Item 1. Financial Statements
Item 1. FINANCIAL STATEMENTS
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, September 30,
2020 2019
(in millions, except share amounts)
Assets:
Cash and cash equivalents $ 170.7 $ 176.7
Receivables, net 155.3 172.8
Inventories 180.3 191.4
Other current assets 28.1 26.0
Total current assets 534.4 566.9
Property, plant and equipment, net 244.9 217.1
Goodwill 96.4 95.7
Intangible assets 413.7 433.7
Other noncurrent assets 51.2 23.9
Total assets $ 1,340.6 $ 1,337.3
Liabilities and equity:
Current portion of long-term debt $ 1.2 $ 0.9
Accounts payable
59.0 84.6
Other current liabilities 84.8 93.0
Total current liabilities 145.0 178.5
Long-term debt 446.4 445.4
Deferred income taxes 89.9 87.9
Other noncurrent liabilities 49.6 33.2
Total liabilities 730.9 745.0
Commitments and contingencies (Note 13.)
Common stock: 600,000,000 shares authorized; 157,762,860 and 157,462,140 shares outstanding at June 30, 2020 and September 30, 2019, respectively 1.6 1.6
Additional paid-in capital 1,383.3 1,410.7
Accumulated deficit ( 740.9 ) ( 786.2 )
Accumulated other comprehensive loss ( 34.3 ) ( 36.0 )
Total stockholders’ equity 609.7 590.1
Noncontrolling interest — 2.2
Total equity 609.7 592.3
Total liabilities and equity $ 1,340.6 $ 1,337.3
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
(in millions, except per share amounts)
Net sales $ 228.5 $ 274.3 $ 698.8 $ 701.1
Cost of sales 152.8 177.1 464.5 469.0
Gross profit 75.7 97.2 234.3 232.1
Operating expenses:
Selling, general and administrative 47.1 47.5 146.3 134.2
Strategic reorganization and other charges 8.6 2.5 11.9 12.6
Total operating expenses 55.7 50.0 158.2 146.8
Operating income 20.0 47.2 76.1 85.3
Other expenses (income):
Pension costs (benefits) other than service ( 0.7 ) ( 0.1 ) ( 2.2 ) 0.8
Interest expense, net 6.1 4.2 19.5 15.6
Walter Energy Accrual — 0.5 0.2 38.4
Net other expense 5.4 4.6 17.5 54.8
Income before income taxes 14.6 42.6 58.6 30.5
Income tax expense 3.4 8.9 13.3 6.9
Net income $ 11.2 $ 33.7 $ 45.3 $ 23.6
Net income per share:
Basic $ 0.07 $ 0.21 $ 0.29 $ 0.15
Diluted $ 0.07 $ 0.21 $ 0.29 $ 0.15
Weighted average shares outstanding:
Basic 157.8 157.8 157.8 157.9
Diluted 158.5 158.8 158.6 158.9
Dividends declared per share $ 0.0525 $ 0.0500 $ 0.1575 $ 0.1500
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
(in millions)
Net income $ 11.2 $ 33.7 $ 45.3 $ 23.6
Other comprehensive income (loss):
Pension 0.7 0.5 2.2 3.2
Income tax effects ( 0.2 ) ( 0.1 ) ( 0.5 ) ( 0.9 )
Foreign currency translation ( 1.7 ) 0.3 — 3.4
( 1.2 ) 0.7 1.7 5.7
Comprehensive income $ 10.0 $ 34.4 $ 47.0 $ 29.3
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
(in millions)
Common stock
Balance, beginning of period $ 1.6 $ 1.6 $ 1.6 $ 1.6
Change in common stock at par value — — — —
Balance, end of period 1.6 1.6 1.6 1.6
Additional paid-in capital
Balance, beginning of period 1,390.1 1,433.2 1,410.7 1,444.5
Dividends declared ( 8.3 ) ( 7.9 ) ( 24.9 ) ( 23.7 )
Shares repurchased under buyback program — ( 10.0 ) ( 5.0 ) ( 10.0 )
Buyout of noncontrolling interest — — ( 3.2 )
Shares retained for employee taxes — — ( 0.7 ) ( 1.4 )
Stock-based compensation 1.1 1.1 3.8 3.4
Stock issued under stock compensation plan 0.4 0.5 2.6 4.1
Balance, end of period 1,383.3 1,416.9 1,383.3 1,416.9
Accumulated deficit
Balance, beginning of period ( 752.1 ) ( 860.1 ) ( 786.2 ) ( 850.0 )
Net income 11.2 33.7 45.3 23.6
Balance, end of period ( 740.9 ) ( 826.4 ) ( 740.9 ) ( 826.4 )
Accumulated other comprehensive income (loss)
Balance, beginning of period ( 33.1 ) ( 27.8 ) ( 36.0 ) ( 32.8 )
Other comprehensive income (loss) ( 1.2 ) 0.7 1.7 5.7
Balance, end of period ( 34.3 ) ( 27.1 ) ( 34.3 ) ( 27.1 )
Noncontrolling interest
Balance, beginning of period — 1.9 2.2 1.5
Acquisition of joint venture partner’s interest — — ( 2.2 ) —
Net income — 0.1 — 0.5
Balance, end of period — 2.0 — 2.0
Total stockholders' equity $ 609.7 $ 567.0 $ 609.7 $ 567.0
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
June 30,
2020 2019
(in millions)
Operating activities:
Net income $ 45.3 $ 23.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 21.7 19.1
Amortization 21.1 19.7
Stock-based compensation 3.8 3.4
Retirement plans 2.2 3.7
Deferred income taxes 1.4 ( 2.9 )
Other, net 7.2 1.5
Changes in assets and liabilities:
Receivables 17.4 2.9
Inventories 5.0 ( 23.3 )
Other assets 0.7 ( 16.5 )
Accounts payable ( 25.6 ) ( 25.5 )
Walter Energy Accrual ( 22.0 ) 38.4
Other current liabilities 6.0 ( 15.9 )
Other noncurrent liabilities ( 6.4 ) ( 10.4 )
Net cash provided by operating activities
77.8 17.8
Investing activities:
