Mueller Water Products, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, September 30, 2022 2021 (in millions, except share amounts) Assets: Cash and cash equivalents $ 154.9 $ 227.5 Receivables, net of allowance for credit losses of $ 4.8 million and $ 3.5 million 221.9 212.2 Inventories, net 250.9 184.7 Other current assets 31.4 29.3 Total current assets 659.1 653.7 Property, plant and equipment, net 293.0 283.4 Intangible assets, net 369.4 392.5 Goodwill 108.6 115.1 Other noncurrent assets 79.5 73.3 Total assets $ 1,509.6 $ 1,518.0 Liabilities and stockholders’ equity: Current portion of long-term debt $ 0.9 $ 1.0 Accounts payable 97.9 92.0 Other current liabilities 103.5 127.1 Total current liabilities 202.3 220.1 Long-term debt 446.1 445.9 Deferred income taxes 96.8 95.1 Other noncurrent liabilities 60.6 62.0 Total liabilities 805.8 823.1 Commitments and contingencies (Note 12.) Common stock: 600,000,000 shares authorized; 156,612,167 and 157,955,433 shares outstanding at June 30, 2022, and September 30, 2021, respectively 1.6 1.6 Additional paid-in capital 1,296.1 1,342.2 Accumulated deficit ( 574.4 ) ( 643.9 ) Accumulated other comprehensive loss ( 19.5 ) ( 5.0 ) Total stockholders’ equity 703.8 694.9 Total liabilities and stockholders’ equity $ 1,509.6 $ 1,518.0 The accompanying notes are an integral part of the condensed consolidated financial statements. 3 Table of Contents MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended Nine months ended June 30, June 30, 2022 2021 2022 2021 (in millions, except per share amounts) Net sales $ 333.2 $ 310.5 $ 916.0 $ 815.4 Cost of sales 234.9 205.1 637.3 543.2 Gross profit 98.3 105.4 278.7 272.2 Operating expenses: Selling, general and administrative 60.8 58.8 175.1 162.2 Strategic reorganization and other charges 0.6 3.9 3.6 6.1 Total operating expenses 61.4 62.7 178.7 168.3 Operating income 36.9 42.7 100.0 103.9 Other expenses (income): Pension benefit other than service ( 0.9 ) ( 0.8 ) ( 2.9 ) ( 2.4 ) Interest expense, net 4.2 6.8 13.0 19.0 Loss on early extinguishment of debt — 16.7 — 16.7 Net other expenses 3.3 22.7 10.1 33.3 Income before income taxes 33.6 20.0 89.9 70.6 Income tax expense 7.1 5.6 20.4 18.6 Net income $ 26.5 $ 14.4 $ 69.5 $ 52.0 Net income per share: Basic $ 0.17 $ 0.09 $ 0.44 $ 0.33 Diluted $ 0.17 $ 0.09 $ 0.44 $ 0.33 Weighted average shares outstanding: Basic 157.0 158.5 157.6 158.4 Diluted 157.6 159.3 158.3 159.0 Dividends declared per share $ 0.058 $ 0.055 $ 0.174 $ 0.165 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Table of Contents MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three months ended Nine months ended June 30, June 30, 2022 2021 2022 2021 (in millions) Net income $ 26.5 $ 14.4 $ 69.5 $ 52.0 Other comprehensive (loss) income: Pension 0.5 0.7 1.3 1.9 Income tax effects ( 0.2 ) ( 0.2 ) ( 0.3 ) ( 0.5 ) Foreign currency translation ( 17.6 ) 4.4 ( 15.5 ) 8.5 Total other comprehensive (loss) income, net ( 17.3 ) 4.9 ( 14.5 ) 9.9 Comprehensive income $ 9.2 $ 19.3 $ 55.0 $ 61.9 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 Table of Contents MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) Three months ended Nine months ended June 30, June 30, 2022 2021 2022 2021 (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 1,307.6 1,364.2 1,342.2 1,378.0 Dividends declared ( 9.1 ) ( 8.7 ) ( 27.4 ) ( 26.1 ) Shares retained for employee taxes ( 0.1 ) — ( 1.9 ) ( 1.0 ) Shares repurchased under buyback program ( 5.0 ) — ( 25.0 ) — Stock-based compensation 2.2 2.7 6.6 6.3 Stock issued under stock compensation plan 0.5 0.5 1.6 1.5 Balance, end of period 1,296.1 1,358.7 1,296.1 1,358.7 Accumulated deficit Balance, beginning of period ( 600.9 ) ( 676.7 ) ( 643.9 ) ( 714.2 ) Net income 26.5 14.4 69.5 52.0 Cumulative effect of accounting change — — — ( 0.1 ) Balance, end of period ( 574.4 ) ( 662.3 ) ( 574.4 ) ( 662.3 ) Accumulated other comprehensive income (loss) Balance, beginning of period ( 2.2 ) ( 19.7 ) ( 5.0 ) ( 24.7 ) Other comprehensive income ( 17.3 ) 4.9 ( 14.5 ) 9.9 Balance, end of period ( 19.5 ) ( 14.8 ) ( 19.5 ) ( 14.8 ) Total stockholders' equity $ 703.8 $ 683.2 $ 703.8 $ 683.2 The accompanying notes are an integral part of the condensed consolidated financial statements. 