Mueller Water Products, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, September 30, 2023 2023 (in millions, except share amounts) Assets: Cash and cash equivalents $ 216.7 $ 160.3 Receivables, net of allowance for credit losses of $ 7.5 million and $ 7.3 million 167.9 217.1 Inventories, net 311.3 297.9 Other current assets 33.5 31.5 Total current assets 729.4 706.8 Property, plant and equipment, net 308.4 311.7 Intangible assets, net 329.3 334.0 Goodwill, net 98.3 93.7 Other noncurrent assets 63.4 58.8 Total assets $ 1,528.8 $ 1,505.0 Liabilities and stockholders’ equity: Current portion of long-term debt $ 0.6 $ 0.7 Accounts payable 108.9 102.9 Other current liabilities 112.1 115.2 Total current liabilities 221.6 218.8 Long-term debt 446.8 446.7 Deferred income taxes 71.1 73.8 Other noncurrent liabilities 58.1 54.2 Total liabilities 797.6 793.5 Commitments and contingencies (Note 10.) Preferred stock: par value $ 0.01 per share; 60,000,000 shares authorized; none outstanding at December 31, 2023, and September 30, 2023 — — Common stock: par value $ 0.01 per share; 600,000,000 shares authorized; 156,112,060 and 155,871,932 shares outstanding at December 31, 2023, and September 30, 2023, respectively 1.6 1.6 Additional paid-in capital 1,231.9 1,240.4 Accumulated deficit ( 467.5 ) ( 481.8 ) Accumulated other comprehensive loss ( 34.8 ) ( 48.7 ) Total stockholders' equity 731.2 711.5 Total liabilities and stockholders' equity $ 1,528.8 $ 1,505.0 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 December 31, 2023 2022 (in millions, except per share amounts) Net sales $ 256.4 $ 314.8 Cost of sales 170.1 221.6 Gross profit 86.3 93.2 Operating expenses: Selling, general and administrative 56.9 62.9 Strategic reorganization and other charges (benefits) 6.6 ( 3.7 ) Total operating expenses 63.5 59.2 Operating income 22.8 34.0 Other expenses: Pension expense other than service 1.0 0.9 Interest expense, net 3.3 3.7 Other expense 1.6 — Total other expenses, net 5.9 4.6 Income before income taxes 16.9 29.4 Income tax expense 2.6 6.9 Net income $ 14.3 $ 22.5 Net income per share: Basic $ 0.09 $ 0.14 Diluted $ 0.09 $ 0.14 Weighted average shares outstanding: Basic 156.0 156.4 Diluted 156.7 157.0 Dividends declared per share $ 0.064 $ 0.061 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 December 31, 2023 2022 (in millions) Net income $ 14.3 $ 22.5 Other comprehensive income, net of income tax: Pension actuarial amortization 0.6 0.6 Foreign currency translation 13.3 4.0 Total other comprehensive income, net of income tax 13.9 4.6 Comprehensive income $ 28.2 $ 27.1 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 STOCKHOLDERS’ EQUITY (UNAUDITED) Common stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive (loss) income Total (in millions) Balance at September 30, 2023 $ 1.6 $ 1,240.4 $ ( 481.8 ) $ ( 48.7 ) $ 711.5 Net income — — 14.3 — 14.3 Dividends declared — ( 10.0 ) — — ( 10.0 ) Stock-based compensation — 2.6 — — 2.6 Shares retained for employee taxes — ( 1.5 ) — — ( 1.5 ) Common stock issued — 0.4 — — 0.4 Other comprehensive income, net of tax — — — 13.9 13.9 Balance at December 31, 2023 $ 1.6 $ 1,231.9 $ ( 467.5 ) $ ( 34.8 ) $ 731.2 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 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) Three months ended December 31, 2023 2022 (in millions) Operating activities: Net income $ 14.3 $ 22.5 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 9.5 7.8 Amortization 6.9 7.0 Gain on sale of assets ( 0.1 ) ( 4.0 ) Stock-based compensation 2.6 1.8 Pension cost 1.2 1.1 Deferred income taxes ( 3.4 ) ( 0.9 ) Inventory reserve provision 2.1 1.2 Other, net 0.3 0.5 Changes in assets and liabilities: Receivables, net 49.7 26.4 Inventories ( 14.6 ) ( 36.1 ) Other assets ( 6.1 ) ( 3.6 ) Accounts payable 5.7 ( 19.6 ) Other current liabilities ( 3.6 ) ( 8.4 ) Other noncurrent liabilities 3.4 ( 2.2 ) Net cash provided by (used in) operating activities 67.9 ( 6.5 ) Investing activities: Capital expenditures ( 5.7 ) ( 9.9 ) Proceeds from sale of assets 0.1 5.1 Net cash used in investing activities ( 5.6 ) ( 4.8 ) Financing activities: Dividends paid ( 10.0 ) ( 9.5 ) Employee taxes related to stock-based compensation ( 1.5 ) ( 1.5 ) Common stock issued 0.4 0.6 Payments for finance lease obligations ( 0.2 ) ( 0.1 ) Net cash used in financing activities ( 11.3 ) ( 10.5 ) Effect of currency exchange rate changes on cash 5.4 0.9 Net change in cash and cash equivalents 56.4 ( 20.9 ) Cash and cash equivalents at beginning of period 160.3 146.5 Cash and cash equivalents at end of period $ 216.7 $ 125.6 The accompanying notes are an integral part of the condensed consolidated financial statements. 7 Table of Contents Three months ended December 31, 2023 2022 (in millions) Supplemental cash flow information: Cash paid for interest, net $ 7.6 $ 8.6 Cash paid for income taxes, net $ 0.8 $ 0.2 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 AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 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. 