Business acquisitions, net of cash received — ( 127.5 )
Capital expenditures ( 51.2 ) ( 52.9 )
Proceeds from sales of assets 0.3 —
Net cash used in investing activities
( 50.9 ) ( 180.4 )
Financing activities:
Dividends ( 24.9 ) ( 23.7 )
Repayment of Krausz debt — ( 13.2 )
Acquisition of joint venture partner’s interest ( 5.2 ) —
Employee taxes related to stock-based compensation ( 0.7 ) ( 1.4 )
Common stock issued 2.6 4.1
Common stock repurchased under buyback program ( 5.0 ) ( 10.0 )
Other 0.6 0.3
Net cash used in financing activities
( 32.6 ) ( 43.9 )
Effect of currency exchange rate changes on cash ( 0.3 ) 0.1
Net change in cash and cash equivalents ( 6.0 ) ( 206.4 )
Cash and cash equivalents at beginning of period 176.7 347.1
Cash and cash equivalents at end of period $ 170.7 $ 140.7
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020
Note 1. Organization
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two business segments: Infrastructure and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly, iron gate, tapping, check, knife, plug and ball valves, as well as dry-barrel and wet-barrel fire hydrants and a broad line of pipe connection and repair products, such as clamps and couplings used to repair leaks. Technologies offers metering systems, leak detection, pipe condition assessment and other related smart-enabled products and services. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed.
In July 2014, Infrastructure acquired a 49 % ownership interest in an industrial valve joint venture for $ 1.7 million. Due to substantive control features in the operating agreement, all of the joint venture’s assets, liabilities and results of operations were included in our consolidated financial statements. We included an adjustment for the income attributable to the noncontrolling interest in selling, general and administrative expenses. Infrastructure acquired the remaining 51 % interest in the business in October 2019.
On December 3, 2018, we completed our acquisition of Krausz Development Ltd. and subsidiaries (“Krausz”). We include the financial statements of Krausz in our consolidated financial statements on a one-month lag. Refer to Note 2. for additional disclosures related to the acquisition.
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses and the disclosure of contingent assets and liabilities for the reporting periods. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2019. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. The condensed consolidated balance sheet data at September 30, 2019 was derived from audited financial statements, but it does not include all disclosures required by GAAP.
In preparing these financial statements in conformity with GAAP, we have considered and, where appropriate, reflected the effects of the COVID-19 pandemic on our operations. As of June 30, 2020, such effects did not result in the impairment of the carrying value of our assets. The pandemic continues to provide significant challenges to the U.S. and global economies.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.
In 2016, Financial Accounting Standards Board (“FASB”) issued new guidance for the recognition of lease assets and lease liabilities for those leases referred to as operating leases and requiring additional financial statement disclosures. On October 1, 2019, we adopted the new guidance related to leases using the modified retrospective transition method. See Note 4. for more information regarding our adoption of this guidance.
In 2016, FASB issued new guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. We will adopt this guidance and apply it to our accounts receivable beginning in the first quarter of fiscal 2021, and we do not believe it will have a material effect on our consolidated financial statements.
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In October 2018, we announced the move of our Middleborough, Massachusetts research and development operations to Atlanta to consolidate our resources and to accelerate product innovation through the creation of a research and development center of excellence for software and electronics. In November 2019, we announced the planned move of our manufacturing operations in Hammond, Indiana to our new facility in Kimball, Tennessee. Expenses incurred for these moves were primarily related to personnel and inventory and were included in strategic reorganization and other charges in the Condensed Consolidated Statements of Operations.
Activity in accrued restructuring, reported as part of other current liabilities, is presented below.
