MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBERMARCH 31, 20172022
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Note 1. | OrganizationNote 1.Organization and Basis of Presentation |
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two2 business segments: InfrastructureWater Flow Solutions and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly,Water Management Solutions. These segments are based on a management reorganization that became effective October 1, 2021; prior period information has been recast to conform to the current presentation. Water Flow Solutions’ product portfolio includes iron gate tapping, check, knife, plugvalves, specialty valves and ball valves, as well as dry-barrelservice brass products. Water Management Solutions’ product and wet-barrelservice portfolio includes fire hydrants. Technologies offershydrants, repair and installation, natural gas, metering, systems, leak detection, pipe condition assessmentpressure control and other related products and services.software products. 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”subsidiaries, and may also refer to the segment being discussed.
On January 6, 2017,December 3, 2018, we soldcompleted our former Anvil segment. Amountsacquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”). During the quarter ended March 31, 2021, we aligned the consolidation of the financial statements of Krausz in the Company’s consolidated financial statements, eliminating the previous inclusion of Krausz financial statements with a one-month reporting lag. In accordance with applicable accounting literature, the elimination of the one-month reporting lag is considered to Anvil have been classifiedbe a change in accounting principle. We believe this change in accounting principle is preferable as discontinued operations.
Infrastructure owns a 49% ownership interestthe financial statements of all of our subsidiaries are now reported on the same basis, providing the most current information available. The effect of the elimination of the reporting lag during the year ended September 30, 2021 resulted in an industrial valve joint venture. Dueincrease of $6.0 million to substantive control featuresnet sales and an increase of $1.4 million to operating income. We concluded that the effect of this change is not material to the balance sheets, statements of operations, statements of cash flows, net income and earnings per share and therefore have not retrospectively applied this change.
On June 14, 2021, we acquired all the outstanding capital stock of i2O Water Ltd (“i2O”), a provider of pressure management solutions to more than 100 water companies in 45 countries. The consolidated balance sheet at September 30, 2021 included the operating agreement, allpreliminary estimated fair values of the joint venture'snet assets liabilities andof i2O. The accounting for this business combination became final during the three months ended March 31, 2022. The results of i2O’s operations and cash flows subsequent to the acquisition are included in ourthe Company’s consolidated financial statements. The net loss attributablestatement of operations and consolidated statement of cash flows, respectively. Refer to noncontrolling interest is included in selling, general and administrative expenses. Noncontrolling interest is recorded at its carrying value, which approximates fair value.
UnlessNote 2. for additional disclosures related to 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.acquisition.
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions that affect the reported amounts ofin recording assets, liabilities, sales and expenses andas well as in the disclosure of contingent assets and liabilities for the reporting periods.liabilities. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2017.2021. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. Certain reclassifications have been made to previously reported amounts to conform to the current presentation. The condensed consolidated balance sheet data at September 30, 20172021 was derived from audited financial statements, but it does not include all disclosures required by GAAP.
On October 1, 2017, we adopted Financial Accountings Standards Board Accounting Standards Update No. 2017-07, which requires us to exclude fromOur business is seasonal as a result of cold weather conditions. Net sales and operating income the components of net periodic benefit cost other than service cost. Accordingly,historically have been lowest in the Condensed Consolidated Statement of Operations for the three months endedmonth periods ending December 31 2016,and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
In preparing these financial statements in conformity with GAAP, we have reclassified $0.2 million from selling, generalconsidered and, administrative expenses and $0.1 million from cost of sales to pension costs other than service.
On February 15, 2017, we acquired Singer Valve. Singer had net sales of $3.7 million inwhere appropriate, included the quarter ended December 31, 2017 and is included in Infrastructure.
HR-1, formerly referred to as the Tax Cuts and Jobs Act, was enacted on December 22, 2017 and made significant revisions to federal income tax laws, including lowering the corporate income tax rate to 21% from 35%, effective January 1, 2018. The effects of these revisions are discussedthe COVID-19 pandemic on our operations. The pandemic continues to provide significant challenges to the U.S. and global economies.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in Note 3.that particular calendar year.
