Forterra (FRTA) 10-K2021 FY Annual report

    On March 13, 2015, through an indirect wholly owned subsidiary, Lone Star Fund IX (U.S.), L.P. (which is referred to, along with its affiliates and associates, but excluding us and other companies that it owns as a result of its investment activity, as Lone Star) acquired the building products business of HeidelbergCement AG, or HC, in the United States and Eastern Canada, or the Acquisition. Unless otherwise specified or where the context otherwise requires, references in this Annual Report on Form 10-K to “our,” “we,” “us,” the “Company” and “our business” refer to the operations of Forterra, Inc., together with its consolidated subsidiaries. We are a holding company incorporated in Delaware in 2016. We are controlled by Lone Star and have been operating as a stand-alone company since 2015.

    On February 19, 2021, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Quikrete Holdings, Inc., a Delaware corporation, or Quikrete, and Jordan Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Quikrete, or Merger Sub. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company, or the Merger, with us surviving the Merger as a wholly-owned subsidiary of Quikrete. At the effective time of the Merger, each issued and outstanding share of common stock of the Company (other than (i) any shares held in the treasury of the Company or owned, directly or indirectly, by Quikrete, Merger Sub or any wholly-owned subsidiary of the Company immediately prior to the Effective Time, (ii) shares that are subject to any vesting restrictions, or Company Restricted Shares granted under the Company’s stock incentive plans, (iii) any shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be automatically canceled and converted into the right to receive $24.00 in cash, without interest, or the Merger Consideration, subject to deduction for any required withholding tax. We and Quikrete are currently working with the United States Department of Justice, or DOJ, to obtain approval to consummate the Merger under the Hart-Scot-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, in the timeframe contemplated by the Merger Agreement.

    In order to address some of the divestitures anticipated to be required by the DOJ, we have entered into two divestiture agreements. On November 24, 2021, we entered into an agreement with Eagle Corporation and Parent pursuant to which Eagle will purchase our 50% equity interest in Concrete Pipe & Precast, LLC, or CP&P, a 50/50 joint venture with Eagle, for a purchase price of $105 million, subject to certain adjustments as described in the purchase agreement. On December 13, 2021, we entered into an agreement with Hydro Conduit, LLC d/b/a Rinker Materials, an affiliate of Parent, and Foley Products Company, Inc. pursuant to which we and Rinker will each sell to Foley certain assets and liabilities associated with reinforced concrete pipe and precast plants for an aggregate purchase price of $95 million, subject to certain adjustments described in the asset purchase agreement. Consummation of these transactions is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.

    See Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in "Overview" for a more fulsome description of the Merger, the Merger Agreement, the risks related thereto and its terms and expected impact on our business.

    We are a manufacturer of concrete pipe and precast products and ductile iron pipe in the United States and Eastern Canada for a variety of essential water-related infrastructure applications. Our products and services are used in the construction, maintenance, repair and replacement of water drainage, distribution and transmission systems.

    We operate 80 active manufacturing facilities, and our manufacturing and distribution network allows us to serve most major markets in the United States and Eastern Canada.

    We manufacture both water drainage pipe and precast structures (used primarily for storm water and drainage applications) and water transmission and distribution pipe (used primarily to transport potable water and as a component of wastewater systems) and believe our complementary product portfolio is well positioned to serve both (i) the storm water and wastewater infrastructure market and (ii) the potable water transmission and distribution market. We serve a diverse set of end markets, including infrastructure, residential, and non-residential construction, which allows us to benefit from both secular and cyclical growth across each of these end-markets. The infrastructure, residential, and non-residential end markets in the United States and Eastern Canada have different growth drivers and operating dynamics, and the cyclical performance of these markets has historically been staggered during different stages of the broader economic cycle serving to mitigate the cyclical impact of any one single market on our business. In addition, given the nature of water as a basic necessity, municipalities generally repair and replace their existing water and wastewater infrastructure.

     Our operational strategy is focused on our five improvement pillars:

    We serve a range of infrastructure-related end markets. Based on the source of funding, we classify these construction markets into infrastructure/municipal, residential and non-residential.

    Infrastructure represents spending by federal, state, and local governments for the construction and repair of streets, highways, storm and sanitary sewers, as well as the construction and repair of water lines for the delivery of potable water, which are often supported by multi-year federal and state legislation and programs. It also includes local municipalities water infrastructure spending associated with the construction, repair and replacement of water transportation and distribution systems. Spending on these items is driven by federal, state and municipal funding for both new build and repair projects. In addition to availability of funding at the federal, state and municipal levels, these programs are impacted by other factors, including demographic and population shifts and the ability of contractors to obtain skilled labor.

    A large proportion of U.S. water infrastructure is approaching, or has already reached, the end of its useful life. According to The American Society of Civil Engineers, or ASCE, many drinking water pipes in the U.S. were laid from 1900 to 1950. Today, aging pipelines contribute to the estimated 240,000 water main breaks per year in the U.S., wasting over two trillion gallons of treated drinking water. Additionally, lead pipes and fixtures, which were commonly installed through the mid-20th century, are still in service in some cities. The American Water Works Association estimated that the need for buried drinking water infrastructure in the U.S. through 2050 totals nearly $1.7 trillion, about 54% of which is needed for replacement of existing infrastructure and the balance being necessary to accommodate population growth and migration over that period. ASCE gave the U.S.

wastewater infrastructure a grade of D+ and, in 2017, estimated that 56 million new users would be connected to centralized treatment systems over the next 15 years requiring at least $271 billion to meet current and future demands and to upgrade existing infrastructure. Likewise, the ASCE grades the U.S. surface transportation (roads, bridges, and transit) infrastructure D/C+/D- and has identified over $1 trillion in additional spending needed to repair and upgrade existing structures as well as construction of new facilities to accommodate growth through 2025. As the leader in our respective markets serving the water related infrastructure industry, we believe we are well positioned to benefit from this much needed spending to repair and upgrade U.S. infrastructure.

    Residential construction includes single family homes and multi-family units such as apartments and condominiums. In this end market, our products are primarily used during the new lot development phase of construction. New residential housing starts provide a strong leading indicator of increased activity in the residential construction market for water transmission, wastewater and drainage systems. Demand for residential construction is influenced by demographic and population shifts, mortgage interest rates, and the ability of builders to obtain skilled labor. U.S. residential new construction peaked in 2006 before experiencing a downturn from 2007 to 2011. Since 2011, the recovery of residential new construction has translated into increased demand for our products and we believe we are well-positioned to capitalize as and to the extent this trend continues. Since 1974, annual additions to the housing supply exceeded household growth by an average of 30% to accommodate replacement of older units, demand for second homes, geographic shifts in the population, and a normal amount of vacancies. However, for most of the last decade, housing production has barely kept pace with household formation. We believe this indicates there is significant pent up demand for housing and that the market will see continued growth.

