14
| |
Note 8. |
Note 10. Supplemental Balance Sheet Information |
Selected supplemental balance sheetasset information is presented below.
| | | | | | | | | | | |
| June 30, | | September 30, |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Inventories: | | | |
Purchased components and raw material | $ | 97.8 | | | $ | 95.2 | |
Work in process | 32.9 | | | 43.7 | |
Finished goods | 49.6 | | | 52.5 | |
| $ | 180.3 | | | $ | 191.4 | |
| | | |
Other current assets: | | | |
Prepaid expenses | $ | 11.1 | | | $ | 9.6 | |
Non-trade receivables | 12.2 | | | 6.3 | |
Maintenance and repair supplies and tooling | 3.9 | | | 4.2 | |
Income taxes | 0.2 | | | 4.7 | |
Other | 0.7 | | | 1.2 | |
| $ | 28.1 | | | $ | 26.0 | |
| | | |
Property, plant and equipment: | | | |
Land | $ | 6.5 | | | $ | 5.2 | |
Buildings | 77.0 | | | 68.9 | |
Machinery and equipment | 396.2 | | | 362.9 | |
Construction in progress | 54.5 | | | 48.0 | |
| 534.2 | | | 485.0 | |
Accumulated depreciation | (289.3) | | | (267.9) | |
| $ | 244.9 | | | $ | 217.1 | |
| | | |
Other noncurrent assets: | | | |
Operating lease right of use asset | $ | 26.3 | | | $ | — | |
Maintenance and repair supplies and tooling | 17.5 | | | 16.4 | |
Workers compensation reimbursement receivable | 3.1 | | | 3.1 | |
Note receivable | 1.8 | | | 1.8 | |
Other | 2.5 | | | 2.6 | |
| $ | 51.2 | | | $ | 23.9 | |
|
| | | | | | | |
| December 31, | | September 30, |
| 2017 | | 2017 |
| (in millions) |
Inventories: | | | |
Purchased components and raw material | $ | 74.3 |
| | $ | 67.7 |
|
Work in process | 37.8 |
| | 35.6 |
|
Finished goods | 43.1 |
| | 35.6 |
|
| $ | 155.2 |
| | $ | 138.9 |
|
| | | |
Other current assets: | | | |
Maintenance and repair tooling | $ | 3.2 |
| | $ | 3.3 |
|
Income taxes | 11.9 |
| | 10.9 |
|
Other | 11.4 |
| | 10.2 |
|
| $ | 26.5 |
| | $ | 24.4 |
|
| | | |
Property, plant and equipment: | | | |
Land | $ | 5.5 |
| | $ | 5.6 |
|
Buildings | 51.4 |
| | 53.4 |
|
Machinery and equipment | 270.0 |
| | 266.7 |
|
Construction in progress | 25.2 |
| | 24.7 |
|
| 352.1 |
| | 350.4 |
|
Accumulated depreciation | (229.8 | ) | | (228.1 | ) |
| $ | 122.3 |
| | $ | 122.3 |
|
Other current liabilities: | | | |
Compensation and benefits | $ | 18.2 |
| | $ | 26.9 |
|
Customer rebates | 8.1 |
| | 6.5 |
|
Taxes other than income taxes | 2.4 |
| | 3.2 |
|
Warranty | 3.7 |
| | 3.5 |
|
Income taxes | 0.8 |
| | 0.9 |
|
Environmental | 1.2 |
| | 1.3 |
|
Interest | 0.7 |
| | 0.6 |
|
Restructuring | 4.2 |
| | 3.3 |
|
Other | 6.8 |
| | 7.3 |
|
| $ | 46.1 |
| | $ | 53.5 |
|
Selected supplemental liability information is presented below. | | | | | | | | | | | |
| June 30, | | September 30, |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Other current liabilities: | | | |
Compensation and benefits | $ | 29.1 | | | $ | 28.5 | |
Customer rebates | 8.5 | | | 8.7 | |
Taxes other than income taxes | 3.6 | | | 3.3 | |
Warranty | 6.7 | | | 6.5 | |
Income taxes | 4.4 | | | 0.6 | |
Environmental | 1.2 | | | 1.2 | |
Interest | 1.1 | | | 7.3 | |
Restructuring | 1.9 | | | 1.7 | |
Walter Energy Accrual | — | | | 22.0 | |
Operating lease liabilities | 4.2 | | | — | |
Deferred revenues | 5.4 | | | 4.7 | |
Refund liability | 4.8 | | | 3.3 | |
Accrued settlements | 10.1 | | | 0.2 | |
Other | 3.8 | | | 5.0 | |
| $ | 84.8 | | | $ | 93.0 | |
| | | |
Other noncurrent liabilities: | | | |
Operating lease liabilities | $ | 23.8 | | | $ | — | |
Warranty | 8.5 | | | 10.7 | |
Transition tax | 4.1 | | | 5.8 | |
Unrecognized income tax benefits | 3.5 | | | 3.3 | |
Asset retirement obligation | 3.3 | | | 3.6 | |
Pension | 1.8 | | | 5.0 | |
Workers compensation | 1.2 | | | 1.9 | |
Other | 3.4 | | | 2.9 | |
| $ | 49.6 | | | $ | 33.2 | |
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 1st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. During the second quarter ended March 31, 2020, we performed an interim assessment for Krausz, both qualitative and quantitative and determined Krausz’s goodwill and indefinite-lived assets were not impaired. However, the excess of the fair value over the carrying value was not significant.
