily of depreciation and amortization,
stock-based compensation, and non-cash lease expense, which contributed
positively to operating activities. This was offset by net cash outflows of $1.0
million provided by changes in our operating assets and liabilities.

Net cash used in investment activities

Cash flows used in investing activities primarily include cash flows paid for acquisitions, capitalized internal software development costs, purchases of property, plant and equipment and intangible assets.


Net cash used in investing activities for the nine months ended September 30,
2022 consisted of $22.3 million of capitalized internal-use software development
costs, $1.2 million of purchases of property and equipment and $0.2 of other
intangible assets acquired.

Net cash used in investing activities for the nine months ended September 30,
2021 consisted of $57.1 million of cash paid for acquisitions, net of cash and
restricted cash acquired and contingent consideration, $13.5 million of
capitalized internal-use software development costs and $0.8 million of
purchases of property and equipment.

                                       34
--------------------------------------------------------------------------------

Net cash provided by financing activities


Cash provided by financing activities consists primarily of proceeds from the
IPO and private placement and proceeds from stock option exercises, changes in
financial institution funds in-transit offset by the redemption of the Series A
preferred stock, payment of deferred offering costs related to the IPO, and
payments on capital lease and other financing arrangements and principal
payments on debt.

Net cash provided by financing activities for the nine months ended September
30, 2022 consisted of an increase in financial institution funds in-transit of
$44.2 million and proceeds from stock option exercises of $1.5 million, offset
by $2.7 million of payments on finance leases and other financing obligations.

Net cash provided financing activities for the nine months ended September 30,
2021 consisted of proceeds from the IPO of $224.6 million, proceeds from the
private placement of $50.0 million, increase in financial institution funds
in-transit of $6.6 million and proceeds of $0.8 million from the repayment of a
related party loan, offset by $23.0 million for the redemption of the Series A
preferred stock, $34.4 million for the repayment of dividends on the Series A
preferred stock, $1.7 million of payments on finance leases and other financing
obligations and $2.0 million of payments of deferred offering costs directly
related to our IPO.

                         Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements and do not hold any interests in variable interest entities.

                   Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these condensed
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, net sales, expenses and
related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual
results could differ from these estimates.

There have been no material changes in our critical accounting policies from the critical accounting policies and material judgments and estimates disclosed in our 2021 Form 10-K.

                         Emerging Growth Company Status

Section 107 of the Jumpstart Our Business Startups Act of 2012, as amended, or
the JOBS Act, provides that an "emerging growth company" may take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. In other words, an
"emerging growth company" may delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. Section 107 of
the JOBS Act provides that any decision to opt out of the extended transition
period for complying with new or revised accounting standards is irrevocable. We
have elected to use this extended transition period under the JOBS Act.

                        Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements included elsewhere in this report for more information on recently issued accounting pronouncements.

© Edgar Online, source Previews

]]>
Dr. Reddy needs time for generic sales to replace Sputnik’s revenue (NYSE:RDY) https://eventplaner.net/dr-reddy-needs-time-for-generic-sales-to-replace-sputniks-revenue-nyserdy/ Mon, 07 Nov 2022 01:00:29 +0000 https://eventplaner.net/dr-reddy-needs-time-for-generic-sales-to-replace-sputniks-revenue-nyserdy/

poba

Summary of investments

Dr. Reddy’s Laboratories (NYSE: RDY) saw strong revenue growth in 2021 driven by sales of its Sputnik COVID vaccine offering. Over a million doses have been administered in India. Now after the cancellations too like a drop in demand for vaccine internationally, RDY needs to refocus on new generics to keep pace with revenue targets. Shareholders should be excited but also wary about the success of these new generic launches and acquisitions.

Recent Company Financial News

RDY’s involvement in the Sputnik COVID-19 vaccine in 2021 boosted the EPS, but now RDY is trying to replace that revenue this year with its other product segments. Recent earnings show a mixed supply. Gross profit margins reached 59% in the last quarter, compared to 53% last year. Sales in the company’s key North American market increased 48% in the last quarter. A 12% growth in consolidated net income was recorded in Q2 2022 compared to 2021, and revenues increased by 9%.

Moving down, their Global Generics business recorded +18% revenue. On the other hand, Pharmaceutical Services and Active Ingredients sales fell by 23% and ‘Other’ sales fell by 63%. In the Global Generics segment, North America recorded revenue growth of 48%. The emerging markets division was down 6% from last year. Pre-tax profit also rose 27% in the second quarter compared to a year ago.

Long-term share price performance

Based on 5-year stock performance, RDY has generated a year-to-date gain of 55.27%. Comparing this performance to the S&P500, it did only marginally better than the S&P500, which only generated a year-to-date gain of 50.39%.

Moving averages RDY, 50 vs 200

Moving averages RDY, 50 vs 200 (Yahoo finance)

RDY stock price fell below MA50 on June 26, 2021 and has remained below since. However, it is looking to cross the MA50 line if the price is still on the upside. Historically, when the price breaks below the MA200 line, there is a strong rebound shortly. When the share price first fell below MA200 in February 2022, there was still a rebound, although not at 2020 levels. This was partly due to headwinds negative macroeconomics, recession fears, rising interest rates and supply chain disruption. Currently, the stock price is approaching the MA200 line and if there is a retracement, it could be an opportunity to start a position once it drops below the MA200 line.

Currently, RDY is trading at a forward P/E of 20+, which is slightly above the healthcare sector’s average forward PE of 15.1. However, this is justified because the company has paid a constant dividend with a payout ratio of at least 15%. The company has also been steadily increasing its EPS and even with the recent lackluster outlook for 2021 and 2022, its EPS and revenue have not missed out on normal estimates. Hence, this would warrant a higher forward P/E ratio relative to the healthcare industry average.

Financial overviews

EBITDA and profit margin increased compared to 2018, while gross margin remained at about the same level over the past 5 years. This is a mixed sign as it shows management’s resilience and ability to keep costs down given the current supply chain and headwinds of inflation that most businesses are facing, but also possible headwinds and a reliance on new products replacing old ones. Asset productivity has increased over the past 5 years, showing that management is effectively using its assets to generate a return. The current ratio has increased, showing that there is enough cash on the balance sheet for management to pay off all of its current liabilities if it chooses to do so. The interest coverage ratio has also increased, which means that management has reduced its debt leverage.

RDY Financials

RDY Financials (SEC filing)

EPS has increased steadily over the past 5 years, and overall the company has shown some improvement over the past 5 years. Assuming a market risk premium of 5.60%, the equity beta of RDY is 0.22. CAPM = 4.01% + (5.60% x 0.22) = 5.24%. Based on their annual report, interest expense is $644 million and total borrowing is $21,711 million. The cost of debt is 2.97% and the equity financing ratio (E/V) is 0.75. The debt funding ratio (D/V) was 0.25.

RDY income statement, consolidated

RDY income statement, consolidated (SEC filing)

The dividend payout ratio has been 15% to 25%, which is the average dividend payout ratio over the past 5 years. Although it never bottomed out at 15%, the outlook for the current macro economy is questionable and it would be more prudent to forecast a lower worst-case dividend payout rate.

RDY’s cash position for 2022 was $0.61 billion.

Overview of short-term earnings and prices

RDY continues to make inroads into the generics market through acquisitions, licensing agreements and new product launches. More recently, RDY’s early generic releases of time-release antihistamines as well as sorafenib for the treatment of kidney and liver cancers have shown that RDY is moving towards a broad range of generics. It has also accelerated its pace of acquisitions and licensing, with Biorphen and related low blood pressure drugs as well as white label Lumify for the treatment of eye redness. The unloading of its non-generic portfolio continues, with I/ONTAK/e7777 coming to mind, an oncology drug focused on CTCL and potentially PTCL which was a reformulation of a previously approved drug.

The extended-release antihistamines Fexofenadine HCI and Pseuudoephedrine HCI are a generic replacement drug for Allegra-D 24hr, which had retail sales in the United States of approximately $45 million as of May 2022. Sorafenib tablets are a generic substitute for Nexavar, which had sales of over $750 million. in 2020. Cysteine ​​hydrochloride injections are generics for Biorphen and Rezipres injections, with a total addressable market of $174 million in 2022. Brimonidine Tartrate Ophthalmic Solution, a generic intended replacement for Lumify OTC eye drops, has a total addressable market of $130 million in 2022. I /ONTAK/e7777 represents a total of over $100 million in one-time payments once approved, with revenue share thereafter of an immediately addressable market of +/ – $330 million.

In total, with several acquisitions and bringing new generic drugs online, RDY hopes to capture some of the $634 million in addressable markets as well as some of the approximately $800 million in ongoing sales from current sales of brand name drugs from the above generic launches. These are the largest product launches not hampered by lawsuits or FDA approval delays, and whose sales are expected to help drive sales across all segments to help fill the gaps Sputnik vaccine. By incorporating relatively conservative estimates of these short-term sales of 10-20% and applying a 10% safety margin, the fair value of RDY would be approximately $49-51 per share, relative to the current price of the share of ~$54. Therefore, RDY appears to be slightly overvalued at the moment. To take full advantage of the revenue from these new generics, RDY needs at least 3-4 quarters to grow. Therefore, a stock price above $54 is justified after sales of these new generics are reflected, assuming that RDY is able to capture 40%+ of its addressable market and sales targets.

Potential external factors and downside risks

Commodity price fluctuation

Raw materials purchased during drug development/manufacturing can fluctuate wildly. The 2022 commodity price cycle has shown huge swings compared to pre-COVID years. With the recent war between Ukraine and Russia and the risks of recession, the prices of materials have increased quite significantly since 2021. This would affect the gross margin and the net result.

Rising interest rates have an impact on the attractiveness of the dividend yield

RDY, like many dividend-paying stocks, will experience negative outflows due to higher interest rates being offered across the world. Although some Fed bank chairs have signaled lower interest rate hikes in 2023, the market consensus is that 5% and above will be the new benchmark for the Fed chair going forward, unless the major inflation indicators do show a downward trend.

