Item 1. Financial Statements
Item 1. FINANCIAL STATEMENTS
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, September 30,
2023 2022
(in millions, except share amounts)
Assets:
Cash and cash equivalents $ 141.2 $ 146.5
Receivables, net of allowance for credit losses of $ 6.4 million and $ 5.6 million
210.3 228.0
Inventories, net 312.7 278.7
Other current assets 27.2 26.8
Total current assets 691.4 680.0
Property, plant and equipment, net 306.9 301.6
Intangible assets, net 341.9 361.2
Goodwill, net 97.0 98.6
Other noncurrent assets 56.1 56.7
Total assets $ 1,493.3 $ 1,498.1
Liabilities and stockholders’ equity:
Current portion of long-term debt $ 0.8 $ 0.8
Accounts payable 101.0 122.8
Other current liabilities 98.1 117.4
Total current liabilities 199.9 241.0
Long-term debt 446.7 446.1
Deferred income taxes 80.0 86.3
Other noncurrent liabilities 52.5 55.4
Total liabilities 779.1 828.8
Commitments and contingencies (Note 10.)
Preferred stock: par value $ 0.01 per share; 60,000,000 shares authorized; none outstanding at June 30, 2023, and September 30, 2022
— —
Common stock: par value $ 0.01 per share; 600,000,000 shares authorized; 156,424,123 and 155,844,138 shares outstanding at June 30, 2023, and September 30, 2022, respectively
1.6 1.6
Additional paid-in capital 1,257.2 1,279.6
Accumulated deficit ( 499.0 ) ( 567.3 )
Accumulated other comprehensive loss ( 45.6 ) ( 44.6 )
Total stockholders' equity 714.2 669.3
Total liabilities and stockholders' equity $ 1,493.3 $ 1,498.1
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,
2023 2022 2023 2022
(in millions, except per share amounts)
Net sales $ 326.6 $ 333.2 $ 974.3 $ 916.0
Cost of sales 226.5 234.9 683.2 637.3
Gross profit 100.1 98.3 291.1 278.7
Operating expenses:
Selling, general and administrative 60.6 60.8 187.7 175.1
Strategic reorganization and other charges 3.9 0.6 0.9 3.6
Total operating expenses 64.5 61.4 188.6 178.7
Operating income 35.6 36.9 102.5 100.0
Other expenses (income):
Pension expense (benefit) other than service 0.9 ( 0.9 ) 2.8 ( 2.9 )
Interest expense, net 3.8 4.2 11.4 13.0
Net other expenses 4.7 3.3 14.2 10.1
Income before income taxes 30.9 33.6 88.3 89.9
Income tax expense 6.4 7.1 20.0 20.4
Net income $ 24.5 $ 26.5 $ 68.3 $ 69.5
Net income per share:
Basic $ 0.16 $ 0.17 $ 0.44 $ 0.44
Diluted $ 0.16 $ 0.17 $ 0.44 $ 0.44
Weighted average shares outstanding:
Basic 156.4 157.0 156.2 157.6
Diluted 157.2 157.6 156.8 158.3
Dividends declared per share $ 0.061 $ 0.058 $ 0.183 $ 0.174
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,
2023 2022 2023 2022
(in millions)
Net income $ 24.5 $ 26.5 $ 68.3 $ 69.5
Other comprehensive income (loss), net of income tax:
Pension actuarial amortization 0.8 0.3 2.0 1.0
Foreign currency translation ( 4.9 ) ( 17.6 ) ( 3.0 ) ( 15.5 )
Total other comprehensive loss ( 4.1 ) ( 17.3 ) ( 1.0 ) ( 14.5 )
Comprehensive income $ 20.4 $ 9.2 $ 67.3 $ 55.0
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 STOCKHOLDERS’ EQUITY
(UNAUDITED)
Common
stock Additional
paid-in
capital Accumulated
deficit Accumulated
other
comprehensive
(loss) income Total
(in millions)
Balance at September 30, 2022 $ 1.6 $ 1,279.6 $ ( 567.3 ) $ ( 44.6 ) $ 669.3
Net income — — 22.5 — 22.5
Dividends declared — ( 9.5 ) — — ( 9.5 )
Stock-based compensation — 1.8 — — 1.8
Shares retained for employee taxes — ( 1.5 ) — — ( 1.5 )
Common stock issued — 0.6 — — 0.6
Other comprehensive income, net of tax — — — 4.6 4.6
Balance at December 31, 2022 $ 1.6 $ 1,271.0 $ ( 544.8 ) $ ( 40.0 ) $ 687.8
Net income — — 21.3 — 21.3
Dividends declared — ( 9.5 ) — — ( 9.5 )
Stock-based compensation — 2.4 — — 2.4
Common stock issued — 0.4 — — 0.4
Other comprehensive loss, net of tax — — — ( 1.5 ) ( 1.5 )
Balance at March 31, 2023 $ 1.6 $ 1,264.3 $ ( 523.5 ) $ ( 41.5 ) $ 700.9
Net income — — 24.5 — 24.5