With our third quarter results and amid the continued pandemic, we reviewed our previous assumptions, our revised expectations and determined it was not more-likely-than-not that the goodwill and indefinite-lived intangibles were impaired as of June 30, 2020. However, with continued uncertainty related to the pandemic, we cannot provide assurance that our estimates will be realized.
The following table summarizes information concerning our goodwill balance for the nine months ended June 30, 2020, in millions.
| | | | | |
Note 9.Balance at beginning of year | Segment Information $ | 95.7 | |
Purchase accounting adjustments | 0.3 | |
Change in foreign currency exchange rates | 0.4 | |
Balance as of June 30, 2020 | $ | 96.4 | |
Note 11. Segment Information
Summarized financial information for our segments is presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | Nine months ended | | | | | | |
| June 30, | | | | June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
| | | | | | | | | | | |
| (in millions) | | | | | | | | | | |
Net sales, excluding intercompany: | | | | | | | | | | | |
Infrastructure | $ | 209.9 | | | $ | 250.2 | | | $ | 643.0 | | | $ | 636.3 | | | | | |
Technologies | 18.6 | | | 24.1 | | | 55.8 | | | 64.8 | | | | | |
| $ | 228.5 | | | $ | 274.3 | | | $ | 698.8 | | | $ | 701.1 | | | | | |
Operating income (loss): | | | | | | | | | | | |
Infrastructure | $ | 43.8 | | | $ | 60.6 | | | $ | 129.9 | | | $ | 131.6 | | | | | |
Technologies | (3.8) | | | (2.2) | | | (10.5) | | | (9.5) | | | | | |
Corporate | (20.0) | | | (11.2) | | | (43.3) | | | (36.8) | | | | | |
| $ | 20.0 | | | $ | 47.2 | | | $ | 76.1 | | | $ | 85.3 | | | | | |
Depreciation and amortization: | | | | | | | | | | | |
Infrastructure | $ | 12.2 | | | $ | 11.3 | | | $ | 36.3 | | | $ | 32.8 | | | | | |
Technologies | 2.3 | | | 2.0 | | | 6.4 | | | 5.9 | | | | | |
Corporate | — | | | — | | | 0.1 | | | 0.1 | | | | | |
| $ | 14.5 | | | $ | 13.3 | | | $ | 42.8 | | | $ | 38.8 | | | | | |
Strategic reorganization and other charges: | | | | | | | | | | | |
Infrastructure | $ | — | | | $ | — | | | $ | 0.4 | | | $ | 1.1 | | | | | |
Technologies | — | | | — | | | — | | | — | | | | | |
Corporate | 8.6 | | | 2.5 | | | 11.5 | | | 11.5 | | | | | |
| $ | 8.6 | | | $ | 2.5 | | | $ | 11.9 | | | $ | 12.6 | | | | | |
Capital expenditures: | | | | | | | | | | | |
Infrastructure | $ | 13.4 | | | $ | 18.9 | | | $ | 49.1 | | | $ | 46.7 | | | | | |
Technologies | 0.5 | | | 1.8 | | | 1.8 | | | 4.5 | | | | | |
Corporate | — | | | 1.7 | | | 0.3 | | | 1.7 | | | | | |
| $ | 13.9 | | | $ | 22.4 | | | $ | 51.2 | | | $ | 52.9 | | | | | |
Infrastructure disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 57.5 | | | $ | 58.8 | | | $ | 163.9 | | | $ | 154.1 | | | | | |
Northeast | 38.8 | | | 52.0 | | | 135.7 | | | 134.8 | | | | | |
Southeast | 35.7 | | | 41.3 | | | 120.3 | | | 117.2 | | | | | |
West | 50.8 | | | 63.8 | | | 154.5 | | | 159.1 | | | | | |
United States | 182.8 | | | 215.9 | | | 574.4 | | | 565.2 | | | | | |
Canada | 20.7 | | | 24.1 | | | 47.3 | | | 49.3 | | | | | |
Other international locations | 6.4 | | | 10.2 | | | 21.3 | | | 21.8 | | | | | |
| $ | 209.9 | | | $ | 250.2 | | | $ | 643.0 | | | $ | 636.3 | | | | | |
Technologies disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 5.0 | | | $ | 6.6 | | | $ | 13.3 | | | $ | 20.5 | | | | | |
Northeast | 4.0 | | | 5.5 | | | 14.6 | | | 12.3 | | | | | |
Southeast | 5.1 | | | 8.0 | | | 16.1 | | | 21.7 | | | | | |
West | 3.6 | | | 2.3 | | | 8.7 | | | 6.6 | | | | | |
United States | 17.7 | | | 22.4 | | | 52.7 | | | 61.1 | | | | | |
Canada | 0.3 | | | 0.5 | | | 1.2 | | | 0.8 | | | | | |
Other international locations | 0.6 | | | 1.2 | | | 1.9 | | | 2.9 | | | | | |
| $ | 18.6 | | | $ | 24.1 | | | $ | 55.8 | | | $ | 64.8 | | | | | |