Recalls and negative public relations

RDY seems to be more prone to recalls and negative press than its American and European counterparts. Their 2019 and 2020 recalls of ranitidine, nitrofurantoin and aripiprazole products due to contamination and manufacturing issues seem to point to gaps in oversight. While manufacturing issues can be quite common at large pharmaceutical companies, public scrutiny of these recent recalls may impact the adoption of their new generic product launches in the near term in the US and European markets.

Conclusion

Although RDY has shown a strong push towards the commercialization and launch of its generic product lines, it remains to be seen whether they can recoup lost revenue from their Sputnik COVID vaccine offering, and subsequently, the current price of the stock around $54 appears to be in line with expectations. New revenue streams are not seasoned enough to show true revenue potential, so RDY remains a long-term expectation and expectation.

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LANDSTAR SYSTEM INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q) https://eventplaner.net/landstar-system-inc-managements-discussion-and-analysis-of-financial-condition-and-results-of-operations-form-10-q/ Fri, 28 Oct 2022 15:22:04 +0000 https://eventplaner.net/landstar-system-inc-managements-discussion-and-analysis-of-financial-condition-and-results-of-operations-form-10-q/
The following discussion should be read in conjunction with the interim
consolidated financial statements and notes thereto included herein, and with
the Company's audited financial statements and notes thereto for the fiscal year
ended December 25, 2021 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the 2021 Annual Report on Form
10-K.

FORWARD-LOOKING STATEMENTS

The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical facts are "forward-looking statements." This
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q contain forward-looking
statements, such as statements which relate to Landstar's business objectives,
plans, strategies and expectations. Terms such as "anticipates," "believes,"
"estimates," "intention," "expects," "plans," "predicts," "may," "should,"
"could," "will," the negative thereof and similar expressions are intended to
identify forward-looking statements. Such statements are by nature subject to
uncertainties and risks, including but not limited to: the impact of the Russian
conflict with Ukraine on the operations of certain independent commission sales
agents, including the Company's largest such agent by revenue in the 2021 fiscal
year; the impact of the coronavirus (COVID-19) pandemic; an increase in the
frequency or severity of accidents or other claims; unfavorable development of
existing accident claims; dependence on third party insurance companies;
dependence on independent commission sales agents; dependence on third party
capacity providers; decreased demand for transportation services; U.S trade
relationships; substantial industry competition; disruptions or failures in the
Company's computer systems; cyber and other information security incidents;
dependence on key vendors; changes in fuel taxes; status of independent
contractors; regulatory and legislative changes; regulations focused on diesel
emissions and other air quality matters; intellectual property; and other
operational, financial or legal risks or uncertainties detailed in Landstar's
Form 10-K for the 2021 fiscal year, described in Item 1A "Risk Factors",
Landstar's Form 10-Qs for the 2022 first and second quarters, described in Part
II, Item 1A "Risk Factors", and in this report or in Landstar's other Securities
and Exchange Commission filings from time to time. These risks and uncertainties
could cause actual results or events to differ materially from historical
results or those anticipated. Investors should not place undue reliance on such
forward-looking statements and the Company undertakes no obligation to publicly
update or revise any forward-looking statements.

Introduction


Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
(collectively referred to herein with their subsidiaries and other affiliated
companies as "Landstar" or the "Company"), a Fortune 500 company, is a
worldwide, technology-enabled, asset-light provider of integrated transportation
management solutions delivering safe, specialized transportation services to a
broad range of customers utilizing a network of agents, third party capacity
providers and employees. The Company offers services to its customers across
multiple transportation modes, with the ability to arrange for individual
shipments of freight to comprehensive third party logistics solutions to meet
all of a customer's transportation needs. Landstar provides services principally
throughout the United States and to a lesser extent in Canada and Mexico, and
between the United States and Canada, Mexico and other countries around the
world. The Company's services emphasize safety, information coordination and
customer service and are delivered through a network of over 1,200 independent
commission sales agents and over 112,000 third party capacity providers,
primarily truck capacity providers, linked together by a series of digital
technologies which are provided and coordinated by the Company. The nature of
the Company's business is such that a significant portion of its operating costs
varies directly with revenue.

Landstar markets its integrated transportation management solutions primarily
through independent commission sales agents and exclusively utilizes third party
capacity providers to transport customers' freight. Landstar's independent
commission sales agents enter into contractual arrangements with the Company and
are responsible for locating freight, making that freight available to
Landstar's capacity providers and coordinating the transportation of the freight
with customers and capacity providers. The Company's third party capacity
providers consist of independent contractors who provide truck capacity to the
Company under exclusive lease arrangements (the "BCO Independent Contractors"),
unrelated trucking companies who provide truck capacity to the Company under
non-exclusive contractual arrangements (the "Truck Brokerage Carriers"), air
cargo carriers, ocean cargo carriers and railroads. Through this network of
agents and capacity providers linked together by Landstar's ecosystem of digital
technologies, Landstar operates an integrated transportation management
solutions business primarily throughout North America with revenue of
$6.5 billion during the most recently completed fiscal year. The Company reports
the results of two operating segments: the transportation logistics segment and
the insurance segment.

                                       19

————————————————– ——————————

Contents


The transportation logistics segment provides a wide range of integrated
transportation management solutions. Transportation services are provided by
Landstar's "Operating Subsidiaries": Landstar Ranger, Inc., Landstar Inway,
Inc., Landstar Ligon, Inc., Landstar Gemini, Inc., Landstar Transportation
Logistics, Inc., Landstar Global Logistics, Inc., Landstar Express America,
Inc., Landstar Canada, Inc., Landstar Metro, S.A.P.I. de C.V., and as further
described below, Landstar Blue. Transportation services offered by the Company
include truckload, less-than-truckload and other truck transportation, rail
intermodal, air cargo, ocean cargo, expedited ground and air delivery of
time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico
cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage.
Examples of the industries serviced by the transportation logistics segment
include automotive parts and assemblies, consumer durables, building products,
metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military
equipment. In addition, the transportation logistics segment provides
transportation services to other transportation companies, including third party
logistics and less-than-truckload service providers. The independent commission
sales agents market services provided by the transportation logistics segment.
Billings for freight transportation services are typically charged to customers
on a per shipment basis for the physical transportation of freight and are
referred to as transportation revenue. During the thirty-nine-week period ended
September 24, 2022, revenue generated by BCO Independent Contractors, Truck
Brokerage Carriers and railroads represented approximately 35%, 53% and 2%,
respectively, of the Company's consolidated revenue. Collectively, revenue
generated by air and ocean cargo carriers represented approximately 8% of the
Company's consolidated revenue in the thirty-nine-week period ended
September 24, 2022.

On May 6, 2020, the Company formed a new subsidiary that was subsequently
renamed Landstar Blue, LLC ("Landstar Blue"). Landstar Blue arranges truckload
brokerage services with a focus on the contract services market. Landstar Blue
also helps the Company to develop and test digital technologies and processes
for the benefit of all Landstar independent commission sales agents. On June 15,
2020, Landstar Blue completed the acquisition of an independent agent of the
Company whose business focused on truckload brokerage services. The results of
operations from Landstar Blue are presented as part of the Company's
transportation logistics segment. Revenue from Landstar Blue represented less
than 1% of the Company's transportation logistics segment revenue in the
thirty-nine-week period ended September 24, 2022.

The insurance segment is comprised of Signature Insurance Company ("Signature"),
a wholly owned offshore insurance subsidiary, and Risk Management Claim
Services, Inc. The insurance segment provides risk and claims management
services to certain of Landstar's operating subsidiaries. In addition, it
reinsures certain risks of the Company's BCO Independent Contractors and
provides certain property and casualty insurance directly to certain of
Landstar's operating subsidiaries. Revenue at the insurance segment represents
reinsurance premiums from third party insurance companies that provide insurance
programs to BCO Independent Contractors where all or a portion of the risk is
ultimately borne by Signature. Revenue at the insurance segment represented
approximately 1% of the Company's consolidated revenue for the thirty-nine-week
period ended September 24, 2022.

Changes in Financial Position and Results of Operations


Management believes the Company's success principally depends on its ability to
generate freight revenue through its network of independent commission sales
agents and to deliver freight safely and efficiently utilizing third party
capacity providers. Management believes the most significant factors to the
Company's success include increasing revenue, sourcing capacity, empowering its
network through technology-based tools and controlling costs.

Revenue


While customer demand, which is subject to overall economic conditions,
ultimately drives increases or decreases in revenue, the Company primarily
relies on its independent commission sales agents to establish customer
relationships and generate revenue opportunities. Management's emphasis with
respect to revenue growth is on revenue generated by independent commission
sales agents who on an annual basis generate $1 million or more of Landstar
revenue ("Million Dollar Agents"). Management believes future revenue growth is
primarily dependent on its ability to increase both the revenue generated by
Million Dollar Agents and the number of Million Dollar Agents through a
combination of recruiting new agents, increasing the revenue opportunities
generated by existing independent commission sales agents and providing its
independent commission sales agents with digital technologies they may use to
grow revenue and increase efficiencies at their businesses. During the 2021
fiscal year, 593 independent commission sales agents generated $1 million or
more of Landstar revenue and thus qualified as Million Dollar Agents. During the
2021 fiscal year, the average revenue generated by a Million Dollar Agent was
$6,150,000 and revenue generated by Million Dollar Agents in the aggregate
represented 94% of consolidated revenue.