Dividends declared — ( 9.6 ) — — ( 9.6 )
Stock-based compensation — 1.7 — — 1.7
Shares retained for employee taxes — ( 0.1 ) — — ( 0.1 )
Common stock issued — 0.9 — — 0.9
Other comprehensive loss, net of tax — — — ( 4.1 ) ( 4.1 )
Balance at June 30, 2023 $ 1.6 $ 1,257.2 $ ( 499.0 ) $ ( 45.6 ) $ 714.2
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 STOCKHOLDERS’ EQUITY
(UNAUDITED)
Common
stock Additional
paid-in
capital Accumulated
deficit Accumulated
other
comprehensive
(loss) income Total
(in millions)
Balance at September 30, 2021 $ 1.6 $ 1,342.2 $ ( 643.9 ) $ ( 5.0 ) $ 694.9
Net income — — 19.4 — 19.4
Dividends declared — ( 9.2 ) — — ( 9.2 )
Stock-based compensation — 2.0 — — 2.0
Shares retained for employee taxes — ( 1.9 ) — — ( 1.9 )
Stock repurchased under buyback program — ( 20.0 ) — — ( 20.0 )
Common stock issued — 0.7 — — 0.7
Other comprehensive income, net of tax — — — 6.0 6.0
Balance at December 31, 2021 $ 1.6 $ 1,313.8 $ ( 624.5 ) $ 1.0 $ 691.9
Net income — — 23.6 — 23.6
Dividends declared — ( 9.1 ) — — ( 9.1 )
Stock-based compensation — 2.4 — — 2.4
Shares retained for employee taxes — 0.1 — — 0.1
Common stock issued — 0.4 — — 0.4
Other comprehensive loss, net of tax — — — ( 3.2 ) ( 3.2 )
Balance at March 31, 2022 $ 1.6 $ 1,307.6 $ ( 600.9 ) $ ( 2.2 ) $ 706.1
Net income — — 26.5 — 26.5
Dividends declared — ( 9.1 ) — — ( 9.1 )
Stock-based compensation — 2.2 — — 2.2
Shares retained for employee taxes — ( 0.1 ) — — ( 0.1 )
Stock repurchased under buyback program — ( 5.0 ) — — ( 5.0 )
Common stock issued — 0.5 — — 0.5
Other comprehensive income, net of tax — — — ( 17.3 ) ( 17.3 )
Balance at June 30, 2022 $ 1.6 $ 1,296.1 $ ( 574.4 ) $ ( 19.5 ) $ 703.8
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,
2023 2022
(in millions)
Operating activities:
Net income $ 68.3 $ 69.5
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
Depreciation 25.1 23.8
Amortization 21.0 21.1
Gain on sale of assets ( 3.7 ) —
Stock-based compensation 5.9 6.6
Pension net periodic cost (benefit) 3.4 ( 1.9 )
Deferred income taxes ( 6.7 ) 1.8
Inventory reserves provision 0.4 3.9
Other, net 0.7 0.7
Changes in assets and liabilities, net of acquisition:
Receivables, net 18.2 ( 10.6 )
Inventories ( 34.1 ) ( 71.3 )
Other assets ( 2.0 ) ( 5.5 )
Accounts payable ( 21.8 ) 6.7
Other current liabilities ( 19.4 ) ( 23.1 )
Other noncurrent liabilities ( 2.8 ) ( 1.2 )
Net cash provided by operating activities 52.5 20.5
Investing activities:
Capital expenditures ( 32.4 ) ( 36.7 )
Acquisition purchase price adjustment — 0.2
Proceeds from sale of assets 5.1 —
Net cash used in investing activities ( 27.3 ) ( 36.5 )
Financing activities:
Dividends paid ( 28.6 ) ( 27.4 )
Employee taxes related to stock-based compensation ( 1.6 ) ( 1.9 )
Common stock issued 1.9 1.6
Common stock repurchased under buyback program — ( 25.0 )
Payments for finance lease obligations ( 0.9 ) ( 0.4 )
Net cash used in financing activities ( 29.2 ) ( 53.1 )
Effect of currency exchange rate changes on cash ( 1.3 ) ( 3.5 )
Net change in cash and cash equivalents ( 5.3 ) ( 72.6 )
Cash and cash equivalents at beginning of period 146.5 227.5
Cash and cash equivalents at end of period $ 141.2 $ 154.9
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Nine months ended
June 30,
2023 2022
(in millions)
Supplemental cash flow information:
Cash paid for interest, net $ 16.5 $ 19.3
Cash paid for income taxes, net $ 27.5 $ 22.2
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
AS OF AND FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2023
(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. Water Flow Solutions’ portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software 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.
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. During the three months ended December 31, 2021, we recorded a purchase price adjustment of $ 0.2 million, resulting in a final purchase price of $ 19.5 million.