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, and pressure management and control products and solutions. 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. Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses as well as in the disclosure of contingent assets and liabilities for the reporting periods. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements do not include all information required by GAAP for complete financial statements and 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, 2023. 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, 2023 was derived from our audited financial statements. 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 most of Canada generally face weather conditions that restrict significant construction activity. Therefore, the results of operations for the three months ending December 31, 2023 are not necessarily indicative of operating results that may be achieved for any other interim period or the full year. 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. Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires public business entities that disclose information on their reportable segments to provide additional information on their significant expense categories and “other segment items,” which represent the difference between segment revenue less significant segment expense and a segment’s measure of profit or loss. A description of “other segment items” is also required. Further, certain segment related disclosures that were limited to annual disclosure are now required for interim periods. Finally, public business entities are required to disclose the title and position of their Chief Operating Decision Maker (“CODM”) and explain how the CODM uses the reported measures of profit or loss to assess segment performance. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Upon adoption, ASU 2023-07 should be applied retrospectively to all prior periods. We do not expect ASU 2023-07 to have a material impact on our financial statements and related disclosures. In December 2023, the FASB issued ASU No 2023-09 “Income Taxes (Topic 740): Improvements to Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 requires public business entities to disclose a tabular rate reconciliation utilizing percentages and reporting currency amounts in specific categories with certain reconciling items at or above the specified 5% threshold to improve the transparency and comparability of disclosures. Additionally, entities are required to disclose the year to date amount of income taxes paid, net of refunds received, disaggregated by federal (national), state, and foreign jurisdictions. Disclosure of all individual jurisdictions where income taxes paid, net of refunds received, is 5% or more of the total is also required. This guidance is effective for fiscal years beginning after December 15, 2024 with early adoption permitted. Upon adoption, ASU 2023-09 should be applied on a prospective basis while retrospective application is permitted. We do not expect ASU 2023-09 to have a material impact on our financial statements and our related disclosures. 9 Table of Contents Strategic Reorganization and Other Charges During the three months ended December 31, 2023, we recorded approximately $ 6.6 million in Strategic reorganization and other charges, primarily consisting of $ 1.5 million of expenses related to the cybersecurity incidents, expenses associated with our previously announced leadership transition as well as other transaction-related expenses. During the three months ended December 31, 2022, we recorded a $ 4.0 million gain, before tax, on the sale of the Aurora, Illinois facility which was partially offset by transaction-related costs. Activity in accrued strategic reorganization and other charges, reported as part of Other current liabilities, is presented below: Three months ended December 31, 2023 2022 (in millions) Beginning balance $ 6.6 $ 3.3 Amounts accrued 6.6 ( 3.7 ) Amounts (paid) received, net ( 5.4 ) 1.1 Ending balance $ 7.8 $ 0.7 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. 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 were expensed as incurred and were immaterial to the financial statements. 10 Table of Contents 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 certainty 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: December 31, September 30, 2023 2023 (in millions) Billed receivables $ 167.5 $ 218.1 Unbilled receivables 7.9 6.3 Gross customer receivables 175.4 224.4 Allowance for credit losses ( 7.5 ) ( 7.3 ) Receivables, net $ 167.9 $ 217.1 Deferred revenue $ 8.4 $ 9.2 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 and products 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. 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. 