    We manufacture drainage pipe and precast products in the United States and Eastern Canada and concrete pressure pipe products in Eastern Canada. Drainage pipe has residential, non-residential and infrastructure applications. It is primarily used for storm water applications, such as storm drains for roads and highways, and for residential and non-residential site developments. In addition, drainage pipe is used for sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping and utility tunnels. Drainage pipe consists of concrete reinforced by a steel cage. It is manufactured by producing a steel mesh cage, enclosing it in a form or mold and then pouring concrete around it to produce the pipe. Drainage pipe is manufactured in round, elliptical and arch shapes ranging from 12 inches to 144 inches in diameter and in box sizes ranging from three feet to 20 feet in length and width.

    We also manufacture a wide variety of precast concrete products, including box culverts, utility vaults, manholes, drainage inlets and pipe end sections. These precast concrete products are used for applications such as roadway drainage, airport drainage, storm water management, utility construction and water treatment and filtration systems. Our range of precast concrete products also includes products that fall under the general description of specialty precast, including products for which we hold patents that make us the exclusive manufacturer, or which are manufactured under license agreements with third parties. These specialty products include architectural panels for buildings, modular railroad crossings, retaining wall systems, highway noise

barriers, storm water treatment systems and concrete vaults, which are used to house either dry utilities (such as electrical, data or communications equipment) or wet utilities (such as valves, pumps or water meters).

    We also manufacture structural precast products in the United States and a range of precast concrete bridge girders for highway projects in both the United States and Eastern Canada. We manufacture a variety of structural precast products primarily for infrastructure and non-residential applications, including hollow-core planks, prestressed bridge girders, beams, columns, wall panels, stairs, garage floors and architectural cladding. These products are used as structural and architectural elements in building structures such as parking garages and arched and modular bridges.

    Precast concrete products are reinforced with steel, similar to pipe, and manufactured using either a dry cast or wet cast concrete mix, depending on the size of the piece and the number of identical pieces to be manufactured. In the dry cast method, a concrete mix with low water content, known as zero-slump concrete, is poured into a mold and then densely compacted around the steel reinforcement using a variety of manufacturing methods. The concrete structure is immediately removed from the mold and allowed to cure in a high humidity environment to ensure proper hydration of the concrete. This method allows multiple pieces to be produced from the same mold each day and is most suitable for high volume, repetitive manufacturing. In the wet cast method, a concrete mix with relatively high water content is poured into a mold and allowed to cure in the mold, which can take from four to 16 hours. Precast concrete products typically range in diameter from four to 12 feet for round products or in length and width from one foot to 12 feet for square or rectangular products.

    We also regularly consider ways to innovate internally and expand our drainage pipe and precast product offerings by working to bring other products to market. Some of our product offerings include precast Duct Bank, Kenner Chainwall, and a number of storm water innovative technologies for storm water management marketed through our Bio Clean subsidiary. Duct Bank is a precast product that consolidates and protects underground electrical and communication cables and can be used in the construction of large buildings, including in data centers, as well as installing cabling underneath roads and areas with existing structures. Kenner Chainwall is a precast concrete foundation that provides a structurally sound, on-grade or elevated foundation to support prefabricated shelters or equipment buildings. One use is to elevate electrical equipment in flood zones such as those devastated by hurricanes. Each of these products is now commercially available.

    In addition to our operations, we have a 50% equity interest in Concrete Pipe & Precast LLC, or CP&P, a joint venture with Eagle Corporation. CP&P operates 12 plants that serve the Mid-Atlantic and Southeastern United States. CP&P manufactures drainage pipe and precast concrete products and sells those products to similar types of customers as the ones to which we market. See Note 6 to our consolidated financial statements for additional information regarding CP&P. In November 2021 we entered into an agreement to sell our 50% equity interest in CP&P to Eagle, with the closing of this transaction subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.

    Utilizing the U.S. Pipe brand, we manufacture a number of products used for the transmission of potable water and wastewater in pipe diameters ranging from three to 64 inches.

    We manufacture DIP in pipe diameters ranging from three to 64 inches in the United States. For each diameter of pipe, we offer a wide range of thicknesses with both standard and specialized linings and coatings. DIP is used for transmission and distribution of potable water and wastewater. DIP has residential and infrastructure repair replacement applications, including potable water distribution systems, small water system grids, major water transmission mains, wastewater collection systems, sewer force mains and water treatment plants. In addition to DIP, we also manufacture a full line of complementary joint restraints and fittings in Mexico, which are utilized for interlocking adjoining segments of pipe and are typically bundled with DIP. We also operate fabrication plants that modify our pipe to meet specific customer design requirements for above-ground applications.

    DIP is manufactured using a process that consists of introducing molten iron into a rapidly-rotating steel mold and relying on centrifugal force to distribute the molten iron evenly around the inner surface of the mold to produce pipe of uniform size and dimensions. We also strive to innovate in our Water Pipe & Products segment, including by offering metallic zinc coating and TR-XTREME pipe. Metallic zinc coating is active corrosion protection for DIP. TR-XTREME pipe is DIP designed for areas of seismic activity and has joints that provide flexible extension capabilities.

    We typically sell our drainage pipe and precast products to contractors that perform construction work for various levels of government, residential and non-residential building owners, and developers in markets across the United States and Eastern Canada. Additionally, although they are not our direct customers, we view the owners and engineers who are customers of the contractors that purchase our products as our customers as well, because these owners and engineers often specify the types of products that our customers are required to use. We also sell our drainage pipe and precast products to utility companies. Several of our largest manufacturing facilities are located in close proximity to our markets. Our drainage pipe and precast products are typically shipped within a radius of 150 miles, but in some cases up to 350 miles, from our manufacturing facilities. Our concrete pressure pipe is used in projects for regional water authorities and districts, cities, counties, municipalities, port authorities, private companies and industrial clients, including power plants, and is typically shipped within a radius of 500 miles from our manufacturing facility.

    Our competitors in our Drainage Pipe & Products Segment include Rinker Materials (a division of the QUIKRETE Companies) and Oldcastle Infrastructure (a unit of CRH plc), as well as numerous regional and local manufacturers servicing various geographies. Additionally, our drainage pipe products compete with high density polyethylene, or HDPE, and polypropylene pipe products where such materials would serve as an appropriate substitute for our product.