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, 2022. 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, 2022 was derived from our audited financial statements, but it does not include all disclosures required by GAAP.
Our business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income historically have been lowest in the three-month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
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 Pronouncements
In December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” (“ASU 2022-06”). ASU 2022-06 defers the sunset date for applying the reference rate reform relief in Accounting Standards Codification (“ASC”) 848 to December 31, 2024 from December 31, 2022. ASU 2022-06 became effective immediately upon issuance. 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 ASU 2020-04 on October 1, 2021 and there was no material impact to our financial statements.
In December 2019, the FASB issued 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.
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Restructuring
Between November 2019 and March 2021, we 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 completed the closure of our facility in Aurora, Illinois during our fiscal year 2022. The majority of the activities from these plants were transferred to our Kimball, Tennessee facility. Additionally, during our fiscal year 2023, we incurred severance costs related to a reorganization of our sales force. In connection with these reorganizations, we recognized certain restructuring costs.
During the nine months ended June 30, 2023, we recorded amounts related to severance and transaction-related costs partially offset by a $ 4.0 million gain, before tax, on the sale of the Aurora, Illinois facility. Activity in accrued restructuring, reported as part of Other current liabilities, is presented below:
Nine months ended
June 30,
2023 2022
(in millions)
Beginning balance $ 3.3 $ 3.1
Amounts accrued 0.9 0.4
Amounts paid ( 2.0 ) ( 3.0 )
Ending balance $ 2.2 $ 0.5
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. The 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.
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.
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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. 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
Refer to Note 8. for disaggregation of our revenues from contracts with customers by reportable segment and by geographical region, which we believe 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 is classified as current based on the timing of when we expect to recognize revenue. We include current deferred revenue within Other current liabilities in the accompanying condensed consolidated balance sheets. Deferred revenue represents contract liabilities and is recorded when customers remit cash payments in advance of our satisfaction of performance obligations pursuant to 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 revenue:
June 30, September 30,
2023 2022
(in millions)
Billed receivables $ 211.2 $ 230.5
Unbilled receivables 5.5 3.1
Gross customer receivables 216.7 233.6
Allowance for credit losses ( 6.4 ) ( 5.6 )
Receivables, net $ 210.3 $ 228.0
Deferred revenue $ 8.7 $ 8.1
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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 equipment or product and 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. 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 typically based on historical experience and known trends. We constrain the amounts of variable consideration that are included in the transaction price, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved.