Nine months ended
June 30,
2020 2019
(in millions)
Beginning balance $ 1.7 $ 0.9
Expenses related to personnel and other 1.7 5.5
Expenses related to inventory 1.4 —
Amounts paid ( 1.5 ) ( 4.6 )
Ending balance $ 3.3 $ 1.8
Note 2. Business Combinations
Acquisition of Krausz
On December 3, 2018, we completed our acquisition of Krausz, a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $ 140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $ 13.2 million. The acquisition of Krausz was financed with cash on hand.
We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill.
The following is a summary of the fair values of the net assets acquired (in millions):
Assets, net of cash:
Receivables $ 6.9
Inventories 17.0
Other current assets 0.2
Property, plant and equipment 8.1
Other noncurrent assets 1.7
Identified intangible assets:
Patents 32.1
Customer relationships 8.7
Tradenames 4.6
Favorable leasehold interests 2.3
Goodwill 80.4
Liabilities:
Accounts payable ( 5.5 )
Other current liabilities ( 2.9 )
Deferred income taxes ( 11.2 )
Other noncurrent liabilities ( 1.7 )
Fair value of assets acquired, net of liabilities assumed 140.7
Repayment of Krausz debt ( 13.2 )
Consideration paid to seller $ 127.5
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The goodwill above is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of Krausz and the value of its workforce. The goodwill is nondeductible for income tax purposes. The amortizable intangible assets acquired have a weighted average useful life of approximately 12 years.
Note 3. Revenue from Contracts with Customers
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.
Disaggregation of Revenue
We disaggregate our revenues from contracts with customers by reportable segment (see Note 11.) and further by geographical region as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region represents the location of the customer.
Contract Asset and Liability Balances
The timing of revenue recognition, billings and cash collections results in customer receivables, advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (contract assets). Amounts are billed in accordance with contractual terms and unbilled amounts arise when the timing of billing differs from the timing of revenue recognized.
Advance payments and billings in excess of revenue are recognized and recorded as deferred revenue, the majority of which is classified as current based on the timing when we expect to recognize revenue. We include current deferred revenue as part of our accrued expenses. Deferred revenues represent contract liabilities and are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements. Contract liabilities are reversed when the performance obligation is satisfied and revenue is recognized.
The table below represents the balances of our customer receivables and deferred revenues.
June 30, September 30,
2020 2019
(in millions)
Billed receivables $ 153.7 $ 171.0
Unbilled receivables 4.5 4.5
Total customer receivables $ 158.2 $ 175.5
Deferred revenues $ 5.4 $ 4.7
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Our performance obligations are satisfied at a point in time as related to sales of equipment or over time as related to our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, which provide frameworks for the nature of the distinct products or services. We allocate the transaction price of each contract to the performance obligations on the basis of standalone selling price and recognize revenue when, or as, control of the performance obligation transfers to the customers.
We have elected to use the practical expedient to not adjust the transaction price of a contract for the effects of a significant financing component if, at the inception of the contract, we expect that the period between when we transfer a product or service to a customer and when a customer remits payment will be one year or less.
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Revenues from products and services transferred to customers at a point in time represented 99 % of our revenues in the nine months ended both June 30, 2020 and 2019. The revenues recognized at a point in time related to the sale of our products was recognized when the obligations of the terms of our contract were satisfied, which generally occurs upon shipment, when control of the product transfers to the customer.
Revenues from products and services transferred to customers over time represented 1 % of our revenues in the nine months ended both June 30, 2020 and 2019.
We offer warranties to our customers in the form of assurance-type warranties, which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These cannot be purchased separately. There was no change to our warranty accounting as a result of the implementation of the new revenue standard and we continue to use our current cost accrual method.
Costs to Obtain or Fulfill a Contract
We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our commissions are paid based on orders and shipments and we reserve the right to claw back any commissions in case of product returns or lost collections. As the expected benefit associated with these incremental costs is one year or less based on the nature of the product sold and benefits received, we have applied a practical expedient and therefore do not capitalize the related costs and expense them as incurred, consistent with our previous accounting treatment.
Note 4. Leases
We adopted the new leasing standard utilizing the modified retrospective approach on October 1, 2019. Adoption of the new standard resulted in an increase to total assets and liabilities due to the recording of lease right-of-use assets (“ROU”) and lease liabilities related to our operating lease portfolio.
We elected the package of three practical expedients for transition, which include the carry forward of our leases without reassessing whether any contracts are leases or contain leases, lease classification and initial direct costs and applying hindsight when determining the lease term and when assessing impairment of right-of-use assets at the adoption date. This allows us to update our assessments according to new information and changes in facts and circumstances that have occurred since lease inception.
Presentation of Leases
We lease certain office, warehouse, manufacturing, distribution, and research and development facilities and equipment under operating leases.
Our leases have remaining lease terms of 1 year to 14 years. The terms and conditions of our leases may include options to extend or terminate the lease which are considered and included in the lease term when these options are reasonably certain of exercise.
We determine if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. For all classes of leased assets, we have elected the practical expedient to account for any non-lease components in the contract together with the related lease component in the same unit of account.