                                       20

————————————————– ——————————

Contents


Management monitors business activity by tracking the number of loads (volume)
and revenue per load by mode of transportation. Revenue per load can be
influenced by many factors other than a change in price. Those factors include
the average length of haul, freight type, special handling and equipment
requirements, fuel costs and delivery time requirements. For shipments involving
two or more modes of transportation, revenue is generally classified by the mode
of transportation having the highest cost for the load. The following table
summarizes this information by trailer type for truck transportation and by mode
for all others:

                                                                  Thirty Nine Weeks Ended                         Thirteen Weeks Ended
                                                            September 24,          September 25,          September 24,          September 25,
                                                                2022                   2021                   2022                   2021
Revenue generated through (in thousands):
Truck transportation
Truckload:
Van equipment                                              $     3,022,297        $     2,502,025        $       914,154        $       918,115
Unsided/platform equipment                                       1,336,956              1,112,358                453,924                422,979
Less-than-truckload                                                105,994                 85,551                 35,343                 30,819
Other truck transportation (1)                                     632,001                518,472                195,345                208,817

Total truck transportation                                       5,097,248              4,218,406              1,598,766              1,580,730
Rail intermodal                                                    113,762                120,540                 27,652                 44,472
Ocean and air cargo carriers                                       475,156                191,951                164,252                 84,111
Other (2)                                                           75,629                 61,654                 25,462                 24,986

                                                           $     5,761,795        $     4,592,551        $     1,816,132        $     1,734,299

Revenue on loads hauled via BCO Independent
Contractors included in total truck transportation         $     2,043,772        $     1,899,313        $       627,809        $       690,257

Number of loads:
Truck transportation
Truckload:
Van equipment                                                    1,130,263              1,037,516                366,513                359,263
Unsided/platform equipment                                         420,436                381,594                141,091                133,332
Less-than-truckload                                                142,740                135,038                 45,912                 49,943
Other truck transportation (1)                                     243,341                208,402                 76,594                 81,242

Total truck transportation                                       1,936,780              1,762,550                630,110                623,780
Rail intermodal                                                     31,940                 40,420                  7,720                 13,620
Ocean and air cargo carriers                                        34,410                 29,650                 11,520                 10,190

                                                                 2,003,130              1,832,620                649,350                647,590

Loads transported via BCO independent contractors included in total truck transport

                                      777,250                773,270                249,420                263,120

Revenue per load:
Truck transportation
Truckload:
Van equipment                                              $         2,674        $         2,412        $         2,494        $         2,556
Unsided/platform equipment                                           3,180                  2,915                  3,217                  3,172
Less-than-truckload                                                    743                    634                    770                    617
Other truck transportation (1)                                       2,597                  2,488                  2,550                  2,570
Total truck transportation                                           2,632                  2,393                  2,537                  2,534
Rail intermodal                                                      3,562                  2,982                  3,582                  3,265
Ocean and air cargo carriers                                        13,809                  6,474                 14,258                  8,254

Revenue per load on loads transported via independent contractors BCO

                                                $         2,629  

$2,456 $2,517 $2,623

Turnover by type of capacity (as % of total turnover): Suppliers of truck capacity: BCO Independent Contractors

                                             35 %                   41 %                   35 %                   40 %
Truck Brokerage Carriers                                                53 %                   50 %                   53 %                   51 %
Rail intermodal                                                          2 %                    3 %                    2 %                    3 %
Ocean and air cargo carriers                                             8 %                    4 %                    9 %                    5 %
Other                                                                    1 %                    1 %                    1 %                    1 %


(1) Includes electric motor only, accelerated, rigid trucks, vans and miscellaneous

other trucking revenue generated by transportation logistics

segment. Power only refers to shipments for which the company provides power

unit and an operator but no trailing equipment, which is usually provided

by the sender or the recipient.

(2) Mainly includes income from reinsurance premiums generated by the

    segment and intra-Mexico transportation services revenue generated by
    Landstar Metro.



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Expenses

Purchased transportation

Another critical element to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that enable the Company to cost-effectively transport customer freight. The following table summarizes the number of truck capacity providers available on the dates shown:

                                                  September 24,       September 25,
                                                      2022                2021
BCO Independent Contractors                               10,742              10,955
Truck Brokerage Carriers:
Approved and active (1)                                   71,207              58,676
Other approved                                            30,222              24,602

                                                         101,429              83,278

Total available truck capacity providers                 112,171            

94,233


Trucks provided by BCO Independent Contractors            11,644            

11,746

(1) Active refers to truck brokerage carriers that have moved at least one load within the

180 days immediately preceding the end of the fiscal quarter.



Purchased transportation represents the amount a BCO Independent Contractor or
other third party capacity provider is paid to haul freight. The amount of
purchased transportation paid to a BCO Independent Contractor is primarily based
on a contractually agreed-upon percentage of revenue generated by loads hauled
by the BCO Independent Contractor. Purchased transportation paid to a Truck
Brokerage Carrier is based on either a negotiated rate for each load hauled or,
to a lesser extent, a contractually agreed-upon fixed rate per load. Purchased
transportation paid to railroads and ocean cargo carriers is based on either a
negotiated rate for each load hauled or a contractually agreed-upon fixed rate
per load. Purchased transportation paid to air cargo carriers is generally based
on a negotiated rate for each load hauled. Purchased transportation as a
percentage of revenue for truck brokerage, rail intermodal and ocean cargo
services is normally higher than that of BCO Independent Contractor and air
cargo services. Purchased transportation is the largest component of costs and
expenses and, on a consolidated basis, increases or decreases as a percentage of
consolidated revenue in proportion to changes in the percentage of consolidated
revenue generated through BCO Independent Contractors and other third party
capacity providers and external revenue from the insurance segment, consisting
of reinsurance premiums. Purchased transportation as a percent of revenue also
increases or decreases in relation to the availability of truck brokerage
capacity and with changes in the price of fuel on revenue generated from
shipments hauled by Truck Brokerage Carriers. The Company passes 100% of fuel
surcharges billed to customers for freight hauled by BCO Independent Contractors
to its BCO Independent Contractors. These fuel surcharges are excluded from
revenue and the cost of purchased transportation. Purchased transportation costs
are recognized over the freight transit period as the performance obligation to
the customer is completed.

Commissions to agents

Commissions to agents are based on contractually agreed-upon percentages of
(i) revenue, (ii) revenue less the cost of purchased transportation, or
(iii) revenue less a contractually agreed upon percentage of revenue retained by
Landstar and the cost of purchased transportation (the "retention contracts").
Commissions to agents as a percentage of consolidated revenue vary directly with
fluctuations in the percentage of consolidated revenue generated by the various
modes of transportation and reinsurance premiums and, in general, vary inversely
with changes in the amount of purchased transportation as a percentage of
revenue on services provided by Truck Brokerage Carriers, railroads, air cargo
carriers and ocean cargo carriers. Commissions to agents are recognized over the
freight transit period as the performance obligation to the customer is
completed.

Other operating expenses, net of gains on sales/disposals of assets


Maintenance costs for Company-provided trailing equipment and BCO Independent
Contractor recruiting and qualification costs are the largest components of
other operating costs. Also included in other operating costs are trailer rental
costs, the provision for uncollectible advances and other receivables due from
BCO Independent Contractors and independent commission sales agents and
gains/losses, if any, on sales of Company-owned trailing equipment.

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Insurance and claims

When it comes to insurance costs and claims, the potential liability associated with accidents in the trucking industry is serious and events are unpredictable.


For periods prior to May 1, 2019, Landstar retains liability for commercial
trucking claims up to $5 million per occurrence and maintains various third
party insurance arrangements for liabilities in excess of its $5 million
self-insured retention. Effective May 1, 2019, the Company entered into a new
three year commercial auto liability insurance arrangement for losses incurred
between $5 million and $10 million (the "Initial Excess Policy") with a third
party insurance company. The Company subsequently extended the Initial Excess
Policy for one additional policy year, from May 1, 2022 through April 30, 2023.
For commercial trucking claims incurred on or after May 1, 2022 through
April 30, 2023, the extended Initial Excess Policy provides for a limit for a
single loss of $5 million, with a remaining aggregate limit of $10 million for
the policy period ending April 30, 2023, and an option to increase such
aggregate limit for a pre-established amount of additional premium. If aggregate
losses under the Initial Excess Policy exceed the aggregate limit for the period
ending April 30, 2023, and the Company did not elect to increase such aggregate
limit for a pre-established amount of additional premium, the Company would
retain liability of up to $10 million per occurrence, inclusive of its
$5 million self-insured retention for commercial trucking claims during the
remainder of the policy period ending April 30, 2023.

The Company also maintains third party insurance arrangements providing excess
coverage for commercial trucking liabilities in excess of $10 million. These
third party arrangements provide coverage on a per occurrence or aggregated
basis. In recent years, there has been a significant increase in the occurrence
of trials in courts throughout the United States involving catastrophic injury
and fatality claims against commercial motor carriers that have resulted in
verdicts in excess of $10 million. Within the transportation logistics industry,
these verdicts are often referred to as "Nuclear Verdicts." The increase in
Nuclear Verdicts has had a significant impact on the cost of commercial auto
liability claims throughout the United States. Due to the increasing cost of
commercial auto liability claims, the availability of excess coverage has
significantly decreased, and the pricing associated with such excess coverage,
to the extent available, has significantly increased. With respect to the annual
policy year ended April 30, 2021, as compared to the annual policy year ended
April 30, 2020, the Company experienced an increase of approximately
$14 million, or over 170%, in the premiums charged by third party insurance
companies to the Company for excess coverage for commercial trucking liabilities
in excess of $10 million. Effective May 1, 2021, with respect to the annual
policy year ending April 30, 2022, as compared to the annual policy year ended
April 30, 2021, the Company experienced an increase of approximately $3 million,
or 19%, in the premiums charged by third party insurance companies to the
Company for excess coverage for commercial trucking liabilities in excess of
$10 million. Effective May 1, 2022, with respect to the annual policy year
ending April 30, 2023, as compared to the annual policy year ended April 30,
2022, the Company experienced an increase of approximately $2.3 million, or 10%,
in the premiums charged by third party insurance companies to the Company for
excess coverage for commercial trucking liabilities in excess of $10 million.