11 Table of Contents 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 in the form of assurance-type warranties, which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These warranties cannot be purchased separately from our products. On limited products, we offer extended warranties which may be purchased separately. 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 accounted for as fulfillment costs and are expensed to Cost of sales within our condensed consolidated statement of operations 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 have applied the practical expedient to expense them as incurred and therefore do not capitalize the related costs. 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 December 31, 2023 2022 U.S. federal statutory income tax rate 21.0 % 21.0 % Adjustments to reconcile to the effective tax rate: State income taxes, net of federal benefit 3.0 3.4 Excess tax deficit related to stock-based compensation 0.8 0.7 Tax credits ( 2.7 ) ( 1.6 ) Global Intangible Low-Taxed Income 1.3 0.8 Foreign income tax rate differential ( 1.8 ) ( 1.6 ) Nondeductible compensation 1.4 0.5 Uncertain tax positions ( 8.8 ) — Valuation allowances 0.4 ( 0.2 ) Other 0.8 0.5 Effective income tax rate 15.4 % 23.5 % At December 31, 2023 and September 30, 2023, the gross liabilities for unrecognized income tax benefits were $ 3.7 million and $ 5.0 million, respectively, and are included in Other noncurrent liabilities. During the three months ended December 31, 2023, we recorded $ 1.6 million in income tax benefits due to the release of an uncertain tax position that expired on December 31, 2023. 12 Table of Contents Note 4. Borrowing Arrangements The components of our long-term debt are as follows: December 31, September 30, 2023 2023 (in millions) 4.0% Senior Notes $ 450.0 $ 450.0 Finance leases 1.1 1.3 Total debt 451.1 451.3 Less: deferred financing costs 3.7 3.9 Less: current portion of long-term debt 0.6 0.7 Long-term debt $ 446.8 $ 446.7 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 borrowings 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. In December 2023, we obtained a waiver under our ABL (“ABL Waiver”) to provide for additional time associated with certain technical reporting requirements that were delayed as a result of the cybersecurity incident announced on October 28, 2023. Under the ABL Waiver, the maximum aggregate amount of borrowings and other credit extensions under the ABL was limited to $ 50.0 million at any time outstanding until all of the required reports were delivered. During our first fiscal quarter of 2024, we delivered the required reports and on February 6, 2024, the ABL Waiver was terminated. Accordingly, we are no longer subject to any additional restrictions or borrowing limitations under the ABL including the $ 50.0 million temporary limit on credit extensions. Borrowings under the ABL bear interest at a floating rate equal to the Secured Overnight Financing Rate (“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 100 to 125 basis points. At December 31, 2023 the applicable margin for SOFR-based loans was 200 basis points and for base rate loans was 100 basis points. 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 December 31, 2023 data was $ 162.4 million, as reduced by $ 12.4 million of outstanding letters of credit and $ 0.2 million of accrued fees and expenses. However, during the waiver period, credit extensions were temporarily limited to $ 50.0 million as set forth in the waiver. 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 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 $ 413.0 million at December 31, 2023. 13 Table of Contents 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 December 31, 2023. We may redeem some or all of the 4.0 % Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices. Additionally, we may redeem up to 40 % of the aggregate principal amount of the 4.0 % Senior Notes at any time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices as set forth in the Indenture. Upon a change of control, as defined in the Indenture, we would be required to offer to purchase the 4.0 % Senior Notes at a price equal to 101 % of the outstanding principal amount. Note 5. Retirement Plan We have a defined benefit plan (“Pension Plan”) that we fund in accordance with its requirements in amounts sufficient to satisfy the minimum funding requirements of applicable laws. The Pension Plan provides benefits based on years of service and compensation or at stated amounts for each year of service with an annual measurement date of September 30. The components of net periodic cost for our Pension Plan are presented below: Three months ended December 31, 2023 2022 (in millions) Service cost $ 0.2 $ 0.2 Pension expense other than service: Interest cost 3.5 3.5 Expected return on plan assets ( 3.3 ) ( 3.5 ) Amortization of actuarial net loss 0.8 0.9 Pension expense other than service 1.0 0.9 Net periodic cost $ 1.2 $ 1.1 The amortization of actuarial losses, net of income tax, is recorded as a component of Other comprehensive income. For the three months ended December 31, 2023 and 2022, the amortization of actuarial net loss is shown net of income tax of $ 0.2 million and $ 0.3 million, respectively, in the condensed consolidated statements of comprehensive income. 