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Net sales, excluding intercompany: | | | |
Infrastructure | $ | 160.1 |
| | $ | 146.3 |
|
Technologies | 18.2 |
| | 20.9 |
|
| $ | 178.3 |
| | $ | 167.2 |
|
Intercompany sales: | | | |
Infrastructure | $ | — |
| | $ | 1.1 |
|
Technologies | — |
| | — |
|
| $ | — |
| | $ | 1.1 |
|
Operating income (loss): | | | |
Infrastructure | $ | 28.1 |
| | $ | 26.2 |
|
Technologies | (4.7 | ) | | (2.2 | ) |
Corporate | (2.7 | ) | | (9.8 | ) |
| $ | 20.7 |
| | $ | 14.2 |
|
Depreciation and amortization: | | | |
Infrastructure | $ | 9.1 |
| | $ | 9.0 |
|
Technologies | 1.4 |
| | 1.2 |
|
Corporate | 0.1 |
| | 0.1 |
|
| $ | 10.6 |
| | $ | 10.3 |
|
Strategic reorganization and other charges: | | | |
Infrastructure | $ | — |
| | $ | 0.1 |
|
Technologies | 0.1 |
| | — |
|
Corporate | 3.8 |
| | 1.2 |
|
| $ | 3.9 |
| | $ | 1.3 |
|
Capital expenditures: | | | |
Infrastructure | $ | 4.8 |
| | $ | 3.0 |
|
Technologies | 1.5 |
| | 1.1 |
|
Corporate | 0.1 |
| | 0.1 |
|
| $ | 6.4 |
| | $ | 4.2 |
|
| |
Note 10. | Note 12. Accumulated Other Comprehensive Loss |
Accumulated other comprehensive loss is presented below.
| | | | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Total |
| | | | | |
| (in millions) | | | | |
Balance at September 30, 2019 | $ | (36.0) | | | $ | — | | | $ | (36.0) | |
Current period other comprehensive income | 1.7 | | | — | | | $ | 1.7 | |
Balance at June 30, 2020 | $ | (34.3) | | | $ | — | | | $ | (34.3) | |
Note 13. Commitments and Contingencies
|
| | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Derivative instruments, net of tax | | Total |
| |
Balance at September 30, 2017 | $ | (47.0 | ) | | $ | (3.3 | ) | | $ | (1.5 | ) | | $ | (51.8 | ) |
Current period other comprehensive income (loss) | 0.5 |
| | 0.1 |
| | 1.0 |
| | 1.6 |
|
Balance at December 31, 2017 | $ | (46.5 | ) | | $ | (3.2 | ) | | $ | (0.5 | ) | | $ | (50.2 | ) |
| |
Note 11. | Commitments and Contingencies
|
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a material adverse effect on our business or prospects.
Environmental. We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“Tyco”), sold our businesses to a previous owner in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999, including environmental liabilities. The indemnity survives indefinitely. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the Tyco indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such Tyco indemnitors has changed. Should any of these Tyco indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suit against Mueller Canada Ltd. and its directors seeking C$10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. Mueller Canada Ltd. leased the property from 1988 through 2008. We are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification. On December 7, 2011, the Court denied the plaintiff’s motion for summary judgment.
The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. Accordingly, becauseSince the amountamounts of such costs cannot be reasonably estimated at this time, no amounts hadhave been accrued for this matter at DecemberJune 30, 2020.
Walter Energy. On November 18, 2019, we paid approximately $22.2 million to the IRS in final settlement of a tax dispute related to our former parent company, Walter Energy, Inc., as described more fully in Note 17. to our Form 10-K for the year ended September 30, 2019.
Chapman v. Mueller Water Products, et al. In 2017, our warranty analyses identified that certain Technologies radio products produced prior to 2017 and installed in particularly harsh environments had been failing at higher than expected rates. During the quarter ended March 31, 2017, we conducted additional testing of these products and revised our estimates of warranty expenses. As a result, we recorded additional warranty expense of $9.8 million in the second quarter of 2017.