We exclude from the measurement of the transaction price all taxes assessed by a governmental authority.
We do 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.
Revenue for the sale of our products is recognized when the obligations of the terms of our contract are satisfied, which is when the customer is able to direct the use of and obtain substantially all of the benefits from the product, which generally occurs upon shipment when control of the product transfers to the customer.
We offer warranties to our customers which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These warranties cannot be purchased separately from our products.
Costs to Obtain or Fulfill a Contract
Shipping and handling costs associated with freight activities after the customer has obtained control of a product are included in cost of sales at the time the related revenue is recognized.
We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our sales 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, cancellations 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 do not capitalize the related costs and expense them as incurred.
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Note 3. 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,
2023 2022 2023 2022
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 3.2 3.3 3.2 3.3
Excess tax benefits related to stock-based compensation — — 0.2 ( 0.3 )
Tax credits ( 3.5 ) ( 3.0 ) ( 2.8 ) ( 3.0 )
Global Intangible Low-Taxed Income 1.1 1.1 1.1 1.1
Foreign income tax rate differential ( 2.2 ) ( 1.7 ) ( 2.2 ) ( 1.7 )
Nondeductible compensation 0.9 0.9 0.9 0.9
Basis difference in foreign investment — ( 0.1 ) — ( 0.1 )
Valuation allowances — — — 0.3
Other 0.2 ( 0.4 ) 1.3 1.2
Effective income tax rate 20.7 % 21.1 % 22.7 % 22.7 %
At June 30, 2023 and September 30, 2022, the gross liabilities for unrecognized income tax benefits were $ 5.3 million and $ 4.7 million, respectively, and are included in Other noncurrent liabilities.
Note 4. Borrowing Arrangements
The components of our long-term debt are as follows:
June 30, September 30,
2023 2022
(in millions)
4.0% Senior Notes $ 450.0 $ 450.0
Finance leases 1.6 1.6
Total borrowings 451.6 451.6
Less: deferred financing costs 4.1 4.7
Less: current portion of long-term debt 0.8 0.8
Long-term debt $ 446.7 $ 446.1
ABL Agreement. Our asset-based lending agreement, as amended, (“ABL”) is provided by a syndicate of banking institutions and consists of a revolving credit facility for up to $ 175.0 million in borrowing that expires on July 29, 2025. The ABL allows up to $ 25.0 million of swing line loans and up to $ 60.0 million of letters of credit. The ABL permits us to increase the size of the credit facility by an additional $ 150.0 million in certain circumstances subject to adequate borrowing base availability.
On April 5, 2023, we amended the ABL. This amendment replaced LIBOR-based loans with Secured Overnight Financing Rate (“SOFR”) based loans plus an adjustment of 10 basis points, among other immaterial modifications.
Borrowings under the ABL bear interest at a floating rate equal to SOFR plus an adjustment of 10 basis points plus an applicable margin range of 200 to 225 basis points, or a base rate, as defined in the ABL, plus an applicable margin range of from 100 to 125 basis points. At June 30, 2023 the applicable margin for SOFR-based loans was 200 basis points and for base rate loans was 100 basis points.
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The ABL is subject to mandatory prepayments if total outstanding borrowings under the ABL are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL is equal to the sum of (a) 85 % of the value of eligible accounts receivable and (b) the lesser of (i) 70 % of the value of eligible inventory or (ii) 85 % of the net orderly liquidation value of eligible inventory, less certain reserves. Prepayments can be made at any time without penalty.
Substantially all of our United States subsidiaries are borrowers under the ABL and are jointly and severally liable for outstanding borrowings. Our obligations under the ABL are secured by a first-priority perfected lien on all of our United States inventory, accounts receivable, certain cash balances and other supporting assets.