6 Table of Contents MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended June 30, 2022 2021 (in millions) Operating activities: Net income $ 69.5 $ 52.0 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition: Depreciation 23.8 23.4 Amortization 21.1 21.2 Loss on early extinguishment of debt — 16.7 Stock-based compensation 6.6 6.3 Pension benefit ( 1.9 ) ( 1.4 ) Deferred income taxes 1.8 0.9 Inventory reserves provision 3.9 6.8 Other, net 0.7 1.2 Changes in assets and liabilities, net of acquisition: Receivables, net ( 10.6 ) ( 18.1 ) Inventories ( 71.3 ) ( 19.1 ) Other assets ( 5.5 ) 0.3 Accounts payable 6.7 18.1 Other current liabilities ( 23.1 ) 11.3 Other noncurrent liabilities ( 1.2 ) 3.7 Net cash provided by operating activities 20.5 123.3 Investing activities: Capital expenditures ( 36.7 ) ( 46.1 ) Acquisition, net of cash acquired 0.2 ( 19.7 ) Proceeds from sales of assets — 0.4 Net cash used in investing activities ( 36.5 ) ( 65.4 ) Financing activities: Issuance of debt — 450.0 Repayment of debt — ( 462.4 ) Dividends paid ( 27.4 ) ( 26.1 ) Employee taxes related to stock-based compensation ( 1.9 ) ( 1.0 ) Common stock issued 1.6 1.5 Deferred financing costs paid — ( 6.0 ) Common stock repurchased under buyback program ( 25.0 ) — Proceeds from financing transaction — 3.9 Financing leases ( 0.4 ) ( 0.5 ) Net cash used in financing activities ( 53.1 ) ( 40.6 ) Effect of currency exchange rate changes on cash ( 3.5 ) 2.4 Net change in cash and cash equivalents ( 72.6 ) 19.7 Cash and cash equivalents at beginning of period 227.5 208.9 Cash and cash equivalents at end of period $ 154.9 $ 228.6 The accompanying notes are an integral part of the condensed consolidated financial statements. 7 Table of Contents Nine months ended June 30, 2022 2021 (in millions) Supplemental cash flow information: Cash paid for interest, net $ 19.3 $ 25.2 Cash paid for income taxes 22.2 12.6 The accompanying notes are an integral part of the condensed consolidated financial statements. 8 Table of Contents MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2022 (UNAUDITED) Note 1. Organization and Basis of Presentation Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two business segments: Water Flow Solutions and Water Management Solutions. These segments are based on a management reorganization that became effective October 1, 2021; prior period information has been recast to conform to the current presentation. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries, and may also refer to the segment being discussed. On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”). During the year ended September 30, 2021, we aligned the consolidation of the financial statements of Krausz in the Company’s consolidated financial statements, eliminating the previous inclusion of Krausz financial statements with a one-month reporting lag. In accordance with applicable accounting literature, the elimination of the one-month reporting lag is considered to be a change in accounting principle. We believe this change in accounting principle is preferable as the financial statements of all of our subsidiaries are now reported on the same basis, providing the most current information available. The effect of the elimination of the reporting lag during the year ended September 30, 2021 resulted in an increase of $6.0 million to net sales and an increase of $1.4 million to operating income. We concluded that the effect of this change is not material to the balance sheets, statements of operations, statements of cash flows, net income and earnings per share and therefore have not retrospectively applied this change. On June 14, 2021, we acquired all the outstanding capital stock of i2O Water Ltd (“i2O”), a provider of pressure management solutions to more than 100 water companies in 45 countries. The consolidated balance sheet at September 30, 2021 included the preliminary estimated fair values of the net assets of i2O. The accounting for this business combination became final during the three months ended March 31, 2022. The results of i2O’s operations and cash flows subsequent to the acquisition are included in the Company’s consolidated statement of operations and consolidated statement of cash flows, respectively. 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 in recording assets, liabilities, sales and expenses as well as in the disclosure of contingent assets and liabilities. 