Walter Energy During the quarter ended June 30, 2018, we completed a similar analysis and determined, based on this new information, that certain other Technologies products had been failing at higher-than-expected rates as well and that the average cost to repair or replace certain products under warranty was higher than previously estimated. As a result, in the third quarter of 2018, we recorded additional warranty expense of $14.1 million associated with such products. Related to the above warranty expenses, on April 11, 2019, an alleged stockholder filed a putative class action lawsuit against Mueller Water Products, Inc. and certain of our former and current officers (collectively, the “Defendants”) in the U.S. District Court for the Southern District of New York (the “Court”). Each memberThe proposed class consists of all persons and entities that acquired our securities between May 9, 2016 and August 6, 2018 (the “Class Period”). The complaint alleges violations of the Walter Energy consolidated group, which included us throughfederal securities laws, including, among other things, that we made materially false and/or misleading statements and failed to disclose material adverse facts about our business, operations, and prospects during the proposed Class Period. Defendants filed their motion to dismiss on November 1, 2019 and second motion to dismiss (in response to the second amended complaint filed on December 14, 2006, is jointly24, 2019) on January 31, 2020. On June 11, 2020, the Court granted Defendants’ motion to dismiss and severally liabledismissed the action with prejudice. The time period for appealing the Court’s decision has expired.
City of Jackson, MS v. Siemens Industry, Inc., et al.On or about August 22, 2013, Mueller Systems, LLC (“Mueller Systems”) entered into an agreement with Siemens Industries, Inc (“Siemens”) to provide advanced metering infrastructure (“AMI”) products and services to Siemens as part of Siemens’ project for the federal income tax liabilityCity of eachJackson, MS (the “City”). This project included products and services, which were provided by parties other memberthan Mueller Systems, for the City’s water treatment plants, sewer lines and billing system (the “Project”).On June 11, 2018, the City filed a lawsuit against Siemens and several of its contractors (excluding Mueller Systems) for multiple claims related to the consolidated groupProject, including claims for any yearfraud, negligence, breach of implied warranty of good workmanship, negligent representation, civil conspiracy, unjust enrichment, breach of contract and breach of covenant of good faith and fair dealing (“Siemens Lawsuit”). In the Siemens Lawsuit, the City alleged damages in which it isexcess of $450.0 million.On November 12, 2019, the City filed an amended complaint, adding Mueller Systems as a member of the group at any time during such year. Accordingly, we could be liabledefendant in the event any such federal income tax liability is incurred, and not discharged, by any other member ofSiemens Lawsuit.
In February 2020, the Walter Energy consolidated group for any period during which we were includedCity dismissed all claims against Mueller Systems in the Walter Energy consolidated group.
Walter Energy effectively controlled all of our tax decisions for periods during which we wereSiemens Lawsuit. On March 27, 2020, the City and Siemens executed a member ofsettlement agreement whereby Siemens agreed to pay the Walter Energy consolidated group for federal income tax purposes and certain combined, consolidated or unitary state and local income tax groups. UnderCity $89.8 million (“Settlement Amount”) in order to settle the terms of an income tax allocation agreement between us and Walter Energy, dated May 26, 2006, we generally compute our tax liability on a stand-alone basis, but Walter Energy has sole authority to respond to and conduct all tax proceedings (including tax audits) relating to our federal income and combined state tax returns, to file all such tax returns on our behalf and to determine the amount of our liability to (or entitlement to payment from) Walter Energy for such previous periods.
As described further below, the IRS is currently alleging that Walter Energy owes substantial amounts for prior taxable periods (specifically, 1983-1994, 2000-2002 and 2005)Siemens Lawsuit (the “Settlement”). As a matter of law, we are jointly and severally liable for any final tax determination, which means we would be liable in the event Walter Energy is unable to pay any amounts owed.
In July 2015, Walter Energy filed a petition for reorganization under Chapter 11result of the U.S. Bankruptcy Code before the Bankruptcy Court for the Northern District of Alabama (“Chapter 11 Case”). During the pendency of the Chapter 11 Case, we monitored the proceedingSettlement, Siemens is seeking to determine whether we could be liable for all orrecover a portion of the Settlement Amount from Mueller Systems, and the parties are in negotiations to resolve this federal income taxmatter on reasonable terms, conditions and amounts. At June 30, 2020, we have accrued a liability if it is incurred, and not discharged, for any period during which we were included in the Walter Energy consolidated group. On January 11, 2016, the IRS filed a proof of claim in the Chapter 11 Case, alleging that Walter Energy owes taxes, interest and penalties for the years 1983-1994, 2000-2002 and 2005 in an aggregate amount of $554.3$10.0 million ($229.1 million of which the IRS claims is entitled to priority status in the Chapter 11 Case). The IRS asserts that its claim is based on an alleged settlement of Walter Energy’s tax liability for the 1983-1995 taxable periods in connection with Walter Energy’s prior bankruptcy proceedingthis matter and have also recorded an asset for related insurance proceeds of $5.0 million. However, the settlement agreement is not final and the ultimate loss could materially differ from this amount. Should settlement negotiations fail and a legal action ultimately arise against us in this matter, we intend to vigorously defend against such legal action. However, the United States Bankruptcy Court foroutcome of a legal action in this matter, if any, cannot be predicted with certainty.