The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $ 17.5 million and 10 % of the Loan Cap as defined in the ABL. Excess availability based on June 30, 2023 data was $ 162.3 million, as reduced by $ 12.5 million of outstanding letters of credit and $ 0.2 million of accrued fees and expenses.
4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $ 450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0 %, paid semi-annually in June and December. We capitalized $ 5.5 million of financing costs which are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to redeem our previously existing 5.5% Unsecured Senior Notes. Substantially all of our United States subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL. Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $ 400.7 million at June 30, 2023.
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, 2023.
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 5. Retirement Plans
The components of net periodic costs (benefits) for our pension plans are presented below:
Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
(in millions)
Service cost $ 0.2 $ 0.3 $ 0.6 $ 0.9
Pension costs (benefits) other than service:
Interest cost 3.4 2.5 10.4 7.3
Expected return on plan assets ( 3.5 ) ( 3.8 ) ( 10.4 ) ( 11.4 )
Amortization of actuarial net loss 1.0 0.4 2.8 1.2
Pension costs (benefits) other than service 0.9 ( 0.9 ) 2.8 ( 2.9 )
Net periodic costs (benefits) $ 1.1 $ ( 0.6 ) $ 3.4 $ ( 2.0 )
The amortization of actuarial losses, net of income tax, is recorded as a component of other comprehensive loss. For each of the three months ended June 30, 2023 and 2022, the amortization of actuarial net loss is shown net of income tax of $ 0.2 million in the condensed consolidated statements of comprehensive income. For the nine months ended June 30, 2023 and 2022, the amortization of actuarial loss is shown net of income tax of $ 0.8 million and $ 0.3 million respectively, in the condensed consolidated statements of comprehensive income.
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Note 6. 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, 2023 are as follows:
Number granted Weighted average grant date fair value per instrument Total grant date fair value
(in millions)
Quarter ended December 31, 2022
MRSUs 166,284 $ 15.08 $ 2.5
PRSUs 166,284 11.41 1.9
Restricted stock units 228,692 11.39 2.6
Phantom Plan instruments 267,093 11.41 3.0
Non-qualified stock options 573,279 3.31 1.9
Employee stock purchase plan instruments 47,463 $ 2.56 0.1
Total - Quarter ended December 31, 2022 $ 12.0
Quarter ended March 31, 2023
Restricted stock units 82,769 $ 13.89 $ 1.1
Phantom Plan instruments 8,367 13.42 0.1
Employee stock purchase plan instruments 56,066 $ 2.21 0.1
Total - Quarter ended March 31, 2023 $ 1.3
Quarter ended June 30, 2023
Phantom Plan instruments 7,176 $ 13.93 $ 0.1
Employee stock purchase plan instruments 45,860 $ 2.28 0.1
Total - Quarter ended June 30, 2023 0.2
Total - Year to date ended June 30, 2023 $ 13.5
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.
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. For these awards, compensation expense is recognized even if the awards are not earned or vested. The assumptions used to determine the grant date fair value are indicated below for awards granted to date during the current fiscal year.
November 29, 2022
Variables used in determining grant date fair value:
Dividend yield 2.20 %
Risk-free rate 4.20 %
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.
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At June 30, 2023, the outstanding Phantom Plan instruments had a fair value of $ 16.23 per instrument and our liability for Phantom Plan instruments was $ 3.5 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 for awards granted to date during the current fiscal year.
November 29, 2022
Variables used in determining grant date fair value:
Dividend yield 1.80 %
Risk-free rate 3.89 %
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 target number of units that may be paid out at the end of a three-year award cycle. 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 issued 282,472 shares of common stock to settle PRSUs vested during the nine months ended June 30, 2023; no shares of common stock were issued to settle PRSUs vested during the three months ended June 30, 2023. Additionally, we issued 2,098 and 218,121 shares of common stock to settle restricted stock units vested during the three and nine months ended June 30, 2023, respectively. Finally, we issued 2,896 and 64,847 shares of common stock to settle stock options exercised during the three and nine months ended June 30, 2023. Common shares totaling 1,589 and 138,525 were surrendered to us to pay the applicable tax withholding obligations of equity award participants for the three and nine months ended June 30, 2023, respectively.