Moreover, in recent years the Company has increased the level of its financial
exposure to commercial trucking claims in excess of $10 million, including
through the use of additional self-insurance, deductibles, aggregate loss
limits, quota shares and other arrangements with third party insurance
companies, based on the availability of coverage within certain excess insurance
coverage layers and estimated cost differentials between proposed premiums from
third party insurance companies and historical and actuarially projected losses
experienced by the Company at various levels of excess insurance coverage. For
example, with respect to a hypothetical claim in the amount of $35 million
incurred during the annual policy year ending April 30, 2023, the Company would
have an aggregate financial exposure of approximately $10 million. Furthermore,
the Company's third party insurance arrangements provide excess coverage up to
an uppermost coverage layer, in excess of which the Company retains additional
financial exposure. No assurances can be given that the availability of excess
coverage for commercial trucking claims will not continue to deteriorate, that
the pricing associated with such excess coverage, to the extent available, will
not continue to increase, nor that insurance coverage from third party insurers
for excess coverage of commercial trucking claims will even be available on
commercially reasonable terms at certain levels. Moreover, the occurrence of a
Nuclear Verdict, or the settlement of a catastrophic injury and/or fatality
claim that could have otherwise resulted in a Nuclear Verdict, could have a
material adverse effect on Landstar's cost of insurance and claims and its
results of operations.

Further, the Company retains liability of up to $1,000,000 for each general
liability claim, up to $250,000 for each workers' compensation claim and up to
$250,000 for each cargo claim. In addition, under reinsurance arrangements by
Signature of certain risks of the Company's BCO Independent Contractors, the
Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with
respect to certain occupational accident claims and up to $750,000 with respect
to certain workers' compensation claims. The Company's exposure to liability
associated with accidents incurred by Truck Brokerage Carriers, railroads and
air and ocean cargo carriers who transport freight on behalf of the Company is
reduced by various factors including the extent to which such carriers maintain
their own insurance coverage. A material increase in the frequency or severity
of accidents, cargo claims or workers' compensation claims or the material
unfavorable development of existing claims could have a material adverse effect
on Landstar's cost of insurance and claims and its results of operations.

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Selling, general and administrative expenses


During the thirty-nine-week period ended September 24, 2022, employee
compensation and benefits accounted for approximately 68% of the Company's
selling, general and administrative costs. Employee compensation and benefits
include wages and employee benefit costs as well as incentive compensation and
stock-based compensation expense. Incentive compensation and stock-based
compensation expense is highly variable in nature in comparison to wages and
employee benefit costs.

Depreciation and amortization

Depreciation and amortization relate primarily to the depreciation of rolling stock and information technology hardware and software.

Revenue costs


The Company incurs costs of revenue related to the transportation of freight
and, to a much lesser extent, reinsurance premiums received by Signature. Costs
of revenue include variable costs of revenue and other costs of revenue.
Variable costs of revenue include purchased transportation and commissions to
agents, as these costs are entirely variable on a shipment-by-shipment basis.
Other costs of revenue include fixed costs of revenue and semi-variable costs of
revenue, where such costs may vary over time based on certain economic factors
or operational metrics such as the number of Company-controlled trailers, the
number of BCO Independent Contractors, the frequency and severity of insurance
claims, the number of miles traveled by BCO Independent Contractors, or the
number and/or scale of information technology projects in process or in-service
to support revenue generating activities, rather than on a shipment-by-shipment
basis. Other costs of revenue associated with the transportation of freight
include: (i) other operating costs, primarily consisting of trailer maintenance
and BCO Independent Contractor recruiting and qualification costs, as reported
in the Company's Consolidated Statements of Income, (ii) transportation-related
insurance premiums paid and claim costs incurred, included as a portion of
insurance and claims in the Company's Consolidated Statements of Income,
(iii) costs incurred related to internally developed software including ASC
350-40 amortization, implementation costs, hosting costs and other support costs
utilized to support our independent commission sales agents, third party
capacity providers, and customers, included as a portion of depreciation and
amortization and of selling, general and administrative in the Company's
Consolidated Statements of Income; and (iv) depreciation on Company-owned
trailing equipment, included as a portion of depreciation and amortization in
the Company's Consolidated Statements of Income. Other costs of revenue
associated with reinsurance premiums received by Signature are comprised of
broker commissions and other fees paid related to the administration of
insurance programs to BCO Independent Contractors and are included in selling,
general and administrative in the Company's Consolidated Statements of Income.
In addition to costs of revenue, the Company incurs various other costs relating
to its business, including most selling, general and administrative costs and
portions of costs attributable to insurance and claims and depreciation and
amortization. Management continually monitors all components of the costs
incurred by the Company and establishes annual cost budgets that, in general,
are used to benchmark costs incurred on a monthly basis.

Gross profit, variable contribution, gross profit margin and variable contribution margin


The following table sets forth calculations of gross profit, defined as revenue
less costs of revenue, and gross profit margin defined as gross profit divided
by revenue, for the periods indicated. The Company refers to revenue less
variable costs of revenue as "variable contribution" and variable contribution
divided by revenue as "variable contribution margin". Variable contribution and
variable contribution margin are each non-GAAP financial measures. The closest
comparable GAAP financial measures to variable contribution and variable
contribution margin are, respectively, gross profit and gross profit margin. The
Company believes variable contribution and variable contribution margin are
useful measures of the variable costs that we incur at a shipment-by-shipment
level attributable to our transportation network of third party capacity
providers and independent commission sales agents in order to provide services
to our customers. The Company believes variable contribution and variable
contribution margin are important performance measurements and management
considers variable contribution and variable contribution margin in evaluating
the Company's financial performance and in its decision-making, such as
budgeting for infrastructure, trailing equipment and selling, general and
administrative costs.

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The reconciliations of gross margin to variable contribution and gross profit margin to variable contribution margin are each presented below:


                                            Thirty Nine Weeks Ended                      Thirteen Weeks Ended
                                      September 24,         September 25,         September 24,         September 25,
                                          2022                  2021                  2022                  2021
Revenue                              $     5,761,795       $     4,592,551       $     1,816,132       $     1,734,299
Costs of revenue:
Purchased transportation                   4,512,341             3,583,197             1,416,323             1,356,671
Commissions to agents                        465,759               356,997               154,125               135,295

Variable costs of revenue                  4,978,100             3,940,194             1,570,448             1,491,966
Trailing equipment depreciation               27,760                26,362                 9,397                 8,615
Information technology costs                  13,868                 9,534                 4,829                 3,450
Insurance-related costs (1)                   98,821                78,175                32,380                30,502
Other operating costs                         34,878                27,117                13,356                10,572

Other costs of revenue                       175,327               141,188                59,962                53,139

Total costs of revenue                     5,153,427             4,081,382             1,630,410             1,545,105

Gross profit                         $       608,368       $       511,169       $       185,722       $       189,194

Gross profit margin                             10.6 %                11.1 %                10.2 %                10.9 %
Plus: other costs of revenue                 175,327               141,188                59,962                53,139

Variable contribution                $       783,695       $       652,357       $       245,684       $       242,333

Variable contribution margin                    13.6 %                14.2 %                13.5 %                14.0 %


(1) Insurance-related costs in the above table include (i) other revenue costs

related to the transport of goods which are included as part of

insurance and claims in the consolidated statements of income and

(ii) certain other revenue costs related to reinsurance premiums received

per signature which are included in selling, general and

administration in the company’s consolidated statements of income. Insurance

and claims costs included in other product costs related to the

freight transportation consists mainly of insurance premiums paid for

commercial auto liability, general liability, freight and other lines of

coverage related to the transport of goods and the costs of

claims incurred under these programs and, to a lesser extent, the cost of

claims incurred under the insurance programs offered to BCO Independent

Contractors reinsured by Signature. Other insurance and claims costs

included in cost of sales which is included in selling, general and

administrative items in the company’s consolidated statements of earnings consist of

brokerage commissions and other costs incurred by Signature in connection with

administration of insurance programs offered to independent contractors of BCO

who are reinsured by Signature.



In general, variable contribution margin on revenue generated by BCO Independent
Contractors represents a fixed percentage due to the nature of the contracts
that pay a fixed percentage of revenue to both the BCO Independent Contractors
and independent commission sales agents. For revenue generated by Truck
Brokerage Carriers, variable contribution margin may be either a fixed or
variable percentage, depending on the contract with each individual independent
commission sales agent. Variable contribution margin on revenue generated from
shipments hauled by railroads, air cargo carriers, ocean cargo carriers and
Truck Brokerage Carriers, other than those under retention contracts, is
variable in nature, as the Company's contracts with independent commission sales
agents provide commissions to agents at a contractually agreed upon percentage
of the amount represented by revenue less purchased transportation for these
types of shipments. Approximately 40% of the Company's consolidated revenue in
the thirty-nine-week period ended September 24, 2022 was generated under
transactions that pay a fixed percentage of revenue to the third party capacity
provider and/or agents while 60% was generated under transactions that pay a
variable percentage of revenue to the third party capacity provider and/or
agents.

Operating profit as a percentage of gross margin and operating profit as a percentage of variable contribution


The following table presents operating income as a percentage of gross profit
and operating income as a percentage of variable contribution. The Company's
operating income as a percentage of variable contribution is a non-GAAP
financial measure calculated as operating income divided by variable
contribution. The Company believes that operating income as a percentage of
variable contribution is useful and meaningful to investors for the following
principal reasons: (i) the variable costs of revenue for a significant portion
of the business are highly influenced by short-term market-based trends in the
freight transportation industry, whereas other costs, including other costs of
revenue, are much less impacted by short-term freight market trends;
(ii) disclosure of this measure allows investors to better

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understand the underlying trends in the Company's results of operations;
(iii) this measure is meaningful to investors' evaluations of the Company's
management of costs attributable to operations other than the purely variable
costs associated with purchased transportation and commissions to agents that
the Company incurs to provide services to our customers; and (iv) management
considers this financial information in its decision-making, such as budgeting
for infrastructure, trailing equipment and selling, general and administrative
costs.