In May 2014,Recently Adopted Accounting Guidance
During 2016, the Financial Accounting Standards Board (“FASB”) issued newAccounting Standards Codification (“ASC”) 326 - Current Expected Credit Losses to replace the “incurred loss” impairment approach with an “expected loss” approach, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We completed historical and forward-looking analyses for receivables and adopted this guidance effective October 1, 2020. Upon adoption, there was no material impact to our financial statements.
In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of revenue and requiring additional financial statement disclosures. We plan to adopt this guidance usingfranchise tax, the modified retrospective transition method beginningevaluation of a step up in the firsttax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but can be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We evaluated our contracts and the optional expedients provided by ASU 2020-04. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.
Restructuring
Since November 2019, we have announced the purchase and closure of several facilities. We purchased a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry and closed our facilities in Hammond, Indiana, Woodland, Washington and Surrey, British Columbia, Canada. We also announced the closure of our facility in Aurora, Illinois which we expect to complete substantially by the third quarter of fiscal 2019. Weyear 2022. The majority of the activities from these facilities have completedbeen, or will be, transferred to our initial scoping and are implementing a project plan to evaluate revenue recognition practices for each revenue stream against the new requirements, to consider changes to the terms of our sales contracts, and to design and implement processes to quantify the effects of necessary changes. This work is ongoing, but at this time, we do not expect the new guidance to materially impact our stockholders' equity, net sales or operating income.
On September 7, 2017, we announced a strategic reorganization plan designed to accelerate our product innovation and revenue growth. We have adopted a matrix management structure, where business teams have line and cross-functional responsibility for managing distinct product portfolios, and engineering, operations, sales and marketing and other functions are centralized to better align with business needs and generate greater efficiencies. Costs and expenses in the quarter ended December 31, 2017 for this plan, included in strategic reorganization and other charges, were primarily personnel-related.
Kimball, Tennessee facility. Activity in accrued restructuring, reported as part of
otherOther current liabilities, is presented below.
| | | | | | | | | | | |
| Six months ended |
| March 31, |
| 2022 | | 2021 |
| | | |
| (in millions) |
| Beginning balance | $ | 3.1 | | | $ | 2.8 | |
| Amounts accrued | 1.6 | | | 1.0 | |
| Amounts paid | (2.6) | | | (1.6) | |
| Ending balance | $ | 2.1 | | | $ | 2.2 | |
|
| | | |
| | Three months ended |
| | December 31, 2017 |
| | (in millions) |
| Beginning balance | $ | 3.3 |
|
| Expense | 2.3 |
|
| Payments | (1.4 | ) |
| Ending balance | $ | 4.2 |
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Note 2. | Discontinued Operations and Divestitures |
On December 4, 2017,22, 2020, we sold an idle propertyentered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) related to our brass foundry construction project in Burlington,Decatur, Illinois under a qualified New JerseyMarkets 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 had previously been a plantare certified to make qualified low-income community investments, such as in our former U.S. Pipe segmentfoundry project.
Under the NMTC, Wells Fargo contributed capital of $4.8 million to an investment fund and recordedwe 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 $9.0 million on$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 Corporate segment. We received $7.4 millionconsolidated financial statements.
Intercompany transactions between us and the VIEs have been eliminated in cash,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 net current assets of $0.8 million and conveyed plant, property and equipment withproceeds, resulting in a net carryingcash contribution of $3.9 million. Other direct costs associated with the transaction were capitalized and are being recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period are expensed as incurred.
Note 2. Acquisitions
Acquisition of i2O Water Ltd
On June 14, 2021, we acquired all the outstanding capital stock of i2O for $19.7 million, net of cash acquired. The purchase agreement provided for customary final adjustments, including a net working capital adjustment that was completed during the three months ended December 31, 2021, resulting in a purchase price of $19.5 million.
We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is considered to be final. The results of i2O are included in our Water Management Solutions segment.
The goodwill below is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of i2O and the value of $0.4 million,its workforce. Goodwill is nondeductible for income tax purposes. Identified intangible assets consist of customer relationships, non-compete agreements and the buyer assumed related environmental liabilitiesdeveloped technology with an estimated weighted-average useful life of approximately 12 years and trade names with an indefinite life. Values of intangible assets were determined using a carrying value of $1.2 million.discounted cash flow method.