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the Middle District of Florida. In the proof of claim, the IRS included an alternative calculation in the event the alleged settlementU.S. and global economies. As a result of the prior bankruptcy court is foundpandemic, we experienced adverse business conditions during our third quarter. We have taken and continue to be non-binding, which providestake steps to maximize liquidity by limiting cash expenditures, including furloughing significant numbers of our employees, implementing temporary shutdowns of our manufacturing facilities or portions of our manufacturing facilities, implementing temporary salary reductions for a claim byour senior leadership team, deferral of capital expenditures, reduced fees for our Board of Directors and aggressively reducing general and administrative spending. We are uncertain of the IRS in an aggregate amountpotential full magnitude or duration of $860.4 million ($535.3 millionthe business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the IRS claims is entitledpandemic affects our results will depend on future developments, the outbreak could result in material effects to priority status in the Chapter 11 Case).
According to a quarterly report on Form 10-Q filed by Walter Energy with the SEC on November 5, 2015 (“Walter November 2015 Filing”), at September 30, 2015, Walter Energy had $33.0 million of accruals for unrecognized tax benefits in connection with the matters subject to the IRS claims. In the Walter November 2015 Filing, Walter Energy stated it believed it had sufficient accruals to address any claims, including interest and penalties, and did not believe that any potential difference between any final settlements and amounts accrued would have a material effect on Walter Energy’sour future financial position, but such potential difference could be material to its results of operations, cash flows and liquidity.
Mass Shooting Event at our Henry Pratt Facility in a future reporting period.
According to a Form 8-K filed by Walter Energy with the SEC on April 1, 2016 (“Walter April 2016 Filing”), on March 31, 2016, Walter Energy closed on the sale of substantially all of Walter Energy’s Alabama assets pursuant to the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. The Walter April 2016 Filing further stated that Walter Energy would have no further material business operations after April 1, 2016 and Walter Energy was evaluating its options with respect to the wind down of its remaining assets. The asset sale did not impact the IRS’ proof of claim filed in the bankruptcy cases and the proof of claim, as well as the alleged tax liability thereunder, remain unresolved.
Aurora, Illinois. On February 2, 2017,15, 2019, we experienced a mass shooting event at our Henry Pratt facility in Aurora, Illinois, in which five employees were killed and one employee and six law enforcement officers were injured. Various workers’ compensation claims arising from the request of Walter Energy, the Bankruptcy Court for the Northern District of Alabama signed an order converting the Chapter 11 Caseevent have been made to a liquidation proceedingdate, and we anticipate that additional claims may be made, and that liability under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy will be wound-down and liquidated (“Chapter 7 Case”). In its objection contesting such conversion, the IRS indicated its intent to pursue collection of amounts included in the Proof of Claim from former members of the Walter Energy consolidated group.
We cannot predict whether or to what extent we may become liable for the tax-related amounts of the Walter Energy consolidated group asserted in the IRS’ proof of claim filed in the bankruptcy cases, in part, because: (i) the amounts owed by the Walter Energy consolidated group for certain of the taxable periods from 1980 through 2006 remain unresolved; (ii) it is unclear what priority,claims, if any, the IRS will receive in the Chapter 7 Case with respectis not expected to its claims against Walter Energy, and whether and to what extent funds will be available in the Chapter 7 Case to pay priority tax claims. We also intend to vigorously assert any and all available defenses against any liability we may have as a member of the Walter Energy consolidated group. However, we cannot currently estimate our liability, if any, relating to the tax-related liabilities of Walter Energy’s consolidated tax group for tax years prior to 2007, and such liability could have a material adverse effect on our business, financial condition, liquidity or results of operations.operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.
Indemnifications. We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.
Additionally, in connection with the sale of assets and the divestiture of businesses, such as the divestitures of U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.
Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.
Other Matters. We monitor and analyze our warranty experience and costs periodically and may revise our accruals as necessary. Critical factors in our analyses include warranty terms, specific claim situations, general incurred and projected failure rates, the nature of product failures, product and labor costs, and general business conditions.
We are party to a number of lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our future financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our business or prospects.
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Note 12. | Note 14. Subsequent Events |
On January 24, 2018,July 28, 2020, our board of directors declared a dividend of $0.05$0.0525 per share on our common stock, payable on or about FebruaryAugust 20, 20182020 to stockholders of record at the close of business on February 9, 2018.August 10, 2020.