                                         Thirty Nine Weeks Ended                          Thirteen Weeks Ended
                                  September 24,            September 25,          September 24,           September 25,
                                       2022                    2021                    2022                   2021
Gross profit                     $        608,368         $       511,169        $        185,722        $       189,194
Operating income                 $        446,749         $       356,928        $        133,498        $       131,412
Operating income as % of
gross profit                                 73.4 %                  69.8 %                  71.9 %                 69.4 %

Variable contribution            $        783,695         $       652,357        $        245,684        $       242,333
Operating income                 $        446,749         $       356,928        $        133,498        $       131,412
Operating income as % of
variable contribution                        57.0 %                  54.7 %                  54.3 %                 54.2 %


The increase in operating income as a percentage of gross profit from the 2021
thirty-nine-week period to the 2022 thirty-nine-week period resulted from
operating income increasing at a more rapid percentage rate than the increase in
gross profit, as the Company was able to scale our fixed cost infrastructure,
primarily certain components of selling, general and administrative costs,
across a larger gross profit base. The increase in operating income as a
percentage of gross profit from the 2021 thirteen-week period to the 2022
thirteen-week period resulted from operating income increasing notwithstanding a
modest decrease in gross profit, as certain components of selling, general and
administrative costs, namely incentive and equity compensation under the
Company's variable compensation programs, decreased approximately $8,500,000
from the 2021 thirteen-week period to the 2022 thirteen-week period.

The increase in operating income as a percentage of variable contribution from
the 2021 thirty-nine-week period to the 2022 thirty-nine-week period resulted
from operating income increasing at a more rapid percentage rate than the
increase in variable contribution, as the Company was able to scale our fixed
cost infrastructure, primarily certain components of selling, general and
administrative costs, as well as certain components of our other costs of
revenue, across a larger variable contribution base. The ten basis point
increase in operating income as a percentage of variable contribution from the
2021 thirteen-week period to the 2022 thirteen-week period resulted from
operating income increasing at a modestly higher percentage rate than the
increase in variable contribution, as the Company was able to scale our fixed
cost infrastructure, primarily certain components of selling, general and
administrative costs across a larger variable contribution base.

Also, as previously mentioned, the Company reports two operating segments: the
transportation logistics segment and the insurance segment. External revenue at
the insurance segment, representing reinsurance premiums, has historically been
relatively consistent on an annual basis at 2% or less of consolidated revenue
and generally corresponds directly with the number of trucks provided by BCO
Independent Contractors. The discussion of cost line items in Management's
Discussion and Analysis of Financial Condition and Results of Operations
considers the Company's costs on a consolidated basis rather than on a segment
basis. Management believes this presentation format is the most appropriate to
assist users of the financial statements in understanding the Company's business
for the following reasons: (1) the insurance segment has no other operating
costs; (2) discussion of insurance and claims at either segment without
reference to the other may create confusion amongst investors and potential
investors due to intercompany arrangements and specific deductible programs that
affect comparability of financial results by segment between various fiscal
periods but that have no effect on the Company from a consolidated reporting
perspective; (3) selling, general and administrative costs of the insurance
segment comprise less than 10% of consolidated selling, general and
administrative costs and have historically been relatively consistent on a
year-over-year basis; and (4) the insurance segment has no depreciation and
amortization.

THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2022 COMPARED TO THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 25, 2021

Revenue for the 39-week period 2022 is $5,761,795,000an augmentation of
$1,169,244,000or 25%, compared to the thirty-nine week period of 2021. Transportation revenues increased $1,163,398,000, or 26%. The increase in transportation revenues is attributable

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to increased revenue per load of approximately 15% and an increased number of
loads hauled of approximately 9% compared to the 2021 thirty-nine-week period.
Reinsurance premiums were $58,836,000 and $52,990,000 for the 2022 and 2021
thirty-nine-week periods, respectively. The increase in revenue from reinsurance
premiums was primarily attributable to (i) an increase in the aggregate value of
equipment insured by BCO Independent Contractors under a physical damage program
reinsured by Signature; (ii) an increase in the average number of trucks
provided by BCO Independent Contractors and (iii) participation levels among BCO
Independent Contractors in certain occupational accident programs and workers'
compensation programs in the 2022 thirty-nine-week period compared to the 2021
thirty-nine-week period.

Truck transportation revenue generated by BCO Independent Contractors and Truck
Brokerage Carriers (together, the "third party truck capacity providers") for
the 2022 thirty-nine-week period was $5,097,248,000, representing 88% of total
revenue, an increase of $878,842,000, or 21%, compared to the 2021
thirty-nine-week period. Revenue per load on loads hauled by third party truck
capacity providers increased approximately 10% compared to the 2021
thirty-nine-week period, and the number of loads hauled by third party truck
capacity providers increased approximately 10% in the 2022 thirty-nine-week
period compared to the 2021 thirty-nine-week period.

The increase in revenue per load on loads hauled via truck was due to a tight
truck capacity environment experienced during the 2022 thirty-nine-week period,
in particular during the first fiscal quarter of 2022, and the impact of higher
diesel fuel costs on loads hauled via Truck Brokerage Carriers, partially offset
by (i) a decrease in the number of loads hauled via heavy specialized equipment,
which typically have a higher revenue per load, as a percentage of total truck
loads and (ii) a decreased average length of haul during the 2022
thirty-nine-week period. Revenue per load on loads hauled via van equipment
increased 11%, revenue per load on loads hauled via unsided/platform equipment
increased 9%, revenue per load on less-than-truckload loadings increased 17% and
other truck transportation services revenue per load increased 4% as compared to
the 2021 thirty-nine-week period.

The increase in the number of loads transported by truck compared to the thirty-nine week period of 2021 is due to a general increase in demand for the Company’s trucking services. Loads transported via vans increased by 9%, loads transported via unridden/flatbed equipment increased by 10%, loads transported by lesser trucks increased by 6% and loads transported via other trucking services increased 17% over the thirty-nine week 2021 period.


Fuel surcharges billed to customers on revenue generated by BCO Independent
Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage
Carrier revenue identified separately in billings to customers and included as a
component of Truck Brokerage Carrier revenue were $153,195,000 and $74,195,000
in the 2022 and 2021 thirty-nine-week periods, respectively. It should be noted
that billings to many customers of the Company's truck brokerage services
include a single all-in rate that does not separately identify fuel surcharges
on loads hauled via Truck Brokerage Carriers. Accordingly, the overall impact of
changes in fuel prices on revenue and revenue per load on loads hauled via truck
is likely to be greater than that indicated.

Transportation revenue generated by rail intermodal, air cargo and ocean cargo
carriers (collectively, the "multimode capacity providers") for the 2022
thirty-nine-week period was $588,918,000, or 10% of total revenue, an increase
of $276,427,000, or 88%, compared to the 2021 thirty-nine-week period. Revenue
per load on revenue generated by multimode capacity providers increased
approximately 99% in the 2022 thirty-nine-week period compared to the 2021
thirty-nine-week period, while the number of loads hauled by multimode capacity
providers decreased approximately 5% over the same period. Revenue per load on
loads hauled by multimode capacity providers increased for all modes, primarily
due to continuing U.S. and global economic recoveries coupled with the impact of
global supply chain disruptions which were particularly acute with respect to
international ocean and air freight. Revenue per load on loads hauled via air,
ocean and rail intermodal increased 139%, 93% and 19%, respectively, during the
2022 thirty-nine-week period as compared to the 2021 thirty-nine-week period.
Revenue per load on revenue generated by multimode capacity providers is
influenced by many factors, including revenue mix among the various modes of
transportation used, length of haul, complexity of freight, density of freight
lanes, fuel costs and availability of capacity. The decrease in the number of
loads hauled by multimode capacity providers was due to a 21% decrease in rail
loadings and a 19% decrease in air loadings, partially offset by a 34% increase
in ocean loadings. The 21% decrease in rail loadings was broad-based across
several agencies and customers, and the 19% decrease in air loadings was
entirely attributable to decreased loadings at one specific customer. The 34%
increase in ocean loadings was due to a broad-based increase in demand across
many customers for the Company's ocean services.

Purchased transportation was 78.3% and 78.0% of revenue in the 2022 and 2021
thirty-nine-week periods, respectively. The increase in purchased transportation
as a percentage of revenue was primarily due to (i) an increased percentage of
revenue generated by Truck Brokerage Carriers, which typically has a higher rate
of purchased transportation than revenue generated by BCO Independent
Contractors and (ii) an increased percentage of revenue generated by multimode
capacity providers, which typically has a higher rate of purchased
transportation than third party truck capacity providers, partially offset by a
lower rate of purchased transportation on revenue generated by Truck Brokerage
Carriers. Commissions to agents were 8.1% and 7.8% of revenue in the 2022 and
2021 thirty-nine-week periods, respectively. The increase in commissions to
agents as a percentage of revenue was primarily attributable to a decreased cost
of purchased transportation as a percentage of revenue on revenue generated by
Truck Brokerage Carriers.

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Investment income was $2,023,000 and $2,138,000 in the thirty-nine week periods 2022 and 2021, respectively. The decrease in investment income is mainly attributable to a lower average investment balance held by the insurance sector during the thirty-nine week period of 2022, partially offset by higher average rates of return on investments in the during the thirty-nine week period 2022.


Other operating costs increased $7,761,000 in the 2022 thirty-nine-week period
compared to the 2021 thirty-nine-week period. The increase in other operating
costs compared to the prior year was primarily due to (i) increased trailing
equipment maintenance costs as a result of (x) increased labor and parts costs
charged by the Company's network of third party trailer maintenance facilities
as the Company retained older trailing equipment to support current business
levels; and (y) an increased average trailer fleet size during the 2022
thirty-nine-week period and (ii) the impact of the resumption of a large
in-person event for the Company's BCO Independent Contractors.