    Our two largest competitors in DIP manufacturing are McWane, Inc. and American Cast Iron Pipe Company. Our DIP products also compete with polyvinyl chloride, or PVC, and HDPE pipe and, when pricing achieves certain levels, we may also compete with foreign manufacturers of DIP. Our national network of fabrication products competes with regional and local providers of those products and services.

    Our products are generally made to order, but certain of our Drainage concrete pipe and DIP products are made to inventory. We have established target levels of inventory for certain products that we attempt to keep available at our manufacturing facilities to meet customer demand. Inventories are held at manufacturing facilities and, to a lesser extent, at distribution yards.

    Our structural precast products, most precast concrete products and concrete pressure pipe are customized products that are made to order. Our order backlog for precast concrete products is typically two to six months. Our order backlog for concrete pressure pipe and other precast offerings (bridge products) is approximately three to eighteen months depending on the demand in the geographic area for specific products.

    We seek to attract and retain customers through customer service and technical expertise, as well as product quality, our product and service offerings and competitive pricing. Our market strategy for products with non-residential end users is centered on building and maintaining strong customer relationships rather than traditional advertising.

    We maintain in-house technical sales, engineering and field service teams which provide customers technical expertise and support to assist them in finding the right product or solution for their specific need. Each of our operating segments has its own sales force. Overall, we employ approximately 275 sales and related support professionals. Our sales force and customer service functions are staffed by experienced professionals who have been trained in our product lines, processes and systems, and who maintain touch points with engineers, contractors, builders, and distributors. Additionally, we have a staff of more than 150 engineers that we employ to work in concert with our sales force to help develop effective product solutions for our customers.

    We sell our DIP products and our fittings and fabricated products primarily through distributors. Our drainage pipe, concrete pressure pipe, and precast concrete products are mostly sold direct to customers who are installing such products for or are the end users of such products. Drainage pipe, concrete pressure pipe, and certain precast products are sold through a bidding process in which we seek to place the most competitive bid. We undertake marketing efforts through our participation in trade shows and through our website. We outsource many of our product deliveries by using a combination of dedicated carriers and other third-party carriers.

    The primary material for our drainage pipe and precast concrete products and our concrete pressure pipe is concrete, which consists of water, cement and aggregates. Another key input for our products is steel, which is used to provide reinforcement within our drainage pipe and precast concrete products. Our DIP is largely made from iron melted from recycled scrap metals. Other key materials for our DIP include foundry coke and certain additives, such as alloys.

    Most of our raw materials are widely available commodities. While we have experienced challenges in obtaining certain materials during 2021 as a result of a globally challenged supply chain environment, we have not experienced any significant shortages of raw materials. To the extent we do not produce any raw materials,

when and where possible, we try to purchase raw materials from the source, and because of their low value-to-weight ratios, we generally try to source our raw materials in the vicinity of our facilities. We usually purchase the raw materials we need in the spot market, except where we anticipate a significant need of materials for a specific project. Other than certain contracts for key materials, including cement and steel, we typically do not enter into long-term supply contracts with our suppliers that require us to purchase particular quantities or to pay particular prices.

    We purchase our steel from a number of different suppliers, but most suppliers are based in the United States in order to comply with “Buy America” government contract requirements placed on our customers. We endeavor to purchase these steel supplies from the entity which is as close as possible to the manufacturer.

    To manufacture DIP, fabricated products and fittings, we purchase scrap metal directly from qualified scrap sources near our foundry sites in the United States and Mexico. We utilize certain categories of scrap metal, primarily shredded automobile bodies, plate & structural, and cast iron. We purchase foundry coke from two merchant coke producers in the United States, both located in Birmingham, Alabama. Major alloys and additives are procured from both domestic and foreign sources based on a semiannual bid process.

    The construction industry, and therefore demand for our products, is typically seasonal and dependent on weather conditions, with periods of snow or heavy rain negatively affecting construction activity. For a more detailed discussion, see the sections titled Item 1A., Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of the seasonality of our business.

    As of December 31, 2021, we had 4,824 team members, 1,434 of which were salaried and 3,390 of which were hourly. Of the total number of team members, 4,272 were located in the United States, 277 were located in Canada and 275 were located in Mexico. The number of hourly workers we employ varies to match our labor needs during periods of fluctuating demand and varies seasonally in certain regions. We also contract to hire temporary workers as needed to meet production goals.

    As of December 31, 2021, approximately 33% of our workforce is covered by collective bargaining agreements, and approximately 46% of these team members are included in collective bargaining agreements that expire within one year of December 31, 2021. We have not had any recent union-organized work stoppages in the United States, Canada or Mexico. We believe that we have good relationships with our team members and with the unions representing our team members.

    We believe there is nothing more important than the health, safety and wellness of our team members; we believe this commitment is both a moral imperative and is fundamental to driving success in our business. We are committed to providing a safe and healthy working environment for our team members and are constantly looking for ways to improve our facilities and processes in order to better serve these goals. We also provide team members and their families with access to programs that promote their health and wellness, including wellness and disease prevention programs, employee assistance programs, and comprehensive health care benefits. In response to the COVID-19 pandemic, we implemented numerous policies and initiatives to assure that our team members, many of whom were essential infrastructure workers, could operate in an environment that promoted each individual’s health and safety, to provide paid leave and other benefits to employees directly impacted by the pandemic, and to allow those team members whose roles enabled them to work from home to do so. We have continued many of these policies and initiatives and are continuing to evaluate the need for such policies in the future.

    In order to attract, retain, and engage our team members to drive our success, we provide compelling compensation and benefit programs that are competitive in our markets. Our programs include a combination of some or all of the following: competitive market-based pay, bonuses, stock awards, defined contribution retirement plans with Company matching contributions, healthcare and insurance benefits, health savings and flexible spending accounts, wellness programs, company-paid life insurance, paid time off, family leave, employee assistance programs, tuition assistance, flexibility to allow work from home in certain situations including in response to the COVID-19 pandemic, reimbursement for some health and fitness programs, and many others. These benefits can vary in our Canada and Mexico locations based on local availability and regulations. We are committed to ensuring equal pay for equal work regardless of gender, race or ethnicity.

    We know that our continued success depends on our ability to engage with our team members and grow them into the future leaders our business needs. To that end, we have implemented robust learning management tools and training programs focused on developing our team members. Recent areas of focus have included implementation of a comprehensive program to develop skills for our sales professionals as well as development of a front-line leader training system for our plant-level supervisors. In addition, we periodically conduct a survey of our team members to determine where they are engaged and where we can improve.