ROU assets and lease liabilities are recognized in our condensed consolidated balance sheets at the commencement date based on the present value of remaining lease payments over the lease term. Additionally, ROU assets include any lease payments made at or before the commencement date, as well as any initial direct costs incurred, and are reduced by any lease incentives received. As most of our operating leases do not provide an implicit rate, we apply our incremental borrowing rate to determine the present value of remaining lease payments. Our incremental borrowing rate is determined based on information available at the commencement date of the lease.
For all classes of leased assets, we have applied an accounting policy election to exclude short-term leases from recognition in our condensed consolidated balance sheets. A short-term lease has a lease term of 12 months or less at the commencement date and does not include a purchase option that is reasonably certain of exercise. We recognize short-term lease expense in our condensed consolidated statements of operations on a straight-line basis over the lease term.
Our short-term lease expense for the three and nine months ended June 30, 2020 and short-term lease commitments at June 30, 2020 are immaterial.
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We have certain lease contracts with terms and conditions that provide for variability in the payment amount based on changes in facts or circumstances occurring after the commencement date. These variable lease payments are recognized in our condensed consolidated statements of operations as the obligation is incurred.
At June 30, 2020, any legally-binding minimum lease payments for operating leases signed but not yet commenced, subleases, leases that imposed significant restrictions or covenants, related party leases or sale-leaseback arrangements were immaterial.
The components of lease cost are presented below.
Three months ended Nine months ended
June 30, 2020 June 30, 2020
(in millions)
Operating lease cost 1.6 4.7
Finance lease cost 0.3 1.0
Total lease expense $ 1.9 $ 5.7
Supplemental cash flow information related to leases for the nine months ended June 30, 2020 is presented below, in millions.
Operating cash flows used in operating leases $ 4.5
Financing cash flows used in finance leases $ 1.0
Supplemental information describing where lease-related assets and liabilities are reflected in the Condensed Consolidated Balance Sheet at June 30, 2020 is presented below, in millions.
Right of use assets:
Operating leases Other noncurrent assets $ 26.3
Finance leases Plant, property and equipment 2.6
Total right of use assets $ 28.9
Lease liabilities:
Operating leases - current Other current liabilities $ 4.2
Operating leases - noncurrent Other noncurrent liabilities 23.8
Finance leases - current Current portion of long-term debt 1.2
Finance leases - noncurrent Long-term debt 1.6
Total lease liabilities $ 30.8
Supplemental information related to lease terms and discount rates at June 30, 2020 is presented below.
Weighted-average remaining lease term (years):
Operating leases 7.99
Finance leases 2.63
Weighted-average interest rate:
Operating leases 5.65 %
Finance leases 5.03 %
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Total lease liabilities at June 30, 2020 have scheduled maturities as follows:
Operating Leases Finance Leases
(in millions)
2020 $ 1.6 $ 0.4
2021 5.5 1.2
2022 4.7 0.8
2023 4.3 0.5
2024 4.1 0.1
Thereafter 16.1 —
Total lease payments 36.3 3.0
Less: imputed interest 8.3 0.2
Present value of lease liabilities $ 28.0 $ 2.8
Note 5. Income Taxes
The reconciliation between the U.S. federal statutory income tax rate and the effective tax rate is presented below.
Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 % 21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit 4.5 4.5 4.5 5.6
Excess tax benefits related to stock compensation — ( 0.3 ) ( 0.6 ) ( 1.4 )
Tax credits ( 1.7 ) ( 1.2 ) ( 2.6 ) ( 2.7 )
Global Intangible Low-Taxed Income ( 0.2 ) 0.6 ( 0.1 ) 1.2
Foreign income taxes ( 0.5 ) — ( 0.6 ) —
Valuation allowances ( 0.3 ) — ( 0.5 ) —
Reversal of uncertain tax positions ( 2.1 ) ( 5.2 ) ( 0.5 ) ( 7.2 )
Other 2.6 1.9 2.0 3.6
23.3 % 21.3 % 22.6 % 20.0 %
Walter Energy Accrual — ( 0.4 ) — 4.6
Transition tax — — — ( 1.9 )
Effective income tax rate 23.3 % 20.9 % 22.6 % 22.7 %
At June 30, 2020 and September 30, 2019, the gross liabilities for unrecognized income tax benefits were $ 3.5 million and $ 3.3 million, respectively.
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Note 6. Borrowing Arrangements
The components of our long-term debt are presented below.
June 30, September 30,
2020 2019
(in millions)
5.5% Senior Notes $ 450.0 $ 450.0
ABL Agreement — —
Finance leases 2.8 2.1
452.8 452.1
Less deferred financing costs 5.1 5.8
Less current portion 1.2 0.9
Long-term debt $ 446.4 $ 445.4
5.5% Senior Unsecured Notes. On June 12, 2018, we privately issued $ 450.0 million of 5.5% Senior Unsecured Notes (“Notes”), which mature in 2026 and bear interest at 5.5 %. We capitalized $ 6.6 million of financing costs, which are being amortized over the term of the Notes using the effective interest method. Proceeds from the Notes, along with other cash, were used to repay our Term Loan. Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL. Based on quoted market prices, the outstanding Notes had a fair value of $ 460.1 million at June 30, 2020.