On July 30, 2020, we amended our ABL Agreement. This amendment, among other things, (i) extended the termination date of the revolving credit facility to July 29, 2025, (ii) established a LIBOR “floor” of 75 basis points, (iii) increased the margin applying to LIBOR-based loans to a range between 200 to 225 basis points, and the margin applying to base rate loans to a range between 100 to 125 basis points, (iv) increased the commitment fee applicable to unused amounts under the revolving credit commitment to 37.5 basis points and (v) increased our ability to issue cash dividends.
On August 5, 2020, we announced the closure of our Woodland, Washington knife gate manufacturing operations, which will be relocated to our new facility in Kimball, Tennessee.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address activities, events or developments that we intend, expect, plan, project, believethe Company intends, expects, plans, projects, believes or anticipateanticipates will or may occur in the future are forward-looking statements.statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, the COVID-19 pandemic, go-to-market strategies, operational excellence, acceleration of new product development, end market performance, net sales performance, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies, and future warranty charges. Forward-looking statements are based on certain assumptions and assessments made by usthe Company in light of ourthe Company’s experience and perception of historical trends, current conditions and expected future developments.
Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severity of the impact of the pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the Company and the financial/capital markets, government-mandated facility closures, COVID-19 related facility closures and other manufacturing restrictions, logistical challenges and supply chain interruptions, potential litigation and claims emanating from the COVID-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world; regional, national or global political, economic, business, competitive, market and competitive conditions; cyclical and changing demand in core markets such as municipal spending; government monetary or fiscal policies; residential and nonresidential construction, and natural gas distribution; manufacturing and product performance; expectations for changes in volumes, continued execution of cost productivity initiatives and improved pricing; warranty exposures (including the adequacy of warranty reserves); the Company’s ability to successfully resolve significant legal proceedings, claims, lawsuits or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; changing regulatory, conditionstrade and tariff conditions; failure to achieve expected cost savings, net sales expectations, profitability expectations and manufacturing efficiencies from our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; and other factors that are described underin the section entitled “RISK FACTORS” in Item 1A.1A of our annual reportthe Company’s most recently filed Annual Report on Form 10-K forand in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the year ended September 30, 2017 (“Annual Report”)pandemic). Forward-looking statements do not guarantee future performance and are only as of the date they are made. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. You are advised to review any further disclosures the Company makes on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.
Overview
COVID-19 Pandemic
On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. Since March 31, 2020, the COVID-19 pandemic has continued to spread and various state and local governments have issued or extended “shelter-in-place” orders which have impacted and restricted various aspects of our business.
We continue to closely monitor the effects of the pandemic on all aspects of our business, including how it will impact our employees, the municipalities and the residential and non-residential industries we serve, our communities, our customers and our suppliers. The Company doespandemic had a material negative effect on our fiscal third quarter operations and affected our financial results to date. However, the full financial effect of the pandemic cannot be reasonably estimated at this time due to the uncertainties relating to the pandemic, its severity, and its duration.These uncertainties include the severity of the pandemic, the duration of the outbreak, governmental, municipality, business or other actions in response to the pandemic, the effect on customer demand and our customers’ ability to pay for our products and services, and changes to our operations caused by the pandemic. The health of our workforce and our ability to manage our operations and other critical functions cannot be predicted and are vital to our operations.
To mitigate the negative financial impact of the pandemic, we have taken steps to maximize liquidity by limiting cash expenditures, including temporary furloughing of significant numbers of our employees, implementing temporary shutdowns of our manufacturing facilities or portions of our manufacturing facilities, implementing temporary salary reductions for our senior leadership team, deferring some capital expenditures, temporarily reducing fees for our Board of Directors and aggressively reducing general and administrative spending. Some of these steps are continuing into the fourth quarter.
Further, global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, as well as other unanticipated consequences, remain unknown. For further information regarding the effects of the pandemic on our business, please see item 1A. Risk Factors in this report, which is incorporated herein by reference. Additionally, we have incurred incremental costs to address the pandemic, including costs associated with voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials to help keep our employees safe and to protect the communities that we serve as well as costs associated with a closure of a manufacturing facility in China and inefficiencies in certain other facilities. The pandemic has also caused supply chain disruptions that have resulted in higher costs in the manufacture of our products.
We continue to operate as an essential business, providing products and services to our customers that they need to manage and maintain our nation’s critical water infrastructure. We have implemented preparedness plans to keep our team safe while we work, including new physical distancing processes and procedures and the use of additional personal protective equipment. All of our facilities are operational and able to fill orders at August 6, 2020, and our teams have worked effectively to address the few temporary closures we have experienced. We continue to proactively monitor our supply chain and have not experienced any material supply chain issues since the temporary closure of our Jingmen facility, which is located near Wuhan in the Hubei Province and partially reopened on March 15, 2020.