    One of our core values is respect for people, and that includes providing a workplace that is committed to valuing diversity and inclusion of people of all backgrounds, regardless of race, ethnicity, gender, age, religious belief, disability, sexual orientation, gender identity, or cultural background. As of December 31, 2021, underrepresented minorities (defined as those individuals who identify as Black/African American, Hispanic/Latinx, Native American, Pacific Islander and/or two or more races) represented 49.43% of our team members, and women represented approximately 9.7% of our workforce.

    We own various United States and foreign patents, registered trademarks, trade names and trade secrets and applications for, or licenses in respect of, the same, that relate to our various business lines including a number of innovative technologies relating to storm water management. The U.S. Pipe name has been a recognized manufacturer of DIP for more than 115 years. We also license intellectual property for use in certain of our products from unaffiliated third parties. We believe that our patents, trademarks, trade names and trade secrets are adequately protected and that any expiration or other loss of one or more of our patents or other intellectual property rights would not have a material adverse effect upon our business, financial condition or results of operations.

    We are subject to a broad range of federal, state, provincial, local and foreign laws and regulations governing health and safety or the protection of the environment and natural resources, including, for example:

    Environmental pre-construction and operating permits are, or may be, required for certain of the Company’s operations, and such permits are subject to modification, renewal, and revocation. It is likely that we will be subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws, as well as laws enacted to reduce climate change. It is also likely that we will be required to make additional expenditures, which could be significant, relating to environmental matters such as pollution controls and carbon emissions, on an ongoing basis. As our operations involve, and have involved, the handling, transport and distribution of materials that are, or could be classified as, toxic or hazardous or otherwise as pollutants, there is some risk of contamination and environmental damage inherent in our operations and the materials and products we handle and transport. Consequently, we are subject to environmental laws that impose liability for historical releases of hazardous substances. We are also subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Manufacturing sites can be inherently dangerous workplaces. Our sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, and manufacturing processes, and highly regulated materials and there is inherent risk of related liabilities in our operations. See Item 1A. Risk Factors.

    We regularly monitor and review our operations, procedures, and policies for compliance with existing laws and regulations, changes in interpretations of existing laws and enforcement policies, new laws that are adopted, and new laws that we anticipate will be adopted that could affect our operations. For health and safety regulations, the Occupational Safety and Health Administration, or OSHA, sets minimum standards; we have adopted programs internally that are intended to meet or exceed these requirements.

    Our consolidated financial statements include estimated liabilities for future costs arising from environmental issues relating to our properties and operations. As of December 31, 2021, the Company had accrued environmental liabilities of approximately $1.3 million. See Note 2 to the consolidated financial statements.

    We have been named as a potentially responsible party, or PRP, at sites identified by the EPA or state regulatory agencies for investigation and remediation under CERCLA, or comparable state statutes, generally referred to as Superfund sites, including Sylacauga, AL, North Birmingham, AL, Portland, OR and Chattanooga, TN. With respect to these Superfund sites for which we have received PRP notices, we are entitled to contractual indemnity from a third party, subject to the terms of the indemnity provisions contained in the relevant agreement. Our estimates of current liabilities factor in these indemnification rights and our assessment of the likelihood that the indemnitor will fulfill its obligations with respect to liabilities relating to such sites. To date, the indemnifying party has been fulfilling its indemnification obligation with respect to those Superfund sites, and we have no reason to believe it will not continue to do so. However, in the future, we can provide no assurance that the indemnifying party will continue to honor its obligations, or that the existing indemnities will be sufficient to cover the liabilities for such matters.

prices and performance characteristics. While the majority of our products are not subject to frequent or rapid stylistic changes, trends do evolve over time, and our competitors may do a better job of predicting market developments or adapt more quickly to new technologies or evolving customer requirements.

and regulatory changes in response to the potential effects of climate change, which could lead to additional legislative and regulatory changes in those countries, including by means of required reporting of greenhouse gas emissions, the use of alternative fuels, the use of carbon credits (including a "cap and trade" system) and/or a carbon tax. The U.S and Canada have agreed to the Paris Agreement, in connection with the United Nations Framework Convention on Climate Change, in which the signatories aim to reduce greenhouse gas emissions, or GHGs, as soon as possible and achieve a position of net zero GHGs by 2050. In the U.S., President Biden has stated his commitment to taking action to address climate change, including by rejoining the Paris Agreement, announcing goals to achieve a 50-52% reduction in GHGs from 2005 levels by 2030, a whole-of-government initiative supported by his National Climate Task Force, and by issuing various executive orders addressing climate change policy, including an executive order in December 2021 directing the federal government to achieve net-zero greenhouse gas emissions by 2050. Based on this focus, it is possible that environmental regulators and other agencies may use their rule-making authority and procurement decisions to further address climate change Although it is uncertain at this time precisely what actions various governmental bodies will take early to address the effects of climate change and to achieve the goals outlined in various agreements, including in what timeframe those actions would be implemented, it seems clear that changes to regulate carbon emissions are a key focus for the Biden Administration and other governmental entities, including California, which has had a cap and trade system in place since 2012. In light of the uncertainty around what regulations will be implemented, we cannot at this time reasonably predict what the costs of any future compliance requirements may be, but it is likely our costs will increase in relation to any climate change legislation and regulation concerning greenhouse gases, which could have an adverse effect on our future financial position, results of operations or cash flows.

into a larger infrastructure system, such as a city’s or municipality’s water transmission system, or built into the fabric of a building or dwelling. In most cases, it is difficult to access, repair, recall or replace these products. Additionally, some of our products, such as our pressure pipe, which is used in nuclear and coal-fired power generation factories, are used in applications where a product failure or construction defect could result in significant project delay, property damage, personal injury or death or could require significant remediation expenses. Because our products, including discontinued products, are long lasting, claims can also arise many years after their manufacture and sale. In certain cases, we may also offer warranties for longer periods now for certain products to compete with certain substitutes, which could increase the number, size, and frequency of warranty claims in the future. Product failures may also arise due to the quality of the raw materials we purchase from third-party suppliers or the quality of the work performed by our customers, including installation work, matters for which we have little to no control, but which may still subject us to a warranty claim. We may also assume product warranty or other similar obligations in acquisition transactions regarding the products sold by the acquired businesses prior to the transaction date for which we are not indemnified pursuant to the terms of the relevant transaction documentation. Our quality control systems and procedures and those of our suppliers and customers cannot test for all possible conditions of use or identify all defects in the design, engineering or specifications of one of our products or the raw materials we use before they are put to their intended purpose. Therefore, there can be no assurances that we will not supply defective or inferior products that cause product or system failure, which could give rise to potentially extensive warranty and other claims for damages, as well as negatively impact our reputation and the perception of our product quality and reliability. While we have established reserves for warranty and related claims that we believe to be reasonable, these claims may exceed our reserves and any such excess and any negative publicity and other issues related to such claims could have a material adverse effect on our business, financial condition and results of operations.