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, 2021. 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 at September 30, 2021 was derived from audited financial statements, but it does not include all disclosures required by GAAP. Our business is seasonal as a result of cold weather conditions. Net sales and operating income historically have been lowest in the three month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity. In preparing these financial statements in conformity with GAAP, we have considered and, where appropriate, included the effects of the COVID-19 pandemic on our operations. 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. Recently Adopted Accounting Guidance During 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 326 - Current Expected Credit Losses to replace the “incurred loss” impairment approach with an “expected loss” approach, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We completed historical and forward-looking analyses for receivables and adopted this guidance effective October 1, 2020. Upon adoption, there was no material impact to our financial statements. 9 Table of Contents In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. ASU 2019-12 was effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but may be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We evaluated our contracts and the optional expedients provided by ASU 2020-04. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements. Restructuring Since November 2019, we have announced the purchase and closure of several facilities. We purchased a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry and closed our facilities in Hammond, Indiana, Woodland, Washington and Surrey, British Columbia, Canada. We also announced the closure of our facility in Aurora, Illinois which we expect to complete substantially by the end of fiscal 2022. The majority of the activities from these facilities have been transferred to our Kimball, Tennessee facility. In connection with these reorganizations, we recognized certain restructuring costs. Activity in accrued restructuring, reported as part of Other current liabilities, is presented below. Nine months ended June 30, 2022 2021 (in millions) Beginning balance $ 3.1 $ 2.8 Amounts accrued 0.4 2.0 Amounts paid ( 3.0 ) ( 2.2 ) Ending balance $ 0.5 $ 2.6 New Markets Tax Credit Program On December 22, 2020, we entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) related to our brass foundry construction project in Decatur, Illinois under a qualified New Markets Tax Credit program (“NMTC”). The NMTC is a federal program intended to encourage capital investment in qualified lower income communities. Under the NMTC, investors claim federal income tax credits over a period of seven years in connection with qualified investments in the equity of community development entities (“CDE”s), which are privately managed investment institutions that are certified to make qualified low-income community investments, such as in our foundry project. Under the NMTC, Wells Fargo contributed capital of $ 4.8 million to an investment fund and we loaned $ 12.2 million to the fund. Wells Fargo is entitled to the associated tax credits, which are subject to 100% recapture if we do not comply with various regulations and contractual provisions surrounding the foundry project. We have indemnified Wells Fargo for any loss or recapture of tax credits related to the transaction until the seven-year period elapses. We do not anticipate any credit recaptures will be required in connection with this arrangement. The investment fund contributed $ 16.5 million cash for a 99.99% stake in a joint venture (“Sub-CDE”) with a CDE. T he Sub-CDE then loaned $ 16.2 million to us, with the use of the loan proceeds restricted to foundry project expenditures. This transaction also includes a put/call provision under which we may be obligated or entitled to repurchase Wells Fargo’s interest in the investment fund. We believe that Wells Fargo will exercise its put option in December 2027 for nominal consideration, resulting in our becoming the sole owner of the investment fund, cancelling the related loans, and recognizing an estimated gain of $3.9 million. 