We continue to prioritize returning cash to our shareholders through our quarterly dividend, as we declared our quarterly dividend on July 28, 2020. However, we have any intention or obligationtemporarily suspended our share repurchase program to update forward-looking statements, except as required by law.provide additional financial flexibility.
UnlessWe have experienced and expect to continue to experience a material slowdown in our end markets for the context indicates otherwise, whenever we refer to a particular year, we meansecond half of our fiscal year, ended or ending September 30especially in residential construction, and our net sales decreased 16.7% in our third quarter as compared with the prior year period. Our municipal market end users provide critical water, energy and public works infrastructure services and continue to operate during this crisis, but they have reduced and may continue to reduce discretionary spending. We are hopeful that particular calendar year.our end markets will recover swiftly from the impact of the pandemic. However, the timing and magnitude of any recovery remain highly uncertain. We manageare reviewing all aspects of our businessesbusiness and report operations through twotaking action as needed, including adjusting our production capacity to preserve liquidity and cash flow during this difficult period. In addition to eliminating non-critical business segments, Infrastructure and Technologies, based largely on the products sold and the customers served.
Overviewexpenses, we are evaluating further actions as changes in market demand evolve.
Organization
On October 3, 2005, Walter Energy, Inc (“Walter Energy”) acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed them to its U.S. Pipe business to form Mueller Water Products, Inc. (“Mueller” or the Company.“Company”). In June 2006, we completed an initial public offering of 28,750,000 shares of Series A common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in the Company, consisting of all of the Company’s outstanding shares of Series B common stock. On January 28, 2009, each share of Series B common stock was converted into one share of Series A common stock and the Series A designation was discontinued.
On January 6, 2017, weMueller, completing our spin-off. We subsequently sold our formerU.S. Pipe and Anvil segment. Amounts applicable to Anvil have been classified as discontinued operations.businesses in 2012 and 2017, respectively.
Business
We expectestimate approximately 60-65% of our 2019 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 25-30% were related to residential construction activity and less than 10% were related to natural gas utilities.
Prior to the pandemic, we expected our two primary end markets, repair and replacement of water infrastructure, driven by municipal spending, and new water infrastructure installation, driven by residential construction, to grow in 2018.the low single digits during 2020. We continue to expect a slowdown in our end markets for the remainder of our fiscal year as a result of the economic effects of the pandemic, but residential construction markethas improved at a faster pace than anticipated. In July 2020, Blue Chip Economic Indicators forecasted a 8% decrease in housing starts for calendar 2020 compared to grow faster than municipal spending.the prior year primarily due to pandemic effects.
Infrastructure
On December 3, 2018, we completed our acquisition of Krausz Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million. We estimate approximately 60%include financial results of Infrastructure’s 2017 net sales wereKrausz in our consolidated financial statements on a one-month lag.
In October 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for repair and replacement directly related to municipal water infrastructure spending, approximately 30% were related to residential construction activity and approximately 10% were related to natural gas utilities.
Infrastructure announceda negotiated purchase price increases on valves, hydrants and gas products effective in February 2018 for its U.S. and Canadian markets. We believe that some customers may accelerate orders prior to the effective date of the price increases.$5.4 million.
Technologies
The municipal market is the key end market for Technologies. TheseThe businesses in Technologies are project-oriented and depend on customer adoption of their technology-based products and services. Mueller Systems is benefiting from its recent introduction of new, longer-range radio capabilities,
Critical Accounting Policies and its growth strategy is focusedEstimates
Accounting for Goodwill
At March 31, 2020, in connection with pandemic-related disruptions on the AMI segmentoverall market and our business, we performed a quantitative goodwill impairment assessment of our Krausz reporting unit. The Krausz reporting unit had $85.9 million of goodwill at March 31, 2020. We used a discounted cash flow model to determine the estimated fair value of the market. Mueller Systems’ 2018 firstreporting unit. We made estimates and assumptions regarding future revenue, cash flows, discount rates, and long-term growth rates to estimate the Krausz reporting unit’s fair value.
These assumptions represented our best estimates and we believe they were reasonable and appropriate. However, they are forecasts in the midst of a complex and still-developing situation with the pandemic, and as such they involve a high degree of uncertainty.
•The discount rate in the model, which includes a forecast-risk factor, was 12.8 percent.
•Long-term growth of revenue in the model beyond 2025 was 3 percent.
•Long term growth of free cash flow in the model beyond 2025 growth was 5 percent.
The results of the quantitative impairment assessment indicated that the Krausz reporting unit’s fair value exceeded its carrying value. However, the excess of the fair value over the carrying value was not significant.
During the third quarter AMI backlogwe assessed for impairment indicators of the Krausz reporting unit and determined that it was lower at December 31, 2017 than at December 31, 2016. Echologics had a greater numbernot more-likely-than-not that the goodwill was impaired as of projects under contract at at December 31, 2017 than at December 31, 2016.June 30, 2020.