times caused and may continue to cause tighter supply and significant price increases. Factors such as adverse weather conditions and other natural disasters, as well as political and other social instability, have and will continue to disrupt raw material supplies and impact prices.

increase in the cost thereof, whether as a result of strikes, slowdowns, a shortage of drivers, other disruption to the highway or rail systems, or other unrelated transportation issues could limit our ability to deliver our products in a timely and cost-effective manner or at all. Any material disruption at one or more of our facilities or those of our customers or suppliers or otherwise within our supply chain, whether as a result of downtime, facility damage, an inability to deliver our products or otherwise, could prevent us from meeting demand, require us to incur unplanned capital expenditures or cause other material disruption to our operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

implement new technology systems, but these updates may not be successful, they may create new issues we currently do not face, or significantly exceed our cost estimates.

Additionally, our business relies on the ability of the contractors who install our products to obtain qualified employees, including experienced supervisors and foreman, and a shortage in the supply of these skilled personnel could cause delays in customer’s ability to take shipments of our products.

which we believe we were indemnified under the relevant transaction agreements, such as environmental liabilities or pension or benefit obligations retained by the seller, including certain environmental and benefit obligations in connection with our U.S. Pipe Acquisition and certain pension obligations we assumed pursuant to the Acquisition and our acquisition of Cretex. We are also engaged in other indemnification and other post-closing disputes with certain of our transaction counterparties. Our inability to realize the anticipated benefits of an acquisition as well as other transaction-related issues could have a material adverse effect on our business, financial condition and results of operations.

Although we currently do not have any material weaknesses in our internal control over financial reporting, we have historically experienced such material weaknesses. To remediate our prior material weaknesses, we have needed to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff, and we may need to do so in the future to maintain the effectiveness of our internal control over financial reporting and other controls. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the

effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

In addition, our ability to borrow under the Revolver is limited by the amount of the borrowing base applicable to U.S. dollar and Canadian dollar borrowings. Any negative impact on the elements of our borrowing base, such as eligible accounts receivable and inventory, will reduce our borrowing capacity under the Revolver. Moreover, the Revolver provides discretion to the agent bank acting on behalf of the lenders to impose additional requirements on what accounts receivable and inventory may be counted toward the borrowing base availability, and to impose other reserves, which could materially impair the amount of borrowings that would otherwise be available to us. The credit facility also requires us to maintain certain financial ratios. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding the terms of our credit facility and the indenture governing our senior secured notes dues due 2025. We are also party to a U.S. and a Canadian master lease under which we currently pay an aggregate of $17.1 million and $1.2 million (CAD) per annum, respectively, to lease certain properties through June 30, 2043. Each of these master lease agreements contain certain restrictions and covenants that limit, among other things, our use of and ability to sublease or discontinue use of the leased properties, our ability to consider strategic divestitures of properties that are leased and our ability to consolidate operations as may be appropriate in order to minimize operating costs. See Note 15 in our consolidated financial statements.

react to markets and potentially making us more vulnerable to downturns. These restrictions could also require that, based on our level of indebtedness, a significant portion of our cash flow from operations be used to make interest payments, thereby reducing the cash flow available for working capital, to fund capital expenditures or other corporate purposes and to generally grow our business. Furthermore, these restrictions could prevent us from pursuing a strategic transaction that we believe would benefit our company.

Any inability to collect customer receivables or inadequate provisions for doubtful receivables could have a material adverse effect on our business, financial condition and results of operations.

dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

Borrowings under our senior term loan and revolver use the London Interbank Offering Rate, or LIBOR, as a benchmark for establishing the applicable interest rate. The Financial Conduct Authority of the United Kingdom has announced that it plans to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate, or SOFR, calculated using short-term repurchase agreements backed by Treasury securities. Whether or not SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement tool remains in question. Although our borrowing arrangements provide for alternative base rates, , those alternative base rates historically would often have led to increased interest rates, in some cases significantly higher, than those we paid based on LIBOR, and may similarly be higher in the future. Therefore, if LIBOR ceases to exist, we will likely need to agree upon a replacement index with our lenders, which would require an amendment to our borrowing arrangements, and the interest rate thereunder will likely change.

agreement. Therefore, Quikrete may not be required to agree to additional divestitures the extent that the DOJ requires divestitures beyond those currently contemplated by the Divestiture Agreements.

resources towards completing the merger and preparing for integration actives and away from ongoing business and operations. Uncertainty as to whether the merger will be completed may also affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the merger is pending because employees may experience uncertainty about their roles following the merger. These risks and the resulting adverse effects on business, financial condition and results of operations could be exacerbated by any delays in completion of the merger or termination of the merger agreement.

do not consist entirely of independent directors. Accordingly, investors will not have the same protections afforded to stockholders of companies that are subject to all of the applicable Nasdaq corporate governance requirements.

These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquirer may offer a premium price for our common stock.

result of tax benefits recognized in connection with payments under the LTIP and, thus, the actual payments we ultimately are required to make under the tax receivable agreement could be greater, potentially materially greater, than these amounts. These payment obligations are our obligations and are not obligations of any of our subsidiaries. Furthermore, these payment obligations are not conditioned upon Lone Star maintaining a continued direct or indirect ownership interest in us. The actual utilization of Covered Tax Benefits as well as the timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.

None.

    We operate a broad network of 80 active manufacturing facilities in the United States, including 10 fabrication plants. We also have three manufacturing facilities in Canada and one in Mexico. Our headquarters is located in Irving, Texas.

    The following tables set forth certain information regarding our active manufacturing facilities:

    We have been from time to time, and may in the future become, party to litigation or other legal proceedings that we consider to be part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations. We may become involved in material legal proceedings in the future.

agreement of the parties. Plaintiffs filed an amended complaint in August 2020 and Defendants filed a motion to dismiss the complaint in September 2020, which is now fully briefed and before the court. In light of the pending merger of the Company with an affiliate of Quikrete Holdings, Inc., the parties have agreed to stay the action, and the Court has entered an order staying the action until the later of the date the merger is completed or April 1, 2022, unless the merger agreement is terminated, in which case the parties must inform the court. and a decision is expected in the coming months.