Operating income included stock-based compensation expense of $ 2.7 million and $ 2.5 million during the three months ended June 30, 2023 and 2022, respectively. Operating income included stock-based compensation expense of $ 8.8 million and $ 7.6 million during the nine months ended June 30, 2023 and 2022, respectively. At June 30, 2023, there was approximately $ 11.9 million of unrecognized compensation expense related to stock-based compensation arrangements, which will be expensed through February 2026.
We excluded 249,933 and 892,662 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended June 30, 2023 and 2022, respectively, and 1,156,428 and 750,343 for the nine months ended June 30, 2023 and 2022, respectively, since their inclusion would have been antidilutive.
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Note 7. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below:
June 30, September 30,
2023 2022
(in millions)
Inventories:
Purchased components and raw materials $ 180.2 $ 181.8
Work in process, net 64.9 56.8
Finished goods, net 67.6 40.1
Inventories, net $ 312.7 $ 278.7
Other current assets:
Prepaid expenses $ 15.6 $ 14.6
Non-trade receivables 1.7 1.6
Maintenance and repair supplies and tooling 3.9 2.8
Income taxes 0.8 0.8
Workers' compensation reimbursement receivable 1.5 2.6
Other current assets 3.7 4.4
Total other current assets $ 27.2 $ 26.8
Property, plant and equipment:
Land $ 6.6 $ 5.7
Buildings 104.0 87.6
Machinery and equipment 505.7 456.0
Construction in progress 59.4 104.7
Total property, plant and equipment 675.7 654.0
Accumulated depreciation ( 368.8 ) ( 352.4 )
Property, plant and equipment, net $ 306.9 $ 301.6
Other noncurrent assets:
Operating lease right-of-use assets $ 25.2 $ 26.0
Maintenance and repair supplies and tooling 21.6 20.4
Workers' compensation reimbursement receivable 3.1 3.6
Pension asset 0.1 0.6
Note receivable 1.8 1.7
Deferred financing fees 0.8 1.0
Other noncurrent assets 3.5 3.4
Total other noncurrent assets $ 56.1 $ 56.7
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Selected supplemental liability information is presented below:
June 30, September 30,
2023 2022
(in millions)
Other current liabilities:
Compensation and benefits $ 33.6 $ 40.2
Customer rebates 12.7 16.2
Income taxes payable 6.4 7.5
Warranty accrual 7.9 6.5
Deferred revenue 8.7 8.1
Returned goods accrual 5.7 4.2
Taxes other than income taxes 2.7 4.4
Operating lease liabilities 5.1 4.4
Workers' compensation accrual 3.1 4.6
CARES Act payroll tax liabilities — 4.4
Restructuring liabilities 2.2 3.3
Environmental liabilities 0.7 0.7
Interest payable 0.8 5.3
Other current liabilities 8.5 7.6
Total other current liabilities $ 98.1 $ 117.4
Other noncurrent liabilities:
Operating lease liabilities $ 21.2 $ 22.4
Warranty accrual 3.1 4.2
Transition tax liability 3.1 4.1
Uncertain tax position liability 5.3 4.7
NMTC liability 3.9 3.9
Workers' compensation accrual 6.1 6.5
Environmental liabilities 3.6 3.6
Deferred development grant 2.5 2.5
Other noncurrent liabilities 3.7 3.5
Total other noncurrent liabilities $ 52.5 $ 55.4
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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.