ABL Agreement . Our asset based lending agreement (“ABL Agreement”) consists of a revolving credit facility for up to $ 175 million of revolving credit borrowings, swing line loans and letters of credit. On July 30, 2020, we amended the ABL Agreement (See Note 14). This amendment, among other things, (i) extended the termination date of the facility, (ii) established a LIBOR “floor” of 75 basis points, (iii) increased interest rates on borrowings, (iv) increased the rate of the unused commitment fee, and (v) increased our ability to pay cash dividends.
The amended ABL Agreement permits us to increase the size of the credit facility by an additional $ 150 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $ 25 million through swing line loans and we are permitted to issue up to $ 60 million of letters of credit.
Borrowings under the amended ABL Agreement bear interest at a floating rate equal to LIBOR, plus a margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 100 to 125 basis points. At July 31, 2020, the applicable rate was LIBOR plus 200 basis points.
The amended ABL Agreement terminates on July 29, 2025 and provides for a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $ 17.5 million and 10 % of the Loan Cap as defined in the ABL Agreement. Excess availability based on June 30, 2020 data, as reduced by outstanding letters of credit and accrued fees and expenses of $ 13.9 million, was $ 116.1 million.
Note 7. Derivative Financial Instruments
In connection with the acquisition of Singer Valve in 2017, we loaned funds to one of our Canadian subsidiaries. Although this intercompany loan has no direct effect on our consolidated financial statements, it creates exposure to currency risk for the Canadian subsidiary. To reduce this exposure, we entered into a U.S. dollar-Canadian dollar swap contract with the Canadian subsidiary and an offsetting Canadian dollar-U.S. dollar swap with a domestic bank. We have not designated these swaps as hedges and the changes in their fair values are included in earnings, where they offset the currency gains and losses associated with the intercompany loan. The values of our currency swap contracts were an asset of $ 0.1 million and a liability $ 0.3 million as of June 30, 2020 and September 30, 2019, respectively, and are included in other noncurrent assets and noncurrent liabilities, respectively, in our Condensed Consolidated Balance Sheets.
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Note 8. Retirement Plans
The components of net periodic benefit cost for our pension plans are presented below.
Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
(in millions)
Service cost $ 0.4 $ 0.4 $ 1.2 $ 1.2
Pension costs (benefits) other than service:
Interest cost 2.8 3.5 8.4 10.5
Expected return on plan assets ( 4.2 ) ( 4.1 ) ( 12.6 ) ( 12.2 )
Amortization of actuarial net loss 0.7 0.5 2.0 1.5
Curtailment/special settlement loss — — — 1.0
Pension costs (benefits) other than service ( 0.7 ) ( 0.1 ) ( 2.2 ) 0.8
Net periodic (benefit) cost $ ( 0.3 ) $ 0.3 $ ( 1.0 ) $ 2.0
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.
During the quarter ended March 31, 2019, we settled our obligation to our Canadian pension plan participants through a combination of lump sum payments and purchases of annuities. We made a contribution to the plans of $ 1.0 million, which was included in pension costs other than service, to fund these settlements.
Also during the quarter ended March 31, 2019, we recorded an estimated settlement liability for our exiting a multi-employer pension plan at one of our manufacturing locations, which resulted in an expense of $ 1.1 million that we included in strategic reorganization and other charges. We subsequently paid the liability in May 2019.
Note 9. Stock-based Compensation Plans
We have granted various forms of stock-based compensation, including stock options, restricted stock units, performance-based restricted stock units (“PRSUs”) and market-based restricted stock units (“MRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”).
A PRSU award consists of a number of units that may be paid out at the end of a multi-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we establish the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, we consider that portion of a PRSU award to be granted. Thus, each award consists of a grant in the year of award and grants in the designated following years. Settlements, in our common shares, will range from zero to two times the number of PRSUs granted, depending on our financial performance against the targets.
A MRSU award represents a target number of units that may be paid out at the end of a three-year award cycle based on a calculation of the Company's relative total shareholder return (“TSR”) performance as compared with a selected peer group's TSR. Settlements, in our common shares, will range from zero to two times the number of MRSUs granted, depending on our TSR performance versus the peer group.
The table below provides information regarding MRSU awards, which were valued using Monte Carlo simulations on the dates the units were granted.
December 3, 2019 January 28, 2020 February 24, 2020
Fair Value at grant date $ 14.94 $ 16.76 $ 18.17
Units granted 147,213 2,763 7,498
Variables used in determining grant date fair value:
Dividend yield 1.87 % 1.76 % 1.73 %
Risk-free rate 1.53 % 1.44 % 1.23 %
Expected term (in years) 2.83 2.67 2.60
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We awarded 209,966 stock-settled PRSUs and 157,474 MRSUs in the nine months ended June 30, 2020 that are scheduled to settle in three years .