    We and other defendants are vigorously defending the Consolidated Lee Action. Given the stage of the proceedings, we cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from the Consolidated Lee Action. See Note 16 to our consolidated financial statements.

    U.S. Pipe received a General Notice Letter and Invitation to Conduct Removal Action dated September 20, 2013 from the EPA with respect to the 35th Avenue Superfund site in Birmingham, Alabama. The letter requests that U.S. Pipe participate in an environmental response action in an area proximate to a closed U.S. Pipe facility in North Birmingham, Alabama. The U.S. Pipe North Birmingham facility was closed and, as part of the acquisition of U.S. Pipe by a private equity fund from Mueller Water Products, Inc. and Mueller Group, LLC, or

the Sellers, in 2012, the facility was retained by and is currently owned by either the Sellers or one of their affiliates. The notice requested response activities including testing and removing surface soils at area residences alleged to be contaminated by locally-sourced air pollutants. In connection with the disposition, the Sellers agreed to jointly and severally defend and indemnify U.S. Pipe against any losses or environmental liabilities related to sites retained by the Sellers, including the North Birmingham facility. Accordingly, U.S. Pipe tendered the defense of this matter to the Sellers for defense and indemnification. The Sellers accepted the tender and, on behalf of U.S. Pipe, have responded to the EPA’s request to participate in a time-critical removal action by declining, based on the EPA’s failure to establish any nexus between the contamination and any operations at the U.S. Pipe North Birmingham facility. The EPA sent a renewed request addressed to the Sellers, U.S. Pipe and a number of other potentially responsible parties on August 8, 2014 seeking participation in a broader cleanup of soil at approximately 80 homes in North Birmingham. The Sellers again responded on U.S. Pipe’s behalf declining to participate on the same grounds. In September 2014, the EPA proposed that the site be listed on the National Priorities List. The Sellers continue to defend on this matter on behalf of U.S. Pipe. While we cannot provide assurance that such defense will be successful, because of the indemnification described above, we do not believe the ultimate resolution of these matters will have a material adverse effect on our business, financial condition or results of operations.

Not applicable.

    

    We are a manufacturer of ductile iron pipe and concrete pipe and precast products in the United States and Eastern Canada for a variety of essential water-related infrastructure applications, including water transmission, distribution and drainage. Our manufacturing and distribution network allows us to serve most major U.S. and Eastern Canadian markets. We operate 80 active manufacturing facilities and currently have additional manufacturing capacity available in both of our segments, providing room to increase production to meet short-cycle demand with minimal incremental investment. These facilities and our distribution network provide us with a local presence and the necessary proximity to our customers to minimize delivery time and distribution costs to the markets we serve.

reinforced concrete pipe and precast plant located in St. Martinville, Louisiana. Consummation of the Asset Sale is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.

Our operations are organized into the following reportable segments:

In the fourth quarter of 2020, we reclassified our pressure pipe business from Water segment to Drainage segment to better align with our organizational structure.

    Beginning in mid-March 2019, local, state, provincial and federal authorities began issuing stay at home orders in response to the spread of the coronavirus disease 2019, or COVID-19, which has quickly spread throughout the United States and worldwide. These government-instituted restrictions, together with the economic volatility and uncertainty caused by the pandemic, have had a significant impact on the United States economy in general and certain parts of our end-markets in particular. Despite these events and the related uncertainty, we have continued to operate as an essential business under the government orders, and the COVID-19 pandemic has not materially affected our liquidity, financial results or business operations thus far. During the initial phase of the pandemic in the early part of the second quarter, we experienced temporary delays in certain projects, primarily related to governmental stay-at-home orders in place at that time and the reactions of certain customers to those orders, specifically in our residential end-markets. Late in the second quarter and continuing through 2020 and into 2021, as most states started gradually resuming their normal economic activities, there was some correction in these trends in the residential housing market.

    Since the onset of the COVID-19 pandemic, we have focused on protecting the health and safety of our team members while maintaining our operations, which have been deemed essential under relevant pandemic-related government regulations, and continuing to meet our customers’ needs. Although some of our team members have tested positive for COVID-19, and we encountered temporary closures of a small number of our manufacturing facilities in the second quarter of 2020 due to such cases or due to government mandate, these events have not had a significant impact on our operations or our ability to serve our customers' needs. We did however utilize the option under the CARES Act to defer the employer portion of the social security taxes that would otherwise have been due in 2020, with 50% paid in the third quarter of 2021 and the remaining 50% due by December 31, 2022.

During 2021, we saw improvements in our business conditions, however, we continued to see supply chain challenges as well as higher raw material, labor, and freight costs. The situation around the COVID-19 pandemic remains fluid because of the evolution of COVID-19 variants, and the extent of the ongoing impact on our business may be significant. However, due the fluidity and unprecedented and uncertain nature of the pandemic, we cannot predict the future impact of the COVID-19 pandemic may have on our business, or that of our customers, and participants in our supply chain, or on economic conditions generally, including the effects on infrastructure spending and other construction activity. The ultimate scope and extent of the effects of the COVID-19 pandemic are highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic may end.

    Our financial performance and results of operations are influenced by a variety of factors, including conditions in the residential, non-residential and infrastructure construction markets, general economic conditions, changes in cost of goods sold, competitive behavior in the markets we serve, and seasonality and weather conditions. Some of the more important factors are discussed below, as well as in the section Item 1A. “Risk Factors,” with the exception of the impacts of the COVID-19 pandemic, which are discussed above.

bridges and 1 in 5 miles of roads are in poor condition, according to the American Society of Civil Engineers, or the ASCE.

A large proportion of our net sales in our Water Pipe & Products segment is generated through municipal infrastructure projects. The U.S. potable water infrastructure, especially the underground pipes that deliver drinking water to homes and businesses, is aging and in need of significant reinvestment. Like many of the roads, bridges, and other public assets on which the U.S. relies, most of the underground drinking water infrastructure was built 50 or more years ago, in the post-World War II era of rapid demographic change and economic growth. In some older urban areas, many water mains have been in the ground for a century or longer. Given its age, a large proportion of the U.S. water infrastructure is approaching, or has already reached, the end of its useful life. In some locations, improvements to water infrastructure are needed to comply with standards for drinking water quality. The ASCE estimates 240,000 water main breaks per year in the U.S. due to aging pipelines, wasting over two trillion gallons of treated drinking water. The underlying demand for municipalities to repair or replace their water systems depends on the status of the water systems and the availability of funding. With people spending more time at their homes in order to reduce the spread of the COVID-19 virus, it is even more critical to ensure the uninterrupted supply of clean water.