Insurance and claims increased $21,067,000 in the 2022 thirty-nine-week period
compared to the 2021 thirty-nine-week period. The increase in insurance and
claims expense compared to the prior year was primarily due to increased
severity of current year trucking claims during the 2022 thirty-nine-week
period, the impact of net unfavorable development of prior years' claims in the
2022 thirty-nine-week period and increased insurance premiums, primarily for
commercial auto and excess liability coverage. During the 2022 and 2021
thirty-nine-week periods, insurance and claims costs included $7,505,000 and
$4,522,000 of net unfavorable adjustments to prior years' claims estimates,
respectively.

Selling, general and administrative costs increased $6,479,000 in the 2022
thirty-nine-week period compared to the 2021 thirty-nine-week period. The
increase in selling, general and administrative costs compared to the prior year
was attributable to increased wages, an increased provision for customer bad
debt and the return of the Company's annual agent convention held in April 2022,
partially offset by decreased stock-based compensation expense and a decreased
provision for incentive compensation. Included in selling, general and
administrative costs was stock-based compensation expense of $9,409,000 and
$18,717,000 for the 2022 and 2021 thirty-nine-week periods, respectively, and
incentive compensation expense of $14,185,000 and $21,370,000 for the 2022 and
2021 thirty-nine-week periods, respectively.

Depreciation and amortization expense increased $6,095,000 in the 2022
thirty-nine-week period compared to the 2021 thirty-nine-week period. The
increase in depreciation and amortization expense was primarily due to increased
depreciation on digital technology tools in connection with the deployment of
new and upgraded applications for use by the Company's network of agents,
capacity providers and employees, and to a lesser extent, in connection with
increased trailing equipment depreciation.

Interest and debt expense in the 2022 thirty-nine-week period increased $301,000
compared to the 2021 thirty-nine-week period. The increase in interest and debt
expense was primarily attributable to increased average borrowings on the
Company's revolving credit facility during the 2022 thirty-nine-week period, as
the Company had no borrowings under its revolving credit facility during the
2021 period. The Company had no borrowings under its revolving credit facility
as of the end of the 2022 thirty-nine-week period.

The provisions for income taxes for the 2022 and 2021 thirty-nine-week periods
were based on estimated annual effective income tax rates of 24.5% and 24.4%,
respectively, adjusted for discrete events, such as benefits resulting from
stock-based awards. The estimated annual effective income tax rate was higher
than the statutory federal income tax rate of 21% in both periods primarily
attributable to state taxes and nondeductible executive compensation. The
effective income tax rate for the 2022 thirty-nine-week period was 23.9%, which
was lower than the estimated annual effective income tax rate of 24.5%,
primarily attributable to excess tax benefits realized on stock-based awards.
The effective income tax rate in the 2021 thirty-nine-week period of 24.2% was
lower than the 24.4% estimated annual effective income tax rate, primarily due
to excess tax benefits realized on stock-based awards in the 2021
thirty-nine-week period.

The net income was $337,612,000Where $9.15 per diluted share, over the thirty-nine week period 2022. Net income was $268,209,000Where $7.00 per diluted share, during the thirty-nine week period of 2021.

THIRTEEN WEEKS COMPLETED SEPTEMBER 24, 2022 COMPARED TO THE THIRTEEN WEEKS ENDED
SEPTEMBER 25, 2021


Revenue for the 2022 thirteen-week period was $1,816,132,000, an increase of
$81,833,000, or 5%, compared to the 2021 thirteen-week period. Transportation
revenue increased $80,397,000, or 5%. The increase in transportation revenue was
attributable to increased revenue per load of approximately 4%, while the number
of loads hauled was approximately equal to the 2021 thirteen-week period.
Reinsurance premiums were $19,731,000 and $18,295,000 for the 2022 and 2021
thirteen-week periods, respectively. The increase in revenue from reinsurance
premiums was primarily attributable to (i) an increase in the aggregate value of
equipment insured by BCO

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Independent Contractors under a physical damage program reinsured by Signature;
(ii) an increase in the average number of trucks provided by BCO Independent
Contractors and (iii) participation levels among BCO Independent Contractors in
certain occupational accident programs and workers' compensation programs in the
2022 thirteen-week period compared to the 2021 thirteen-week period.

Truck transportation revenue generated by third party truck capacity providers
for the 2022 thirteen-week period was $1,598,766,000, representing 88% of total
revenue, an increase of $18,036,000, or 1%, compared to the 2021 thirteen-week
period. The number of loads hauled by third party truck capacity providers
increased approximately 1% in the 2022 thirteen-week period compared to the 2021
thirteen-week period, while revenue per load on loads hauled by third party
truck capacity providers was approximately equal to the 2021 thirteen-week
period.

The increase in the number of loads hauled via truck compared to the 2021
thirteen-week period was due to (i) a broad-based increase in demand for the
Company's truck transportation services provided via unsided/platform equipment
and (ii) a modest increase in demand for the Company's truck transportation
services provided via van equipment, partially offset by reduced demand for
substitute line-haul and power-only services from certain parcel and
less-than-truckload carriers. Loads hauled via unsided/platform equipment
increased 6% and loads hauled via van equipment increased 2%, while
less-than-truckload loadings decreased 8% and other truck transportation
services load count decreased 6% as compared to the 2021 thirteen-week period.
The number of loads hauled via truck increased 5% in July, was relatively flat
in August and then declined 1% in September, as compared to the corresponding
periods in 2021.

Fuel surcharges billed to customers on revenue generated by BCO Independent
Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage
Carrier revenue identified separately in billings to customers and included as a
component of Truck Brokerage Carrier revenue were $58,658,000 and $28,621,000 in
the 2022 and 2021 thirteen-week periods, respectively.

Transportation revenue generated by multimode capacity providers for the 2022
thirteen-week period was $191,904,000, or 11% of total revenue, an increase of
$63,321,000, or 49%, compared to the 2021 thirteen-week period. Revenue per load
on revenue generated by multimode capacity providers increased approximately 85%
in the 2022 thirteen-week period compared to the 2021 thirteen-week period,
while the number of loads hauled by multimode capacity providers decreased
approximately 19% over the same period. Revenue per load on loads hauled by
multimode capacity providers increased for all modes, primarily due to the
continuing U.S. and global economic recoveries coupled with the impact of global
supply chain disruptions which were particularly acute with respect to
international ocean and air freight. Revenue per load on loads hauled via air,
ocean and rail intermodal increased 127%, 63% and 10%, respectively, during the
2022 thirteen-week period as compared to the 2021 thirteen-week period. The
decrease in the number of loads hauled by multimode capacity providers was due
to a 43% decrease in rail loadings, partially offset by an 18% increase in ocean
loadings. Air loadings during the 2022 thirteen-week period were approximately
equal to the 2021 thirteen-week period. The 43% decrease in rail loadings was
broad-based across several agencies and customers. The 18% increase in ocean
loadings was due to a broad-based increase in demand across many customers for
the Company's ocean services.

Purchased transportation was 78.0% and 78.2% of revenue in the 2022 and 2021
thirteen-week periods, respectively. The decrease in purchased transportation as
a percentage of revenue was primarily due to a lower rate of purchased
transportation on revenue generated by Truck Brokerage Carriers, partially
offset by (i) an increased percentage of revenue generated by Truck Brokerage
Carriers, which typically has a higher rate of purchased transportation than
revenue generated by BCO Independent Contractors; and (ii) an increased
percentage of revenue generated by multimode capacity providers, which typically
has a higher rate of purchased transportation than third party truck capacity
providers. Commissions to agents were 8.5% and 7.8% of revenue in the 2022 and
2021 thirteen-week periods, respectively. The increase in commissions to agents
as a percentage of revenue was primarily attributable to a decreased cost of
purchased transportation as a percentage of revenue on revenue generated by
Truck Brokerage Carriers.

Investment income was $716,000 and $706,000 during the thirteen-week periods 2022 and 2021, respectively.


Other operating costs increased $2,784,000 in the 2022 thirteen-week period
compared to the 2021 thirteen-week period. The increase in other operating costs
compared to the prior year was primarily due to (i) increased trailing equipment
maintenance costs as a result of (x) increased labor and parts costs as the
Company retained older equipment to support current business levels, and (y) an
increased average trailer fleet size during the 2022 thirteen-week period,
(ii) the impact of the resumption of a large in-person event for the Company's
BCO Independent Contractors and (iii) decreased gains on the sale of operating
property.

Insurance and claims increased $1,876,000 in the 2022 thirteen-week period
compared to the 2021 thirteen-week period. The increase in insurance and claims
expense compared to the prior year was primarily due to increased severity of
current year trucking claims during the 2022 thirteen-week period as well as
increased premiums for commercial auto and excess liability coverage, partially
offset by decreased net unfavorable development of prior years' claims during
the 2022 thirteen-week period. During the 2022 and 2021 thirteen-week periods,
insurance and claims costs included $2,124,000 and $3,542,000 of net unfavorable
adjustments to prior years' claims estimates, respectively.

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Selling, general and administrative costs decreased $5,679,000 in the 2022
thirteen-week period compared to the 2021 thirteen-week period. The decrease in
selling, general and administrative costs compared to the prior year was
attributable to a decreased provision for incentive compensation, decreased
stock-based compensation expense and decreased employee benefit costs, partially
offset by increased wages. Included in selling, general and administrative costs
was incentive compensation expense of $4,462,000 and $8,755,000 for the 2022 and
2021 thirteen-week periods, respectively, and stock-based compensation expense
of $3,599,000 and $7,824,000 for the 2022 and 2021 thirteen-week periods,
respectively.

Depreciation and amortization expense increased $2,294,000 in the 2022
thirteen-week period compared to the 2021 thirteen-week period. The increase in
depreciation and amortization expense was primarily due to increased
depreciation on digital technology tools in connection with the deployment of
new and upgraded applications for use by the Company's network of agents,
capacity providers and employees, and to a lesser extent, in connection with
increased trailing equipment depreciation.