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 three months ended December 31, 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, 2023 MRSUs 136,983 $ 18.11 $ 2.5 PRSUs 136,983 13.22 1.8 Restricted stock units 161,943 13.27 2.1 Phantom Plan instruments 230,523 13.22 3.0 Non-qualified stock options 457,356 3.96 1.8 Employee stock purchase plan instruments 31,139 $ 3.48 0.1 Total - Quarter ended December 31, 2023 $ 11.3 14 Table of Contents 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 28, 2023 Variables used in determining grant date fair value: Dividend yield 2.00 % Risk-free rate 4.50 % Expected term (in years) 2.84 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 December 31, 2023, the outstanding Phantom Plan instruments had a fair value of $ 14.40 per instrument and our liability for Phantom Plan instruments was $ 2.0 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 28, 2023 Variables used in determining grant date fair value: Dividend yield 1.94 % Risk-free rate 4.33 % 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 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. Restricted stock units generally vest ratably over the life of the award, usually three years , on each anniversary date of the original grant. Compensation expense for restricted stock units is recognized between the grant date and the vesting date (or the date on which a participant becomes Retirement-eligible, if sooner) on a straight line basis for each tranche of each award. Fair values of restricted stock units are determined using the closing price of our common stock on the respective grant date. Employee stock purchase plan instruments are shares of our common stock purchased by employees under the Mueller Water Products Inc. 2006 Employee Stock Purchase Plan (“ESPP”). Generally, all full-time, active employees are eligible to participate in the ESPP, subject to certain restrictions. Employee purchases are funded through payroll deductions, and excess payroll withholdings are returned to the employee. The price for the shares purchased under the ESPP is 85 % of the lower of the closing price on the first day or the last day of the offering period. We issued 168,897 shares of common stock to settle PRSUs vested during the three months ended December 31, 2023. 15 Table of Contents Additionally, we issued 146,760 shares of common stock to settle restricted stock units vested during the three months ended December 31, 2023. Finally, we issued 3,582 shares of common stock to settle stock options exercised during the three months ended December 31, 2023. Common shares totaling 109,961 were surrendered to us to pay the applicable tax withholding obligations of equity award participants for the three months ended December 31, 2023. Operating income included stock-based compensation expense of $ 2.6 million and $ 2.7 million during the three months ended December 31, 2023 and 2022, respectively. At December 31, 2023, there was approximately $ 16.8 million of unrecognized compensation expense related to stock-based compensation arrangements, which will be expensed through December 2026. We excluded 712,164 and 1,274,371 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended December 31, 2023 and 2022, respectively, since their inclusion would have been antidilutive. 16 Table of Contents Note 7. Supplemental Balance Sheet Information Selected supplemental asset information is presented below: December 31, September 30, 2023 2023 (in millions) Inventories: Purchased components and raw materials $ 169.0 $ 176.9 Work in process, net 66.5 60.0 Finished goods, net 75.8 61.0 Inventories, net $ 311.3 $ 297.9 Other current assets: Prepaid expenses $ 18.4 $ 17.8 Non-trade receivables 2.4 1.7 Maintenance and repair supplies and tooling 4.4 4.1 Income taxes 0.8 0.8 Workers' compensation reimbursement receivable 1.8 2.2 Other current assets 5.7 4.9 Total other current assets $ 33.5 $ 31.5 Property, plant and equipment: Land $ 6.5 $ 6.4 Buildings 118.0 117.2 Machinery and equipment 528.2 525.8 Construction in progress 40.5 36.9 Total property, plant and equipment 693.2 686.3 Accumulated depreciation ( 384.8 ) ( 374.6 ) Property, plant and equipment, net $ 308.4 $ 311.7 Other noncurrent assets: Operating lease right-of-use assets $ 29.9 $ 23.6 Maintenance and repair supplies and tooling 21.8 21.1 Workers' compensation reimbursement receivable 2.4 2.4 Pension asset 6.2 6.6 Note receivable 1.8 1.8 Deferred financing fees 0.6 0.7 Other noncurrent assets 