    In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, a $1.2 trillion investment in U.S. infrastructure, of which more than $100 billion is dedicated to upgrading aging bridges, highways and roads. In addition, more than $50 billion of the contemplated spending is dedicated to upgrading water infrastructure in the U.S. The law's increased federal funding for highways, roads, bridges, transit and water systems is expected to benefit the state and local governments, which undertake the bulk of public-sector investment in the U.S. The funding will allow these entities to maintain aging assets and clear project backlogs especially for projects which were delayed during the initial outbreak of the COVID-19 pandemic, as well as supporting economic activity and revenue growth.

A relatively smaller proportion of our products has been closely tied to residential construction and non-residential construction activity in the United States and Eastern Canada. Activity levels in these markets can be materially affected by general economic and global financial market conditions. In addition, residential construction activity levels are influenced by and sensitive to mortgage availability, the cost of financing a home (in particular, mortgage and interest rates), unemployment levels, household formation rates, residential vacancy and foreclosure rates, existing housing prices, rental prices, housing inventory levels, consumer confidence and government policy and incentives. During 2021, the residential construction activities continued recovering from the brief downturn during the initial outbreak of the pandemic in 2020, driven by improvements in economic activities, increased demand for single-family housing as more people work remotely, as well as historically low mortgage interest rates. Non-residential construction activity is primarily driven by levels of business investment, availability of credit and interest rates, as well as many of the factors that impact residential construction activity levels. See Item 1 “Business.”

    We derive our revenues from both the sale of products manufactured to inventory, such as concrete drainage pipe and DIP, and highly engineered products which are made to order, such as precast concrete products and concrete pressure pipe. These two product categories differ in their dynamics. The mix of products our customers order is project driven and varies from period to period. We generally recognize revenue at the time of shipment of our products; however, for some of our highly engineered structural precast products, we recognize revenue on a percentage of completion method, which accounted for 1.7% of our total sales in 2021.

    Most of our products are sold on a one-off basis, with volumes and prices determined frequently based on market participants’ perceptions of short-term supply and demand factors. A shortage of capacity or excess capacity in the industry, or in the regions where we have operations, or the behavior of our competitors, can each result in significant increases or decreases in market prices for these products, often within a short period of time. By contrast, our project-driven business involves highly engineered and customized products with a wide range of contract values. The products for these projects are engineered, manufactured and delivered on the basis of contracts that tend to extend over periods of several months or, in some cases, several years. The timing of the

commencement of a project and the progress and completion of work under a contract, therefore, can have a significant effect on our results of operations for a particular period.

    The average selling prices we are able to obtain for our products affect our results of operations and our margins. Our average selling price can vary by market location, particularly in our Drainage Pipe and Products segment, product mix, factors relating to supply and demand, and the actions of our customers and competitors. The average selling prices for our products increased in 2021 over the average selling prices we received in 2020 in both our Water and Drainage segments. For a discussion of changes to average selling price see the discussion by segment in “Results of Operations” below.

    Costs of raw material and other inputs, supplies, labor (including contract labor), freight and energy constitute a large portion of our cost of goods sold, and fluctuations in the prices of these materials and inputs affect our results of operations and, in particular, our margins. Our primary raw materials in our Drainage Pipe and Products segment are cement, aggregates, and steel. We typically negotiate contracts with suppliers of these materials for one to three years, with prices subject to annual revisions. The primary input in our Water business is scrap steel, which we purchase on the spot market, and its costs can vary significantly from period to period. We do not generally hedge our raw material purchases but rather utilize our product pricing strategy to manage our exposure to fluctuations in our raw material costs. The costs of our raw materials increased significantly during 2021 over 2020, in particular the costs of steel and scrap steel.

    

    The construction industry, and therefore demand for our products, is typically seasonal and highly dependent on weather conditions, with periods of snow or heavy rain negatively affecting construction activity. Because the majority of our products are buried underground, we experience lower demand for our products in periods of cold weather, particularly during winter, and periods of excessive rain or flooding. These types of conditions or other unfavorable weather conditions generally lead to seasonal fluctuations in our quarterly financial results. Historically, our net sales in the second and third quarters have been higher than in the other quarters of the year, particularly the first quarter.

    In addition, unfavorable weather conditions, such as hurricanes or severe storms, or public holidays during peak construction periods can result in temporary cessation of projects and a material reduction in demand for our products and consequently have an adverse effect on our net sales. Results of a fiscal quarter may therefore not be a reliable basis for the expectations of a full fiscal year and may not be comparable with the results in the other fiscal quarters in the same year or prior years.

    

Our strategy is focused on continued execution of our five improvement pillars: health and safety of our team members, plant-level operational discipline, enhanced commercial capabilities, working capital efficiency, and general and administrative effectiveness. See Item 1 "Business" These pillars are designed to expand our product margin so that we can earn a full and fair return on the products we produce and the capital we deploy. We are also committed to strengthening our capital structure through a combination of working capital improvement, debt repayment and prudent investment in the business. Prudent investment in the business includes growth capital expenditures in projects and smaller acquisitions. Our near-term goal is to reduce our net leverage ratio to 3x-3.5x. After achieving that, we will cautiously evaluate our capital allocation plans going forward to maximize values to our stakeholders.

    Net sales consist of the consideration received or receivable for the sale of products in the ordinary course of business and include the billable costs of delivery of our products to customers, net of discounts given to the customer. Net sales include any outbound freight charged to the customer. Revenue on certain long-term engineering and construction contracts for our structural precast and products that are designed and engineered specifically for the customer is recognized under the percentage-of completion method. See Note 2 to our consolidated financial statements.

    Cost of goods sold includes raw materials and other inputs (cement, aggregates, scrap, and steel) and supplies, labor (including contract labor), freight (including outbound freight for delivery of products to end users and other charges such as inbound freight), energy, depreciation and amortization, repairs and maintenance and other cost of goods sold.

    Selling, general and administrative expenses include expenses for sales, marketing, legal, accounting and finance services, human resources, customer support, treasury and other general corporate services. Selling, general and administrative expenses also include transaction costs directly related to business combinations.