The following table summarizes information concerning our goodwill, all of which is within our Water Management Solutions segment, during the nine months ended June 30, 2023, in millions:
Balance at September 30, 2022:
Goodwill $ 822.7
Accumulated impairment ( 724.1 )
Goodwill, net 98.6
Activity during the nine months ended June 30, 2023:
Change in foreign currency exchange rates ( 1.6 )
Balance at June 30, 2023
$ 97.0
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Note 8. Segment Information
We have two reportable segments, Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products and services. Summarized financial information for our segments is presented below:
Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
(in millions)
Net sales, excluding intercompany:
Water Flow Solutions $ 150.1 $ 195.9 $ 472.9 $ 534.7
Water Management Solutions 176.5 137.3 501.4 381.3
$ 326.6 $ 333.2 $ 974.3 $ 916.0
Operating income (loss):
Water Flow Solutions $ 12.6 $ 38.1 $ 52.0 $ 104.8
Water Management Solutions 39.0 12.0 90.3 35.1
Corporate ( 16.0 ) ( 13.2 ) ( 39.8 ) ( 39.9 )
$ 35.6 $ 36.9 $ 102.5 $ 100.0
Depreciation and amortization:
Water Flow Solutions $ 8.2 $ 7.6 $ 23.7 $ 22.5
Water Management Solutions 7.6 7.2 22.3 22.2
Corporate — 0.1 0.1 0.2
$ 15.8 $ 14.9 $ 46.1 $ 44.9
Strategic reorganization and other charges (benefits):
Water Flow Solutions $ 0.1 $ — $ 0.1 $ —
Water Management Solutions 1.0 — 1.2 0.2
Corporate 2.8 0.6 ( 0.4 ) 3.4
$ 3.9 $ 0.6 $ 0.9 $ 3.6
Capital expenditures:
Water Flow Solutions $ 7.5 $ 8.1 $ 23.1 $ 29.6
Water Management Solutions 4.4 2.6 9.3 7.1
Corporate — — — —
$ 11.9 $ 10.7 $ 32.4 $ 36.7
Water Flow Solutions disaggregated net sales:
Central $ 43.0 $ 53.8 $ 131.0 $ 145.0
Northeast 31.7 29.4 93.4 90.5
Southeast 24.8 44.3 86.8 122.3
West 37.8 47.4 123.4 131.3
United States 137.3 174.9 434.6 489.1
Canada 9.8 18.8 29.2 40.7
Other international locations 3.0 2.2 9.1 4.9
$ 150.1 $ 195.9 $ 472.9 $ 534.7
Water Management Solutions disaggregated net sales:
Central $ 47.4 $ 37.7 $ 133.2 $ 101.1
Northeast 44.3 25.4 116.1 78.1
Southeast 37.1 27.8 109.8 79.6
West 31.2 30.8 93.0 77.8
United States 160.0 121.7 452.1 336.6
Canada 10.0 9.7 29.9 26.0
Other international locations 6.5 5.9 19.4 18.7
$ 176.5 $ 137.3 $ 501.4 $ 381.3
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Note 9. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is as follows:
Pension actuarial amortization,
net of income tax Foreign currency translation,
net of income tax Total
(in millions)
Balance at September 30, 2022 $ ( 36.3 ) $ ( 8.3 ) $ ( 44.6 )
Current period other comprehensive income (loss) 2.0 ( 3.0 ) ( 1.0 )
Balance at June 30, 2023 $ ( 34.3 ) $ ( 11.3 ) $ ( 45.6 )
For the nine months ended June 30, 2023, pension actuarial amortization included in the condensed consolidated statements of comprehensive income as a component of pension expense other than service was $ 2.8 million, net of income tax of $ 0.8 million. Refer to Note 5. Retirement Plans for further information. For the nine months ended June 30, 2023, foreign currency translation included in the condensed consolidated statements of comprehensive income was $ 3.0 million, net of $ 0 income tax.
Note 10. 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 and 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 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.
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, 2023.
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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 continues to affect 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. 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 materially 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.
Indemnification . 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 unless 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 financial position, results of operations, cash flows or liquidity.
Note 11. Subsequent Events
On July 26, 2023 , our Board of Directors declared a dividend of $ 0.061 per share on our common stock, payable on or about August 21, 2023 to stockholders of record at the close of business on August 10, 2023 .
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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.