10 Table of Contents We determined that the investment fund and the Sub-CDE are variable interest entities (“VIEs”) and that we are the primary beneficiary of the VIEs. The ongoing activities of the VIEs, namely collecting and remitting interest and fees and administering NMTC compliance, were contemplated in the initial design of the transaction and are not expected to significantly affect economic performance throughout the life of the VIEs. Additionally, we are obligated to deliver tax benefits and provide various other guarantees to Wells Fargo and to absorb the losses of the VIEs. Wells Fargo does not have a material interest in the underlying economics of the project. Consequently, we have included the financial statements of the VIEs in our consolidated financial statements. Intercompany transactions between us and the VIEs have been eliminated in consolidation. Wells Fargo’s contribution to the investment fund is consolidated in our financial statements within Other noncurrent liabilities as a result of its redemption features. Direct costs associated with Wells Fargo’s capital contribution were netted against the recorded proceeds, resulting in a net cash contribution of $3.9 million. Other direct costs associated with the transaction were capitalized and are being recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period are expensed as incurred. Note 2. Acquisitions Acquisition of i2O Water Ltd On June 14, 2021, we acquired all the outstanding capital stock of i2O for $ 19.7 million, net of cash acquired. The purchase agreement provided for customary final adjustments, including a net working capital adjustment that was completed during the three months ended December 31, 2021, resulting in a purchase price of $ 19.5 million. 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 accounting for the business combination is considered to be final. The results of i2O are included in our Water Management Solutions segment. The goodwill below is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of i2O and the value of its workforce. Goodwill is nondeductible for income tax purposes. Identified intangible assets consist of customer relationships, non-compete agreements and developed technology with an estimated weighted-average useful life of approximately 12 years and trade names with an indefinite life. Values of intangible assets were determined using a discounted cash flow method. The following is a summary of the fair values of the net assets acquired (in millions): Assets, net of cash: Receivables $ 0.5 Inventories 0.6 Other current assets 0.9 Identified intangible assets: Tradename 1.8 Customer relationships 2.1 Non-compete agreements 0.1 Developed technology 3.5 Goodwill 12.1 Liabilities: Accounts payable ( 0.8 ) Other current liabilities ( 1.3 ) Fair value of net assets acquired, net of cash $ 19.5 11 Table of Contents 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 revenue from contracts with customers by reportable segment (see Note 10.) 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 Differences in the timing of revenue recognition, billing and cash collection result 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 (i.e., 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 we expect to receive within one year and therefore is included within Other current liabilities in the accompanying consolidated balance sheets. Deferred revenue represents contract liabilities and are recorded when customers remit cash payments in advance of our satisfaction of performance obligations under contractual arrangements. Contract liabilities are relieved and revenue is recognized when the performance obligation is satisfied. Th e table below represents the balances of our customer receivables and deferred revenue. June 30, September 30, 2022 2021 (in millions) Billed receivables $ 224.3 $ 213.4 Unbilled receivables 2.4 2.3 Gross customer receivables 226.7 215.7 Allowance for credit losses ( 4.8 ) ( 3.5 ) Receivables, net $ 221.9 $ 212.2 Deferred revenue $ 8.2 $ 5.4 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 for sales of product or over time for 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 control of the performance obligation transfers to the customer. The transaction price is adjusted for our estimate of variable consideration which may include discounts, and rebates. To estimate variable consideration, we apply the expected value or the most likely amount method, based on whichever method most appropriately predicts the amount of consideration we expect to receive. The method applied is based typically on historical experience and known trends. We do not recognize variable consideration in the event there are uncertainties in the amount of variable consideration to be paid nor when it is probable there will be a significant reversal in the related revenue. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority. We classify shipping and handling costs, such as freight to our customers’ destinations, as a component of Cost of sales. 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. 12 Table of Contents The revenue recognized at a point in time related to the sale of our products is recognized when the obligations of the terms of our contract are satisfied, which generally occurs upon shipment when control of the product transfers to the customer. We offer warranties that provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These cannot be purchased separately. 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 a combination of 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 generally 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. Note 4. Income Taxes The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below. Three months ended Nine months ended June 30, June 30, 2022 2021 2022 2021 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 3.3 4.2 3.3 4.2 Excess tax benefits related to stock-based compensation — — ( 0.3 ) ( 0.3 ) Tax credits ( 3.0 ) ( 1.7 ) ( 3.0 ) ( 1.7 ) Global Intangible Low-Taxed Income 1.1 0.5 1.1 0.5 Foreign income tax rate differential ( 1.7 ) ( 0.4 ) ( 1.7 ) ( 0.4 ) Nondeductible compensation 0.9 0.6 0.9 0.6 Basis difference in foreign investment (0.1) 1.2 (0.1) 1.2 Valuation allowances — — 0.3 0.7 Other ( 0.4 ) 2.6 1.2 0.5 Effective income tax rate 21.1 % 28.0 % 22.7 % 26.3 % At June 30, 2022 and September 30, 2021, the gross liabilities for unrecognized income tax benefits were $ 4.9 million and $ 4.8 million, respectively, and are included in Other noncurrent liabilities. Note 5. Borrowing Arrangements The components of our long-term debt are as follows: June 30, September 30, 2022 2021 (in millions) 4.0% Senior Notes $ 450.0 $ 450.0 Finance leases 1.8 2.2 Total borrowings 451.8 452.2 Less deferred financing costs ( 4.8 ) ( 5.3 ) Less current portion ( 0.9 ) ( 1.0 ) Long-term debt $ 446.1 $ 445.9 ABL Agreement. Our asset-based lending agreement (“ABL Agreement”) consists of a revolving credit facility for up to $ 175.0 million which includes up to $ 25.0 million of swing line loans and may have up to $ 60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $ 150.0 million in certain circumstances subject to adequate borrowing base availability. 13 Table of Contents Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus an applicable margin range of 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus an applicable margin range of from 100 to 125 basis points. At June 30, 2022 the applicable margin for LIBOR based loans was 200 basis points and for base rate loans was 100 basis points. The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less certain reserves. Prepayments can be made at any time without penalty. Substantially all of our United States subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our United States inventories, accounts receivable, certain cash and other related items. The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million or 10% of the Loan Cap as defined in the ABL Agreement. Excess availability based on June 30, 2022 data was $160.7 million, as reduced by $ 14.1 million of outstanding letters of credit and $ 0.2 million of accrued fees and expenses. 4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $ 450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0 %, paid semi-annually in June and December. We capitalized $ 5.5 million of financing costs which are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior Notes that are subordinate to borrowings under our ABL Agreement. Based on quoted market prices that are a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $ 392.8 million at June 30, 2022. An indenture governing the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at June 30, 2022. As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices. Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices. Upon a change of control, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount. Note 6. 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 had no direct effect on our consolidated financial statements, it created 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 did not designate these swaps as hedges and the changes in their fair value were included in earnings, offsetting the currency gains and losses associated with the intercompany loan. The value of our currency swap contracts as of September 30, 2021 was a liability of $1.1 million, and was included in Other current liabilities. The currency swap contracts expired in February 2022. 14 Table of Contents Note 7. 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, 2022 2021 2022 2021 (in millions) Service cost $ 0.3 $ 0.4 $ 0.9 $ 1.2 Pension costs (benefits) other than service: Interest cost 2.5 2.5 7.3 7.5 Expected return on plan assets ( 3.8 ) ( 3.9 ) ( 11.4 ) ( 11.7 ) Amortization of actuarial net loss 0.4 0.6 1.2 1.8 Pension benefits other than service ( 0.9 ) ( 0.8 ) ( 2.9 ) ( 2.4 ) Net periodic benefit $ ( 0.6 ) $ ( 0.4 ) $ ( 2.0 ) $ ( 1.2 ) The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive income (loss). Note 8. Stock-based Compensation Plans We grant various forms of stock-based compensation, including market-based restricted stock units (“MRSUs”), restricted stock units, stock options and performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”), Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants issued during the nine months ended June 30, 2022 are as follows: Number granted Weighted average grant date fair value per instrument Total grant date fair value (in millions) Quarter ended December 31, 2021 MRSUs 230,089 $ 15.76 $ 3.6 Phantom Plan instruments 199,549 13.64 2.7 Restricted stock units 135,129 13.64 1.8 Non-qualified stock options 457,482 3.43 1.6 PRSUs: 2020 award 57,627 13.81 0.8 Employee stock purchase plan instruments 38,069 3.01 0.1 Quarter ended March 31, 2022 Restricted stock units 88,250 13.03 1.1 Employee stock purchase plan instruments 38,512 3.39 0.1 Quarter ended June 30, 2022 Restricted stock units 4,285 11.66 — Employee stock purchase plan instruments 40,946 2.94 0.1 $ 11.9 An 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 our relative total shareholder return (“TSR”) performance as compared with the TSR of a selected peer group. Settlements, in our common shares, will range from zero to two times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group. 15 Table of Contents Compensation expense attributed to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the grant date fair value are indicated below. November 30, 2021 Variables used in determining grant date fair value: Dividend yield 1.70 % Risk-free rate 0.76 % Expected term (in years) 2.83 The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding. At June 30, 2022, the outstanding Phantom Plan instruments had a fair value of $ 11.73 per instrument and our liability for Phantom Plan instruments was $ 2.5 million and is included within Other current and Other noncurrent liabilities. Stock options generally vest ratably over three years on each anniversary date. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below. November 30, 2021 Dividend yield 1.62 % Risk-free rate 1.33 % Expected term (in years) 6.00 The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the options are expected to be outstanding. A PRSU award consists of a number of units that may be paid out at the end of a three-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 two following years. Settlements, in our common shares, will range from zero to two times the number of PRSUs granted, depending on our financial performance relative to the targets. We did not issue any shares of common stock to settle PRSUs vested during the three months ended June 30, 2022; however, we issued 240,412 shares of common stock to settle PRSUs vested during the nine months ended June 30, 2022. Additionally, we issued 3,716 and 238,811 shares of common stock to settle restricted