0.7 2.6 Total other noncurrent assets $ 63.4 $ 58.8 17 Table of Contents Selected supplemental liability information is presented below: December 31, September 30, 2023 2023 (in millions) Other current liabilities: Compensation and benefits $ 25.3 $ 33.8 Customer rebates 18.0 14.6 Income taxes payable 15.2 8.5 Warranty accrual 10.0 8.6 Deferred revenue 8.4 9.2 Returned goods accrual 6.3 6.7 Taxes other than income taxes 0.7 2.0 Operating lease liabilities 5.3 4.9 Workers' compensation accrual 4.3 4.0 Strategic reorganization and other charges liabilities 7.8 6.6 Interest payable 0.8 5.3 Other current liabilities 10.0 11.0 Total other current liabilities $ 112.1 $ 115.2 Other noncurrent liabilities: Operating lease liabilities $ 25.8 $ 19.8 Warranty accrual 6.7 7.1 Transition tax liability 3.1 3.1 Uncertain tax position liability 3.7 5.0 NMTC liability 3.9 3.9 Workers' compensation accrual 5.6 5.9 Asset retirement obligation 4.2 4.2 Deferred development grant 2.5 2.5 Other noncurrent liabilities 2.6 2.7 Total other noncurrent liabilities $ 58.1 $ 54.2 Goodwill Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis on September 1 of each fiscal year or more frequently 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 three months ended December 31, 2023, in millions: Balance at September 30, 2023: Goodwill $ 817.8 Accumulated impairment ( 724.1 ) Goodwill, net 93.7 Activity during the three months ended December 31, 2023: Change in foreign currency exchange rates 4.6 Balance at December 31, 2023 $ 98.3 18 Table of Contents 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, and pressure management and control products and solutions. Summarized financial information for our segments is presented below: Three months ended December 31, 2023 2022 (in millions) Net revenue, excluding intercompany: Water Flow Solutions $ 141.3 $ 165.6 Water Management Solutions 115.1 149.2 $ 256.4 $ 314.8 Operating income (loss): Water Flow Solutions $ 27.2 $ 24.2 Water Management Solutions 15.1 19.6 Corporate ( 19.5 ) ( 9.8 ) $ 22.8 $ 34.0 Depreciation and amortization: Water Flow Solutions $ 9.3 $ 7.7 Water Management Solutions 7.0 7.0 Corporate 0.1 0.1 $ 16.4 $ 14.8 Strategic reorganization and other charges (benefits): Water Flow Solutions $ 0.2 $ — Water Management Solutions — — Corporate 6.4 ( 3.7 ) $ 6.6 $ ( 3.7 ) Capital expenditures: Water Flow Solutions $ 3.9 $ 7.8 Water Management Solutions 1.8 2.1 Corporate — — $ 5.7 $ 9.9 Water Flow Solutions disaggregated revenue: Central $ 38.5 $ 44.0 Northeast 28.3 31.3 Southeast 37.1 33.4 West 30.6 49.2 United States 134.5 157.9 Canada 4.8 4.4 Other international locations 2.0 3.3 $ 141.3 $ 165.6 Water Management Solutions disaggregated revenue: Central $ 29.2 $ 41.5 Northeast 26.8 31.2 Southeast 28.4 33.3 West 20.0 29.1 United States 104.4 135.1 Canada 5.7 7.3 Other international locations 5.0 6.8 $ 115.1 $ 149.2 19 Table of Contents 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, 2023 $ ( 28.5 ) $ ( 20.2 ) $ ( 48.7 ) Current period other comprehensive income 0.6 13.3 13.9 Balance at December 31, 2023 $ ( 27.9 ) $ ( 6.9 ) $ ( 34.8 ) For the three months ended December 31, 2023, pension actuarial amortization included in the condensed consolidated statements of comprehensive income as a component of pension expense other than service was $ 0.8 million, net of income tax of $ 0.2 million. Refer to Note 5. Retirement Plans for further information. For the three months ended December 31, 2023, foreign currency translation included in the condensed consolidated statements of comprehensive income was $ 13.3 million, net of no 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 December 31, 2023. 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 20 Table of Contents 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. 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 offer warranties on many of our products, including products related to our metrology business line, which carry an extended warranty in many instances. Our products are often utilized in harsh environmental conditions and are exposed to water and other exogenous factors such as flooding and other environmental conditions that are beyond our control. We periodically monitor and analyze our warranty experience and costs. Accordingly, should specific events or issues occur, additional warranty accruals may also be made relating to those issues or events. Factors considered 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 January 25, 2024 , our Board of Directors declared a dividend of $ 0.064 per share on our common stock, payable on or about February 20, 2024 to stockholders of record at the close of business on February 9, 2024 . As of February 6, 2024, we were in compliance with the required deliverables under the ABL and the waiver period terminated including the $ 50.0 million temporary limit on credit extensions. See Note 4. 21 Table of Contents