    Earnings from equity method investee represents our share of the income of the CP&P joint venture we entered into with Americast, Inc. CP&P is engaged primarily in the manufacture, marketing, sale and distribution of concrete pipe and precast products in Virginia, West Virginia, Maryland, North Carolina, Pennsylvania and South Carolina with sales to contiguous states. See Note 6 to the consolidated financial statements for additional information on CP&P.

    The remaining categories of operating income and expenses consist of scrap income (associated with scrap from the manufacturing process or remaining scrap after plants are closed), insurance gains, rental income, as well as net gain or loss on the sale of assets including property, plant and equipment.

    Interest expense represents interest on the indebtedness.

    Income tax expense consists of federal, state, provincial, local and foreign taxes based on income in the jurisdictions in which we operate.

    The following table summarizes certain financial information relating to our operating results for the years ended December 31, 2021 and December 31, 2020 (in thousands).

    Net sales for the year ended December 31, 2021 were $1,858.3 million, an increase of $263.8 million or 16.5% from $1,594.5 million for the year ended December 31, 2020. The increase was the combination of a $157.7 million increase in our in our Water Pipe & Products segment due to both higher average selling prices and higher shipment volumes, and a $106.1 million increase in our Drainage Pipe & Products segment mostly driven by higher shipment volumes.

    Gross profit in the year ended December 31, 2021 was $420.4 million, an increase of $43.7 million, or 11.6%, from $376.7 million in the year ended December 31, 2020. Most of the increase in gross profit came from our Drainage Pipe and Products segment primarily driven by higher shipment volumes

    Selling, general and administrative expenses in the year ended December 31, 2021 were $216.1 million, a slight decrease compared to $221.8 million in the year ended December 31, 2020.

    Impairment and exit charges in the year ended December 31, 2021 were $0.6 million, compared to $2.5 million in the year ended December 31, 2020. These charges in both years primarily related to plant closings undertaken for purposes of achieving operating efficiencies.

    Other operating income, net increased to $13.8 million in the year ended December 31, 2021, compared to $1.4 million in the year ended December 31, 2020. The increase was primarily due to $10.3 million of gains from disposal of properties, plant and equipment during the year as we continue optimizing our asset portfolio.

    Interest expense in the year ended December 31, 2021 was $75.0 million, a decrease of $4.9 million, or 6.2%, from $79.9 million in the year ended December 31, 2020. Lower LIBOR and lower average outstanding term loan balances year-over-year contributed a $12.3 million decrease in interest expenses, which was partially offset by $6.3 million impact of a full year of interest expense on the $500 million senior secured notes that were issued in July 2020.

    Income tax expense in the year ended December 31, 2021 was $38.7 million, an increase of $30.2 million from an income tax expense of $8.5 million in the year ended December 31, 2020. The change is primarily due to the improvement of our operating income in 2021 to $155.0 million, compared to $72.9 million in 2020. In addition, the prior year income tax expense was offset by an $11.5 million reversal of valuation allowance.

        

    Net sales in the year ended December 31, 2021 were $993.5 million, an increase of $106.0 million, or 12.0%, from $887.4 million in the year ended December 31, 2020. The increase was primarily driven by higher shipment volumes in our pipe and precast products as the economy continued to recover from the COVID-19 pandemic. Pipe and precast products revenues accounted for more than 85% of the net sales in this segment.

    Gross profit in the year ended December 31, 2021 was $254.1 million, an increase of $42.5 million or 20.1% from $211.6 million in the year ended December 31, 2020. The increase was primarily due to higher shipment volumes of our pipe and precast products.

    Net sales in the year ended December 31, 2021 were $864.8 million, an increase of $157.7 million or 22.3% from $707.1 million in the year ended December 31, 2020. The increase was primarily the combination of $68.0 million driven by higher shipment volumes and $63.3 million driven by higher average selling prices of our ductile iron pipe products. Ductile-iron pipe sales accounted for more than 85% of the net sales in this segment.

    Gross profit in the year ended December 31, 2021 was $166.4 million, a slight increase of $1.3 million or 0.8% from $165.1 million in the year ended December 31, 2020. Higher average selling prices were offset by higher raw material, labor and freight costs.

    The following table summarizes certain financial information relating to our operating results for the years ended December 31, 2020 and December 31, 2019 (in thousands).

    Net sales for the year ended December 31, 2020 were $1,594.5 million, an increase of $64.7 million or 4.2% from $1,529.8 million for the year ended December 31, 2019. The increase was the net effect of a $90.3 million increase in our in our Water Pipe & Products segment mostly due to higher average selling prices; partially offset by a decrease of $25.6 million in our Drainage Pipe & Products segment primarily driven by lower shipment volumes, partially offset by higher average selling prices.

    Gross profit in the year ended December 31, 2020 was $376.7 million, an increase of $80.3 million, or 27.1%, from $296.4 million in the year ended December 31, 2019. Gross profit in both our Water Pipe & Products segment and our Drainage Pipe & Products segment increased by $69.5 million and $10.6 million, respectively, primarily due to higher average selling prices in both businesses, partially offset by the volume decline in our Drainage Pipe & Products segment.

    Selling, general and administrative expenses in the year ended December 31, 2020 were $221.8 million, the same as $221.8 million in the year ended December 31, 2019. Higher incentive compensation expenses of $6.1 million driven by better results were partially offset by lower travel expenses of $3.1 million, and lower executive severance expenses of $2.5 million in 2020 compared to 2019.

    Impairment and exit charges in the year ended December 31, 2020 were $2.5 million, compared to $3.5 million in the year ended December 31, 2019. The exit charges in both years primarily related to plant closings undertaken for the purpose of achieving operating efficiencies.

    Interest expense in the year ended December 31, 2020 was $79.9 million, a decrease of $15.1 million, or 15.9%, from $95.0 million in the year ended December 31, 2019. The decrease in interest expense was primarily driven by both the impact of lower LIBOR of $12.3 million and the impact of lower average outstanding debt balance of $4.0 million as we continued voluntarily prepaying our term loan, partially offset by $6.3 million impact of higher interest rate on the $500 million senior secured notes that were issued in July 2020. In addition, $5.4 million of the change was related to the decrease of mark-to-market loss on the interest rate swaps year over year.

    Income tax expense in the year ended December 31, 2020 was $8.5 million, a change of $11.8 million from an income tax benefit of $3.3 million in the year ended December 31, 2019. The change is primarily due to the improvement of our operating income in 2020 to $72.9 million, compared to an operating loss of $10.6 million in 2019. The increase in income tax expense was partially offset by an $11.8 million reversal of valuation allowance in 2020 as our operating income improved over the prior year.