stock units vested during the three and nine months ended June 30, 2022, respectively. Finally, we issued no shares of common stock to settle stock options exercised during the three months ended June 30, 2022; however, we issued 24,153 shares of common stock to settle stock options exercised during the nine months ended June 30, 2022. Operating income included stock-based compensation expense of $ 2.5 million and $3.4 million for the three months ended June 30, 2022 and 2021, respectively. Operating income included stock-based compensation expense of $7.6 million and $8.4 million during the nine months ended June 30, 2022 and 2021, respectively. At June 30, 2022, there was approximately $ 10.5 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 53,067 PRSUs that have been awarded for the 2022 performance period for which performance goal achievement cannot yet be determined. We excluded 892,662 and 131,178 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended June 30, 2022 and 2021, respectively, and 750,343 and 566,666 for the nine months ended June 30, 2022 and 2021, respectively, since their inclusion would have been antidilutive. 16 Table of Contents Note 9. Supplemental Balance Sheet Information Selected supplemental asset information is presented below. June 30, September 30, 2022 2021 (in millions) Inventories: Purchased components and raw material $ 154.6 $ 100.9 Work in process, net 57.1 41.6 Finished goods, net 39.2 42.2 Total inventories $ 250.9 $ 184.7 Other current assets: Prepaid expenses $ 14.9 $ 12.8 Non-trade receivables 11.3 10.7 Maintenance and repair supplies and tooling 1.8 2.9 Income taxes 0.2 0.2 Workers’compensation reimbursement receivable 1.8 0.8 Other current assets 1.4 1.9 Total other current assets $ 31.4 $ 29.3 Property, plant and equipment: Land $ 5.8 $ 6.1 Buildings 86.1 84.6 Machinery and equipment 447.8 433.3 Construction in progress 99.2 83.7 Total property, plant and equipment 638.9 607.7 Accumulated depreciation ( 345.9 ) ( 324.3 ) Property, plant and equipment, net $ 293.0 $ 283.4 Other noncurrent assets: Operating lease right-of-use assets $ 26.5 $ 27.1 Maintenance and repair supplies and tooling 21.0 19.3 Workers’ compensation reimbursement receivable 5.3 2.7 Pension asset 20.0 16.8 Note receivable 1.8 1.8 Deferred financing fees 1.1 1.3 Other noncurrent assets 3.8 4.3 Total other noncurrent assets $ 79.5 $ 73.3 17 Table of Contents Selected supplemental liability information is presented below. June 30, September 30, 2022 2021 (in millions) Other current liabilities: Compensation and benefits $ 38.3 $ 44.6 Customer rebates 13.7 19.6 Warranty accrual 5.9 6.7 Deferred revenue 8.2 5.4 Refund liability 6.7 6.0 Taxes other than income taxes 6.1 4.4 Operating lease liabilities 4.2 4.0 Workers’ compensation accrual 3.6 2.6 CARES Act payroll tax liabilities 3.6 3.6 Restructuring liabilities 0.5 3.1 Environmental liabilities 1.2 1.2 Interest payable 0.8 6.2 Income taxes payable 4.8 8.5 Other current liabilities 5.9 11.2 Total other current liabilities $ 103.5 $ 127.1 Other noncurrent liabilities: Operating lease liabilities $ 23.3 $ 24.6 Warranty accrual 4.4 3.0 Transition tax liability 4.1 4.7 Uncertain tax position liability 4.9 4.8 NMTC liability 3.9 3.9 Workers’ compensation accrual 10.4 7.9 Asset retirement obligation 3.6 3.6 CARES Act payroll tax liabilities — 3.6 Deferred development grant 2.5 2.5 Other noncurrent liabilities 3.5 3.4 Total other noncurrent liabilities $ 60.6 $ 62.0 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. The following table summarizes information concerning our goodwill balance in the nine months ended June 30, 2022, in millions. Balance at September 30, 2021 $ 115.1 Acquisition adjustments 0.1 Effects of changes in foreign currency exchange rates ( 6.6 ) Balance at June 30, 2022 $ 108.6 Note 10. Segment Information We adopted a new management structure effective October 1, 2021 which resulted in a change to our reportable segments. Prior period information has been recast to conform to the current presentation. The recasting has no effect on our previously reported consolidated balance sheets, consolidated statements of operations, or consolidated statements of cash flows. The two newly named business units and reportable segments are Water Flow Solutions and Water Management