Interest and debt expense in the thirteen-week period of 2022 increased $82,000
compared to the thirteen-week period of 2021.


The provisions for income taxes for the 2022 and 2021 thirteen-week periods were
based on estimated annual effective income tax rates of 24.5% and 24.4%,
respectively, adjusted for discrete events, such as benefits resulting from
stock-based awards. The estimated annual effective income tax rate was higher
than the statutory federal income tax rate of 21% in both periods primarily
attributable to state taxes and nondeductible executive compensation. The
effective income tax rate for the 2022 thirteen-week period was 24.3%, which was
lower than the estimated annual effective income tax rate of 24.5%, primarily
attributable to higher than anticipated state income tax refunds and excess tax
benefits realized on stock-based awards. The effective income tax rate in the
2021 thirteen-week period of 24.4% was consistent with the estimated annual
effective income tax rate of 24.4%.

The net income was $100,218,000Where $2.76 per diluted share, over the thirteen-week period 2022. Net income was $98,675,000Where $2.58 per diluted share, over the thirteen-week period 2021.

CAPITAL AND LIQUIDITY RESOURCES


Working capital and the ratio of current assets to current liabilities were
$543,330,000 and 1.6 to 1, respectively, at September 24, 2022, compared with
$512,917,000 and 1.5 to 1, respectively, at December 25, 2021. Landstar has
historically operated with current ratios within the range of 1.5 to 1 to 2.0 to
1. Cash provided by operating activities was $436,381,000 in the 2022
thirty-nine-week period compared with $216,990,000 in the 2021 thirty-nine-week
period. The increase in cash flow provided by operating activities was primarily
attributable to favorable working capital impacts in connection with the timing
of collections of receivables and payment of certain payables and increased net
income.

The Company declared and paid $0.80 per share, or $29,506,000 in the aggregate,
in cash dividends during the thirty-nine-week period ended September 24, 2022
and, during such period, also paid $75,387,000 of dividends payable which were
declared during fiscal year 2021 and included in current liabilities in the
consolidated balance sheet at December 25, 2021. The Company declared and paid
$0.67 per share, or $25,693,000 in the aggregate, in cash dividends during the
thirty-nine-week period ended September 25, 2021 and, during such period, also
paid $76,770,000 of dividends payable which were declared during fiscal year
2020 and included in current liabilities in the consolidated balance sheet at
December 26, 2020. During the thirty-nine-week period ended September 24, 2022,
the Company purchased 1,900,826 shares of its common stock at a total cost of
$285,983,000. During the thirty-nine-week period ended September 25, 2021, the
Company purchased 317,046 shares of its common stock at a total cost of
$50,230,000. As of September 24, 2022, the Company may purchase in the aggregate
up to 1,099,174 shares of its common stock under its authorized stock purchase
program. Long-term debt, including current maturities, was $109,470,000 at
September 24, 2022, $2,334,000 lower than at December 25, 2021.

Shareholders' equity was $873,173,000, or 89% of total capitalization (defined
as long-term debt including current maturities plus equity), at September 24,
2022, compared to $862,010,000, or 89% of total capitalization, at December 25,
2021. The increase in shareholders' equity was primarily the result of net
income, partially offset by purchases of shares of the Company's common stock,
dividends declared by the Company in the 2022 thirty-nine-week period and taxes
paid in lieu of shares issued related to stock-based compensation plans.

On August 18, 2020, Landstar entered into an amended and restated credit agreement with a syndicate of banks and JPMorgan Chase Bank, North America., as Administrative Agent (the “First Amended and Restated Credit Agreement”). As previously reported in a filed Form 8-K

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with the SEC on July 8, 2022, Landstar entered into a second amended and
restated credit agreement, dated July 1, 2022, with a bank syndicate led by
JPMorgan Chase Bank, N.A., as administrative agent (the "Second Amended and
Restated Credit Agreement") that superseded and replaced the First Amended and
Restated Credit Agreement. The Second Amended and Restated Credit Agreement
which matures July 1, 2027, provides for borrowing capacity in the form of a
revolving credit facility of $300,000,000, $45,000,000 of which may be utilized
in the form of letters of credit. The Second Amended and Restated Credit
Agreement also includes an "accordion" feature providing for a possible increase
of up to an aggregate amount of borrowing capacity of $600,000,000.  The Second
Amended and Restated Credit Agreement, which superseded and replaced the First
Amended and Restated Credit Agreement, is referred to herein as the "Credit
Agreement." As of September 24, 2022, there were no borrowings outstanding under
the revolving credit facility of the Credit Agreement.

The Credit Agreement contains a number of covenants that limit, among other
things, the incurrence of additional indebtedness. The Company is required to,
among other things, maintain a minimum fixed charge coverage ratio, as described
in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit
Agreement, below a specified maximum. The Credit Agreement provides for a
restriction on cash dividends and other distributions to stockholders on the
Company's capital stock to the extent there is a default under the Credit
Agreement. In addition, the Credit Agreement under certain circumstances limits
the amount of such cash dividends and other distributions to stockholders to the
extent that, after giving effect to any payment made to effect such cash
dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a
pro forma basis as of the end of the Company's most recently completed fiscal
quarter. The Credit Agreement provides for an event of default in the event
that, among other things, a person or group acquires 35% or more of the
outstanding capital stock of the Company or obtains power to elect a majority of
the Company's directors or the directors cease to consist of a majority of
Continuing Directors, as defined in the Credit Agreement. None of these
covenants are presently considered by management to be materially restrictive to
the Company's operations, capital resources or liquidity. The Company is
currently in compliance with all of the debt covenants under the Credit
Agreement.

At September 24, 2022, the Company had no borrowings outstanding and $33,493,000
of letters of credit outstanding under the Credit Agreement. At September 24,
2022, there was $266,507,000 available for future borrowings under the Credit
Agreement. In addition, the Company has $76,567,000 in letters of credit
outstanding as collateral for insurance claims that are secured by investments
totaling $85,074,000 at September 24, 2022. Investments, all of which are
carried at fair value, include primarily investment-grade bonds and asset-backed
securities having maturities of up to five years. Fair value of investments is
based primarily on quoted market prices. See "Notes to Consolidated Financial
Statements" included herein for further discussion on measurement of fair value
of investments.

Historically, the Company has generated sufficient operating cash flow to meet
its debt service requirements, fund continued growth, both organic and through
acquisitions, complete or execute share purchases of its common stock under
authorized share purchase programs, pay dividends and meet working capital
needs. As an asset-light provider of integrated transportation management
solutions, the Company's annual capital requirements for operating property are
generally for trailing equipment and information technology hardware and
software. In addition, a significant portion of the trailing equipment used by
the Company is provided by third party capacity providers, thereby reducing the
Company's capital requirements. During the 2022 thirty-nine-week period, the
Company purchased $21,096,000 of operating property and acquired $26,741,000 of
trailing equipment by entering into finance leases. Landstar anticipates
acquiring either by purchase or lease financing during the remainder of fiscal
year 2022 approximately $17,000,000 in operating property, consisting primarily
of new trailing equipment to replace older trailing equipment and information
technology equipment.

On April 1, 2022, Landstar Investment Holdco, LLC, a newly formed Delaware LLC
and wholly owned subsidiary of Landstar System Holdings, Inc., purchased Class A
units of Cavnue, LLC for approximately $4,999,000 in cash consideration. Cavnue,
LLC is a privately held company focused on combining technology and road
infrastructure to unlock the full potential of connected and autonomous
vehicles.

Management believes that cash flow from operations combined with the Company's
borrowing capacity under the Credit Agreement will be adequate to meet
Landstar's debt service requirements, fund continued growth, both internal and
through acquisitions, pay dividends, complete the authorized share purchase
program and meet working capital needs.

LEGAL AFFAIRS


The Company is involved in certain claims and pending litigation arising from
the normal conduct of business. Many of these claims are covered in whole or in
part by insurance. Based on knowledge of the facts and, in certain cases,
opinions of outside counsel, management believes that adequate provisions have
been made for probable losses with respect to the resolution of all such claims
and pending litigation and that the ultimate outcome, after provisions therefor,
will not have a material adverse effect on the financial condition of the
Company, but could have a material effect on the results of operations in a
given quarter or year.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Landstar provides for the estimated costs of self-insured claims primarily on an
actuarial basis. The amount recorded for the estimated liability for claims
incurred is based upon the facts and circumstances known on the applicable
balance sheet date. The ultimate resolution of these claims may be for an amount
greater or less than the amount estimated by management. The Company continually
revises its existing claim estimates as new or revised information becomes
available on the status of each claim. Historically, the Company has experienced
both favorable and unfavorable development of prior years' claims estimates.
During the 2022 and 2021 thirty-nine-week periods, insurance and claims costs
included $7,505,000 and $4,522,000 of net unfavorable adjustments to prior
years' claims estimates, respectively. It is reasonably likely that the ultimate
outcome of settling all outstanding claims will be more or less than the
estimated claims liability at September 24, 2022.

Significant variances from management's estimates for the ultimate resolution of
self-insured claims could be expected to positively or negatively affect
Landstar's earnings in a given quarter or year. However, management believes
that the ultimate resolution of these items, given a range of reasonably likely
outcomes, will not significantly affect the long-term financial condition of
Landstar or its ability to fund its continuing operations.

SEASONALITY

Landstar operations are subject to seasonal trends common to the trucking industry. Truckload shipments for the quarter ending in March are generally lower than those for the quarters ending in June, September and December.