The continuation of pandemic-related effects on our business and the overall market could potentially materially change the key assumptions and lead to future impairment charges.
Results of Operations
Three Months Ended December 31, 2017June 30, 2020 Compared to Three Months Ended December 31, 2016June 30, 2019
| | | | | | | | | | | | | | | | | | Three months ended June 30, 2020 | |
| Three months ended December 31, 2017 | | Infrastructure | | Technologies | | Corporate | | Total |
| Infrastructure | | Technologies | | Corporate | | Total | | | | | | | | |
| (in millions) | | (in millions) | |
Net sales | $ | 160.1 |
| | $ | 18.2 |
| | $ | — |
| | $ | 178.3 |
| Net sales | $ | 209.9 | | | $ | 18.6 | | | $ | — | | | $ | 228.5 | |
Gross profit | $ | 52.5 |
| | $ | 2.9 |
| | $ | — |
| | $ | 55.4 |
| Gross profit | 73.5 | | | 2.2 | | | — | | | $ | 75.7 | |
Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Selling, general and administrative | 24.4 |
| | 7.5 |
| | 7.9 |
| | 39.8 |
| Selling, general and administrative | 29.7 | | | 6.0 | | | 11.4 | | | 47.1 | |
Gain on sale of idle property | — |
| | — |
| | (9.0 | ) | | (9.0 | ) | |
Strategic reorganization and other charges | — |
| | 0.1 |
| | 3.8 |
| | 3.9 |
| Strategic reorganization and other charges | — | | | — | | | 8.6 | | | 8.6 | |
| 24.4 |
| | 7.6 |
| | 2.7 |
| | 34.7 |
| | 29.7 | | | 6.0 | | | 20.0 | | | 55.7 | |
Operating income (loss) | $ | 28.1 |
| | $ | (4.7 | ) | | $ | (2.7 | ) | | 20.7 |
| Operating income (loss) | $ | 43.8 | | | $ | (3.8) | | | $ | (20.0) | | | 20.0 | |
Pension costs other than service | | | | | | | 0.2 |
| |
Non-operating expenses: | | Non-operating expenses: | | | | | | |
Pension benefit other than service | | Pension benefit other than service | | (0.7) | |
Interest expense, net | | | | | | | 5.2 |
| Interest expense, net | | 6.1 | |
Income before income taxes | | | | | | | 15.3 |
| Income before income taxes | | 14.6 | |
Income tax benefit | | | | | | | (39.8 | ) | |
Income from continuing operations | | | | | | | $ | 55.1 |
| |
Income tax expense | | Income tax expense | | 3.4 | |
Net income | | Net income | | $ | 11.2 | |
| | | | | | | | | | Three months ended June 30, 2019 | |
| Three months ended December 31, 2016 | | Infrastructure | | Technologies | | Corporate | | Total |
| Infrastructure | | Technologies | | Corporate | | Total | | | | | | | | |
| (in millions) | | (in millions) | |
Net sales | $ | 146.3 |
| | $ | 20.9 |
| | $ | — |
| | $ | 167.2 |
| Net sales | $ | 250.2 | | | $ | 24.1 | | | $ | — | | | $ | 274.3 | |
Gross profit | $ | 47.6 |
| | $ | 4.2 |
| | $ | — |
| | $ | 51.8 |
| Gross profit | 92.7 | | | 4.5 | | | — | | | $ | 97.2 | |
Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Selling, general and administrative | 21.3 |
| | 6.4 |
| | 8.6 |
| | 36.3 |
| Selling, general and administrative | 32.1 | | | 6.7 | | | 8.7 | | | 47.5 | |
Other charges | 0.1 |
| | — |
| | 1.2 |
| | 1.3 |
| |
Strategic reorganization and other charges | | Strategic reorganization and other charges | — | | | — | | | 2.5 | | | 2.5 | |
| 21.4 |
| | 6.4 |
| | 9.8 |
| | 37.6 |
| | 32.1 | | | 6.7 | | | 11.2 | | | 50.0 | |
Operating income (loss) | $ | 26.2 |
| | $ | (2.2 | ) | | $ | (9.8 | ) | | 14.2 |
| Operating income (loss) | $ | 60.6 | | | $ | (2.2) | | | $ | (11.2) | | | 47.2 | |
Pension costs other than service | | | | | | | 0.3 |
| |
Pension benefit other than service | | Pension benefit other than service | | | | | | | (0.1) | |
Interest expense, net | | | | | | | 6.4 |
| Interest expense, net | | 4.2 | |
Walter Energy Accrual | | Walter Energy Accrual | | 0.5 | |
Income before income taxes | | | | | | | 7.5 |
| Income before income taxes | | 42.6 | |
Income tax expense | | | | | | | 2.1 |
| Income tax expense | | 8.9 | |
Income from continuing operations | | | | | | | $ | 5.4 |
| |
Net income | | Net income | | $ | 33.7 | |