Solutions. Water Flow 18 Table of Contents Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Su mmarized financial information for our segments is presented below. Three months ended Nine months ended June 30, June 30, 2022 2021 2022 2021 (in millions) Net sales, excluding intercompany: Water Flow Solutions $ 195.9 $ 177.0 $ 534.7 $ 452.9 Water Management Solutions 137.3 133.5 381.3 362.5 $ 333.2 $ 310.5 $ 916.0 $ 815.4 Operating income (loss): Water Flow Solutions $ 38.1 $ 40.2 $ 104.8 $ 93.0 Water Management Solutions 12.0 21.1 35.1 56.4 Corporate ( 13.2 ) ( 18.6 ) ( 39.9 ) ( 45.5 ) $ 36.9 $ 42.7 $ 100.0 $ 103.9 Depreciation and amortization: Water Flow Solutions $ 7.6 $ 7.9 $ 22.5 $ 22.8 Water Management Solutions 7.2 7.2 22.2 21.6 Corporate 0.1 0.1 0.2 0.2 $ 14.9 $ 15.2 $ 44.9 $ 44.6 Strategic reorganization and other charges: Water Flow Solutions $ — $ — $ — $ 0.1 Water Management Solutions — 0.2 0.2 ( 0.5 ) Corporate 0.6 3.7 3.4 6.5 $ 0.6 $ 3.9 $ 3.6 $ 6.1 Capital expenditures: Water Flow Solutions $ 8.1 $ 11.5 $ 29.6 $ 37.6 Water Management Solutions 2.6 3.5 7.1 8.4 Corporate — — — 0.1 $ 10.7 $ 15.0 $ 36.7 $ 46.1 Water Flow Solutions disaggregated net revenue: Central $ 53.8 $ 44.2 $ 145.0 $ 117.6 Northeast 29.4 31.7 90.5 79.0 Southeast 44.3 37.3 122.3 90.3 West 47.4 47.9 131.3 127.6 United States 174.9 161.1 489.1 414.5 Canada 18.8 14.9 40.7 31.7 Other international locations 2.2 1.0 4.9 6.7 $ 195.9 $ 177.0 $ 534.7 $ 452.9 Water Management Solutions disaggregated net revenue: Central $ 37.7 $ 32.6 $ 101.1 $ 91.8 Northeast 25.4 24.2 78.1 72.8 Southeast 27.8 28.8 79.6 76.1 West 30.8 28.2 77.8 73.2 United States 121.7 113.8 336.6 313.9 Canada 9.7 13.5 26.0 29.6 Other international locations 5.9 6.2 18.7 19.0 $ 137.3 $ 133.5 $ 381.3 $ 362.5 19 Table of Contents Note 11. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) is as follows: Pension, net of tax Foreign currency translation Total (in millions) Balance at September 30, 2021 $ ( 22.2 ) $ 17.2 $ ( 5.0 ) Current period other comprehensive income 1.0 ( 15.5 ) $ ( 14.5 ) Balance at June 30, 2022 $ ( 21.2 ) $ 1.7 $ ( 19.5 ) Note 12. 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. Legal 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 materially adverse effect on our financial position, results of operations, cash flows or liquidity. 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 the Environmental Protection Agency’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, 2022. 20 Table of Contents 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. We have taken action and continue to counter such disruption, and work to protect the safety of our employees. While the extent to which the pandemic affects our results will depend on future developments, the pandemic could result in material effects to our future financial position, results of operations, cash flows and liquidity. Mass Shooting Event at our Mueller Co. Facility in Albertville, Alabama. On June 15, 2021, we experienced a mass shooting event at our Mueller Co. facility in Albertville, Alabama, in which two employees were killed and two employees were injured. Various claims arising from the event have been filed 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 outcome of these claims, or legal proceedings, and 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. During the three months ended June 30, 2022, we recorded $ 4.5 million of warranty obligations. 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 financial position, results of operations, cash flows or liquidity. Note 13. Subsequent Events On July 27, 2022 , our Board of Directors declared a dividend of $ 0.058 per share on our common stock, payable on or about August 22, 2022 to stockholders of record at the close of business on August 10, 2022 . In July 2022, the Company entered into an amendment to the collective bargaining agreement with Albertville, AL USWA 65B to extend the current agreement to October 2027 on substantially similar terms. In August 2022, the Company entered into an amendment to its Decatur, IL collective bargaining agreement with Local 7-838 United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO (United Steelworkers, USW) to extend the current agreement to June 2027 on substantially similar terms. 21 Table of Contents