© Edgar Online, source Previews

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Nasdaq rises nearly 2% as traders await key tech earnings https://eventplaner.net/nasdaq-rises-nearly-2-as-traders-await-key-tech-earnings/ Tue, 25 Oct 2022 15:40:00 +0000 https://eventplaner.net/nasdaq-rises-nearly-2-as-traders-await-key-tech-earnings/

The Nasdaq was up on Tuesday as investors anticipated big tech earnings and priced yields lower for fresh clues about the health of the U.S. economy.

The tech-heavy index added 2%, while the S&P 500 rose 1.3%. The Dow Jones Industrial Average added 286 points, or 0.9%.

The yield on the benchmark 10-year Treasury last fell about 15 basis points to 4.085%, building on volatility seen on Monday and last week. The 2-year Treasury yield last fell about 7 basis points to 4.424%.

Taken together, the index’s performance and major moves are signs that investors are “doubling down on their expectations of an easier Fed,” said Cliff Hodge, chief investment officer at Cornerstone Wealth.

Hodge said the economic data released on Tuesday is also a hopeful point for investors who want the Federal Reserve to change course on interest rate hikes as the central bank tries to fight inflation.

The S&P CoreLogic Case-Shiller 20-City home price index released on Tuesday showed home prices fell 1.3% in the 20 major cities surveyed month-over-month in August, but that they were still 13.1% higher than a year ago. The consumer confidence index also fell, showing that sentiment on the economy has deteriorated after two months of improving prospects.

“The market is just starting to get indications that the economic data is likely to slow down,” he said. “The ripple effects from there, maybe give the Fed a little more breathing room.”

Alphabet and Microsoft are among the companies expected to report earnings after the bell as a week with tech as the centerfold continues. Chipotle Mexican Grill is also on deck.

These reports will come after a handful of results before the bell.

UPS, 3M and General Motors all posted earnings above expectations. Shares of UPS and GM rose in early trading, but 3M fell 1.6%.

Coca-Cola also reported better-than-expected earnings, pushing the stock up 1%.

So far this season, the companies have proven that they are perhaps doing better than expected. That’s in part because analysts’ earnings estimates have fallen in recent months as companies grapple with headwinds in the currency market and other growth issues. This could create stocks for rallies on potentially better than expected results.

“‘Earnings have really come down a lot,” said Sam Stovall, chief investment strategist at CFRA. “Maybe investors are happy because it’s up 2% not down 2%, but we also saw reductions in the forecast for 2023. This bear market is likely to play out even if we get a short-term bear rally.”

Meta Platforms reports on Wednesday, followed by Amazon and Apple on Thursday. Given their size and market capitalization, any movement is likely to push the market forward.

Tuesday’s moves come after a back-to-back rally.

The Dow gained 417.06 points, or 1.3%, on Monday. The Nasdaq Composite ended up 0.9% and the S&P 500 added about 1.2%, with nine of 11 sectors ending higher, led by health care.

“The market has become accustomed to real price volatility, almost insensitive to it,” said Jeff O’Connor, head of market structure for the Americas at Liquidnet. “And the wild moves make trading conditions much more difficult.”

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BARK Stock: Continued Execution, Profitability Improves https://eventplaner.net/bark-stock-continued-execution-profitability-improves/ Fri, 21 Oct 2022 21:55:00 +0000 https://eventplaner.net/bark-stock-continued-execution-profitability-improves/

Sergi Alexander/Getty Images Entertainment

Investment thesis

BARK (NYSE: BARK) shares have jumped as much as 120% since I last covered the company in June. The company reported better-than-expected first-quarter profitability results. The company continues to lose money, and this the investment is highly speculative. But I think the outlook for the company is heading in the right direction. I still think BARK shares have considerable upside potential if the company manages to achieve profitability.

Progress towards profitability

BARK’s business model is simple. The company sells its line of branded products to dog owners. Most of its sales are through its direct-to-consumer subscription boxes. This model is simple and coherent. The company has clear profitability drivers. It must increase average revenue per customer and reduce customer acquisition costs.

BARK announced an adjusted EBITDA loss of $13 million in the last quarter. This beat its previous forecast of $5 million. The company increased its average order value by 7% year over year and 3% quarter over quarter. This is largely due to management’s focus on their higher margin products. Products like BARK Eats and BARK Bright generate more profit for the company.

List of BARK products

BARK December 2020 Management Presentation

BARK’s subscription business is showing strong fundamentals. Management reports that its customer acquisition costs have not increased. However, the company has experienced strong growth thanks to newly acquired customers. The average revenue generated by new customers has jumped 10% since last year.

At the same time, management is trying to control expenses. The company’s operating expenses increased 18% year over year, compared to revenue growth of 12%. But management has cut operating expenses by 10% in the past two quarters. They discussed the company’s expense growth during their last earnings call.

The year-over-year increase was primarily driven by a 6% increase in subscription shipments in the last quarter and an increase in headcount. Going forward, we do not intend to significantly increase staff numbers from current levels. We expect the majority of G&A expense growth this year to be driven by subscription shipping volume and therefore expect our operating margins to improve in fiscal 2023 compared to last year. fiscal year 2022.

I think that’s a solid prospect. The company continues to record positive revenue growth. BARK’s hiring freeze will allow more of the company’s gross profit to flow into net income. For this reason, management expects the company’s EBITDA loss to narrow to $8 million in the second quarter. This would be a sequential decrease of 38%.

Overall, I think the company’s profitability outlook is quite positive. There is still a long way to go, but all major BARK metrics are moving in the right direction.

Rating is always up to date

Even after a 32% rebound from its lows, I still think BARK shares are cheap. The company has a price-to-book ratio of 1.4 times. Its market cap is around $300 million. It has $177 million in cash on its balance sheet, offset by $76 million in debt. This gives the company an enterprise value of just $190 million. That seems low for a company with over $500 million in annual sales and strong margin potential.

The company has $158 million in inventory on its books, up 54% from last year. This represents more than eight months of inventory. This seems high for a company with this profile. But I don’t think that will be a problem due to BARK’s business model. Management discussed its inventory outlook during its earnings call.

We continue to protect against potential supply chain disruptions. However, we do not expect inventory to be a significant drag on working capital this year and expect our inventory to decline from current levels as we leverage the products available to us over the coming quarters.

It takes time for us to achieve this, because we usually order the product six months in advance. So we’re going to take a few quarters to see our progress reflected on our balance sheet. But a great thing about our subscription model is that the customer is unaware of what products they will receive in their fashion dogs. In a traditional e-commerce business, the customer selects the exact products they want to send to them. In our model, it’s a surprise every month and we can leverage the inventory we have at our discretion.

This inventory model is very effective. This effectively eliminates the risk of BARK having to take large markdowns. This should allow the company to maintain its solid margins above 50%.

The company reduces its cash consumption rate. Last quarter, the company spent $17.4 million on operations. This cost has decreased by almost 70% since last year. At the current pace, the company has enough cash to sustain itself for more than three years.

It is difficult to value a company with so much uncertainty. But the shares are trading at a forward EV to earnings of 0.34 times, so it looks like the market doesn’t think BARK will be able to achieve profitability. I think there is a good risk in rewarding that the business becomes profitable. Even modest margins would make the company’s stock undervalued in my view.

Future drivers of growth

BARK continues to grow its top line even as economic headwinds increase. The company reported 259,000 net new subscribers last quarter. I think BARK can continue to add subscribers sustainably. Spending on pets generally remains constant during recessions. Sectors such as pet food and healthcare are particularly resilient. BARK Bright and BARK Eats are fast growing offerings in these categories.

I also think BARK has good opportunities to sell new products to existing customers. The company generated $10 million in cross-selling in the first quarter. This is an increase of 42% since last year. Management has integrated all of BARK’s offerings into one site. For example, the company began cross-selling BARK Bright food products and toppings to its toy and candy customers in May. This boosted the company’s average order value. It also lowered its customer acquisition costs.

Opportunities to cross-sell BARK products

BARK December 2020 Management Presentation

This is where BARK’s data advantage comes in. The company has a list of nearly 2.3 million customers who are currently paying for any of BARK’s services. The company also has basic information on about 10% of the dog population in the United States. This allows the company to be more effective in advertising and marketing. The business can leverage this information to reduce the cost of acquiring customers, thereby increasing margins.

final verdict

There is still a lot of uncertainty here. But I think BARK’s outlook is becoming clearer. The company is making strong progress towards profitability. I am interested in the next quarterly report from BARK. I want to see how the company handles the current economic headwinds. Overall, my outlook is unchanged. I think this is a decent speculative buy for high value investors with high risk tolerance.

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Automotive Dealer Services Company: Strong, with Challenges https://eventplaner.net/automotive-dealer-services-company-strong-with-challenges/ Sun, 16 Oct 2022 17:21:20 +0000 https://eventplaner.net/automotive-dealer-services-company-strong-with-challenges/

Some dealer groups are investing to add capacity and efficiency as times remain good.

Number 1 Cochran Automotive in Monroeville, Pa., near Pittsburgh, is adding 27,000 square feet to its existing wholesale parts distribution center, CEO Rob Cochran said.

The dealership group centralized its wholesale parts business about five years ago, in part to support its own body repair business, Cochran said. As the collision business grew and attracted more sales from independent body shops, the aftermarket operation outgrew the space.

The parts wholesale business has an annual turnover of about $45 million, he said. The group expects the business to reach $65-70 million with more space.

“It’s going to put us in a position to really expand and grow this wholesale parts business,” Cochran said.

Beyer Auto Group in Virginia was able to add two hours of evening service at most of its stores after offering technicians the option of working four 10-hour days, rather than eight-hour Monday-Friday shifts, Patrick said. Brooke, Director of Fixed Operations. This change has been in place for about a year, allowing the group to support an additional 180 to 200 repair orders per month.

The group, which sells Kia, Jaguar, Land Rover, Mazda, Subaru, Volkswagen and Volvo vehicles at five locations, has also stepped up efforts to call customers who have not been in service for several months or who have declined a prior service. He hired a company to handle calls and schedule appointments after hours and during peak periods, which made that process more efficient, Brooke said.

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