We issued 93,647 shares and 181,065 shares of common stock during the nine months ended June 30, 2020 and 2019, respectively, to settle PRSUs that vested during those periods.
In addition to the PRSU activity, we issued 1,618 and 248,612 shares of common stock for restricted stock units vested during the three and nine months ended June 30, 2020, respectively.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At June 30, 2020, the outstanding Phantom Plan instruments had a fair value of $ 9.43 per instrument and our liability for Phantom Plan instruments was $ 1.6 million.
We granted stock-based compensation awards under the 2006 Stock Plan, the Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan, and the Phantom Plan during the nine months ended June 30, 2020 as follows.
Number granted Weighted average grant date fair value per instrument Total grant date fair value
(in millions)
Quarter ended December 31, 2019
Restricted stock units 162,433 $ 11.26 $ 1.8
Employee stock purchase plan instruments 39,492 1.97 0.1
Phantom Plan awards 188,973 11.26 2.1
PRSUs: 2020 award 65,428 11.26 0.7
2019 award 102,203 11.26 1.2
2018 award 44,451 11.26 0.5
MRSUs 147,213 14.94 2.2
Quarter ended March 31, 2020
Restricted stock units 118,684 12.14 1.4
Employee stock purchase plan instruments 53,876 2.09 0.1
PRSUs: 2020 award 13,682 12.09 0.2
MRSUs 10,261 17.79 0.2
Quarter ended June 30, 2020:
Restricted stock units 2,118 9.20 —
Employee stock purchase plan instruments 48,282 3.64 0.2
$ 10.7
Operating income included stock-based compensation expense of $ 1.8 million and $ 1.4 million during the three months ended June 30, 2020 and 2019, respectively and $ 5.0 million and $ 4.2 million during the nine months ended June 30, 2020 and 2019, respectively. At June 30, 2020, there was approximately $ 8.9 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 218,966 PRSUs that have been awarded for the 2021 and 2022 performance periods for which performance goals have not been set.
We excluded 474,423 and 202,245 of stock-based compensation instruments from the calculations of diluted earnings per share for the quarters ended June 30, 2020 and 2019, respectively, and 274,009 and 167,775 for the nine months ended June 30, 2020 and 2019, respectively, since their inclusion would have been antidilutive.
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Note 10. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below.
June 30, September 30,
2020 2019
(in millions)
Inventories:
Purchased components and raw material $ 97.8 $ 95.2
Work in process 32.9 43.7
Finished goods 49.6 52.5
$ 180.3 $ 191.4
Other current assets:
Prepaid expenses $ 11.1 $ 9.6
Non-trade receivables 12.2 6.3
Maintenance and repair supplies and tooling 3.9 4.2
Income taxes 0.2 4.7
Other 0.7 1.2
$ 28.1 $ 26.0
Property, plant and equipment:
Land $ 6.5 $ 5.2
Buildings 77.0 68.9
Machinery and equipment 396.2 362.9
Construction in progress 54.5 48.0
534.2 485.0
Accumulated depreciation ( 289.3 ) ( 267.9 )
$ 244.9 $ 217.1
Other noncurrent assets:
Operating lease right of use asset $ 26.3 $ —
Maintenance and repair supplies and tooling 17.5 16.4
Workers compensation reimbursement receivable 3.1 3.1
Note receivable 1.8 1.8
Other 2.5 2.6
$ 51.2 $ 23.9
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Selected supplemental liability information is presented below.
June 30, September 30,
2020 2019
(in millions)
Other current liabilities:
Compensation and benefits $ 29.1 $ 28.5
Customer rebates 8.5 8.7
Taxes other than income taxes 3.6 3.3
Warranty 6.7 6.5
Income taxes 4.4 0.6
Environmental 1.2 1.2
Interest 1.1 7.3
Restructuring 1.9 1.7
Walter Energy Accrual — 22.0
Operating lease liabilities 4.2 —
Deferred revenues 5.4 4.7
Refund liability 4.8 3.3
Accrued settlements 10.1 0.2
Other 3.8 5.0
$ 84.8 $ 93.0
Other noncurrent liabilities:
Operating lease liabilities $ 23.8 $ —
Warranty 8.5 10.7
Transition tax 4.1 5.8
Unrecognized income tax benefits 3.5 3.3
Asset retirement obligation 3.3 3.6
Pension 1.8 5.0
Workers compensation 1.2 1.9
Other 3.4 2.9
$ 49.6 $ 33.2
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Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1 st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. During the second quarter ended March 31, 2020, we performed an interim assessment for Krausz, both qualitative and quantitative and determined Krausz’s goodwill and indefinite-lived assets were not impaired. However, the excess of the fair value over the carrying value was not significant.
With our third quarter results and amid the continued pandemic, we reviewed our previous assumptions, our revised expectations and determined it was not more-likely-than-not that the goodwill and indefinite-lived intangibles were impaired as of June 30, 2020. However, with continued uncertainty related to the pandemic, we cannot provide assurance that our estimates will be realized.
The following table summarizes information concerning our goodwill balance for the nine months ended June 30, 2020, in millions.
Balance at beginning of year $ 95.7
Purchase accounting adjustments 0.3
Change in foreign currency exchange rates 0.4
Balance as of June 30, 2020 $ 96.4
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Note 11. Segment Information
Summarized financial information for our segments is presented below.
Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
(in millions)
Net sales, excluding intercompany:
Infrastructure $ 209.9 $ 250.2 $ 643.0 $ 636.3
Technologies 18.6 24.1 55.8 64.8
$ 228.5 $ 274.3 $ 698.8 $ 701.1
Operating income (loss):
Infrastructure $ 43.8 $ 60.6 $ 129.9 $ 131.6
Technologies ( 3.8 ) ( 2.2 ) ( 10.5 ) ( 9.5 )
Corporate ( 20.0 ) ( 11.2 ) ( 43.3 ) ( 36.8 )
$ 20.0 $ 47.2 $ 76.1 $ 85.3
Depreciation and amortization:
Infrastructure $ 12.2 $ 11.3 $ 36.3 $ 32.8
Technologies 2.3 2.0 6.4 5.9
Corporate — — 0.1 0.1
$ 14.5 $ 13.3 $ 42.8 $ 38.8
Strategic reorganization and other charges:
Infrastructure $ — $ — $ 0.4 $ 1.1
Technologies — — — —
Corporate 8.6 2.5 11.5 11.5
$ 8.6 $ 2.5 $ 11.9 $ 12.6
Capital expenditures:
Infrastructure $ 13.4 $ 18.9 $ 49.1 $ 46.7
Technologies 0.5 1.8 1.8 4.5
Corporate — 1.7 0.3 1.7
$ 13.9 $ 22.4 $ 51.2 $ 52.9
Infrastructure disaggregated net revenues:
Central $ 57.5 $ 58.8 $ 163.9 $ 154.1
Northeast 38.8 52.0 135.7 134.8
Southeast 35.7 41.3 120.3 117.2
West 50.8 63.8 154.5 159.1
United States 182.8 215.9 574.4 565.2
Canada 20.7 24.1 47.3 49.3
Other international locations 6.4 10.2 21.3 21.8
$ 209.9 $ 250.2 $ 643.0 $ 636.3
Technologies disaggregated net revenues:
Central $ 5.0 $ 6.6 $ 13.3 $ 20.5
Northeast 4.0 5.5 14.6 12.3
Southeast 5.1 8.0 16.1 21.7
West 3.6 2.3 8.7 6.6
United States 17.7 22.4 52.7 61.1
Canada 0.3 0.5 1.2 0.8
Other international locations 0.6 1.2 1.9 2.9
$ 18.6 $ 24.1 $ 55.8 $ 64.8
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Note 12. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is presented below.
Pension, net of tax Foreign currency translation Total
(in millions)
Balance at September 30, 2019 $ ( 36.0 ) $ — $ ( 36.0 )
Current period other comprehensive income 1.7 — $ 1.7
Balance at June 30, 2020 $ ( 34.3 ) $ — $ ( 34.3 )
Note 13. Commitments and Contingencies
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a material adverse effect on our business or prospects.
Environmental. We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“Tyco”), sold our businesses to a previous owner in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999, including environmental liabilities. The indemnity survives indefinitely. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the Tyco indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such Tyco indemnitors has changed. Should any of these Tyco indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suit against Mueller Canada Ltd. and its directors seeking C$ 10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. Mueller Canada Ltd. leased the property from 1988 through 2008. We are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification. On December 7, 2011, the Court denied the plaintiff’s motion for summary judgment.
The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. Since the amounts of such costs cannot be reasonably estimated at this time, no amounts have been accrued for this matter at June 30, 2020.
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Walter Energy . On November 18, 2019, we paid approximately $ 22.2 million to the IRS in final settlement of a tax dispute related to our former parent company, Walter Energy, Inc., as described more fully in Note 17. to our Form 10-K for the year ended September 30, 2019.
Chapman v. Mueller Water Products, et al. In 2017, our warranty analyses identified that certain Technologies radio products produced prior to 2017 and installed in particularly harsh environments had been failing at higher than expected rates. During the quarter ended March 31, 2017, we conducted additional testing of these products and revised our estimates of warranty expenses. As a result, we recorded additional warranty expense of $ 9.8 million in the second quarter of 2017. During the quarter ended June 30, 2018, we completed a similar analysis and determined, based on this new information, that certain other Technologies products had been failing at higher-than-expected rates as well and that the average cost to repair or replace certain products under warranty was higher than previously estimated. As a result, in the third quarter of 2018, we recorded additional warranty expense of $ 14.1 million associated with such products. Related to the above warranty expenses, on April 11, 2019, an alleged stockholder filed a putative class action lawsuit against Mueller Water Products, Inc. and certain of our former and current officers (collectively, the “Defendants”) in the U.S. District Court for the Southern District of New York (the “Court”). The proposed class consists of all persons and entities that acquired our securities between May 9, 2016 and August 6, 2018 (the “Class Period”). The complaint alleges violations of the federal securities laws, including, among other things, that we made materially false and/or misleading statements and failed to disclose material adverse facts about our business, operations, and prospects during the proposed Class Period. Defendants filed their motion to dismiss on November 1, 2019 and second motion to dismiss (in response to the second amended complaint filed on December 24, 2019) on January 31, 2020. On June 11, 2020, the Court granted Defendants’ motion to dismiss and dismissed the action with prejudice. The time period for appealing the Court’s decision has expired.
City of Jackson, MS v. Siemens Industry, Inc., et al. On or about August 22, 2013, Mueller Systems, LLC (“Mueller Systems”) entered into an agreement with Siemens Industries, Inc (“Siemens”) to provide advanced metering infrastructure (“AMI”) products and services to Siemens as part of Siemens’ project for the City of Jackson, MS (the “City”). This project included products and services, which were provided by parties other than Mueller Systems, for the City’s water treatment plants, sewer lines and billing system (the “Project”). On June 11, 2018, the City filed a lawsuit against Siemens and several of its contractors (excluding Mueller Systems) for multiple claims related to the Project, including claims for fraud, negligence, breach of implied warranty of good workmanship, negligent representation, civil conspiracy, unjust enrichment, breach of contract and breach of covenant of good faith and fair dealing (“Siemens Lawsuit”). In the Siemens Lawsuit, the City alleged damages in excess of $ 450.0 million. On November 12, 2019, the City filed an amended complaint, adding Mueller Systems as a defendant in the Siemens Lawsuit.
In February 2020, the City dismissed all claims against Mueller Systems in the Siemens Lawsuit. On March 27, 2020, the City and Siemens executed a settlement agreement whereby Siemens agreed to pay the City $ 89.8 million (“Settlement Amount”) in order to settle the Siemens Lawsuit (the “Settlement”). As a result of the Settlement, Siemens is seeking to recover a portion of the Settlement Amount from Mueller Systems, and the parties are in negotiations to resolve this matter on reasonable terms, conditions and amounts. At June 30, 2020, we have accrued a liability of $ 10.0 million in connection with this matter and have also recorded an asset for related insurance proceeds of $ 5.0 million. However, the settlement agreement is not final and the ultimate loss could materially differ from this amount. Should settlement negotiations fail and a legal action ultimately arise against us in this matter, we intend to vigorously defend against such legal action. However, the outcome of a legal action in this matter, if any, cannot be predicted with certainty.
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. As a result of the pandemic, we experienced adverse business conditions during our third quarter. We have taken and continue to take steps to maximize liquidity by limiting cash expenditures, including furloughing significant numbers of our employees, implementing temporary shutdowns of our manufacturing facilities or portions of our manufacturing facilities, implementing temporary salary reductions for our senior leadership team, deferral of capital expenditures, reduced fees for our Board of Directors and aggressively reducing general and administrative spending. We are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the pandemic affects our results will depend on future developments, the outbreak could result in material effects to our future financial position, results of operations, cash flows and liquidity.
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Mass Shooting Event at our Henry Pratt Facility in Aurora, Illinois. On February 15, 2019, we experienced a mass shooting event at our Henry Pratt facility in Aurora, Illinois, in which five employees were killed and one employee and six law enforcement officers were injured. Various workers’ compensation claims arising from the event have been made to date, and we anticipate that additional claims may be made, and that liability under such claims, if any, is not expected to have a material adverse effect on our results of operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.
Indemnifications . We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.
Additionally, in connection with the sale of assets and the divestiture of businesses, such as the divestitures of U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.
Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.
Other Matters. We monitor and analyze our warranty experience and costs periodically and may revise our accruals as necessary. 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.
We are party to a number of lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our business or prospects.
Note 14. Subsequent Events
On July 28, 2020 , our board of directors declared a dividend of $ 0.0525 per share on our common stock, payable on August 20, 2020 to stockholders of record at the close of business on August 10, 2020 .
On July 30, 2020, we amended our ABL Agreement. This amendment, among other things, (i) extended the termination date of the revolving credit facility to July 29, 2025, (ii) established a LIBOR “floor” of 75 basis points, (iii) increased the margin applying to LIBOR-based loans to a range between 200 to 225 basis points, and the margin applying to base rate loans to a range between 100 to 125 basis points, (iv) increased the commitment fee applicable to unused amounts under the revolving credit commitment to 37.5 basis points and (v) increased our ability to issue cash dividends.
On August 5, 2020 , we announced the closure of our Woodland, Washington knife gate manufacturing operations, which will be relocated to our new facility in Kimball, Tennessee.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.