On January 6, 2017, we sold our former Anvil segment to affiliates of One Equity Partners. The table below presentsfollowing is a summary of the operating results forfair values of the Anvil discontinued operations during the quarter ended December 31, 2016. These operating results do not reflect what they would have been had Anvil not been sold.net assets acquired (in millions):
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| | | |
| | Three months ended |
| | December 31, 2016 |
| | (in millions) |
| Net sales | $ | 83.1 |
|
| Cost of sales | 62.8 |
|
| Gross profit | 20.3 |
|
| Operating expenses: | |
| Selling, general and administrative | 18.3 |
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| Other charges | 0.2 |
|
| Total operating expenses | 18.5 |
|
| Operating income | 1.8 |
|
| Income tax expense | 0.5 |
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| Income from discontinued operations | $ | 1.3 |
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Note 3.Assets, net of cash: | Income Taxes |
| Receivables | $ | 0.5 | |
| Inventories | 0.6 | |
| Other current assets | 0.9 | |
| Identified intangible assets: | |
| Tradename | 1.8 | |
| Customer relationships | 2.1 | |
| Non-compete agreements | 0.1 | |
| Developed technology | 3.5 | |
| Goodwill | 12.1 | |
| Liabilities: | |
| Accounts payable | (0.8) | |
| Other current liabilities | (1.3) | |
| Fair value of net assets acquired, net of cash | $ | 19.5 | |
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus aan applicable margin ranging from 125range of 200 to 150225 basis points, or a base rate, as defined in the ABL Agreement, plus aan applicable margin rangingrange of from 25100 to 50125 basis points. At DecemberMarch 31, 2017,2022 the applicable margin for LIBOR based loans was 200 basis points and for base rate loans was LIBOR plus 125100 basis points.
The fair values of the swap contracts are presented below.
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| | | | | | | |
| | December 31, | | September 30, |
| | 2017 | | 2017 |
| | (in millions) |
| Interest rate swap contracts, designated as cash flow hedges: | | | |
| Other current liabilities | $ | 0.7 |
| | $ | 1.2 |
|
| Other noncurrent liabilities | 0.2 |
| | 1.3 |
|
| | $ | 0.9 |
| | $ | 2.5 |
|
| | | | |
| Currency swap contracts, not designated as hedges: | | | |
| Other noncurrent liabilities | $ | 1.3 |
| | $ | 1.3 |
|
The fair values and the classification of the fair values between current and noncurrent portions are based on calculated cash flows using publicly available interest rate forward rate yield curve information, but amounts due at the actual settlement dates are dependent on actual rates in effect at the settlement dates and may differ significantly from amounts shown above.
The components of net periodic benefit cost for our pension plans are presented below. | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| March 31, | | March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions) |
| Service cost | $ | 0.3 | | | $ | 0.4 | | | $ | 0.6 | | | $ | 0.8 | |
| Pension costs (benefits) other than service: | | | | | | | |
| Interest cost | 2.4 | | | 2.5 | | | 4.8 | | | 5.0 | |
| Expected return on plan assets | (3.8) | | | (3.9) | | | (7.6) | | | (7.8) | |
| Amortization of actuarial net loss | 0.4 | | | 0.6 | | | 0.8 | | | 1.2 | |
| Pension benefits other than service | (1.0) | | | (0.8) | | | (2.0) | | | (1.6) | |
| Net periodic benefit | $ | (0.7) | | | $ | (0.4) | | | $ | (1.4) | | | $ | (0.8) | |
|
| | | | | | | |
| | Three months ended |
| | December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Service cost | $ | 0.5 |
| | $ | 0.5 |
|
| Pension costs other than service: | | | |
| Interest cost | 3.6 |
| | 3.6 |
|
| Expected return on plan assets | (4.2 | ) | | (4.3 | ) |
| Amortization of actuarial net loss | 0.8 |
| | 1.0 |
|
| | 0.2 |
| | 0.3 |
|
| Net periodic benefit cost | $ | 0.7 |
| | $ | 0.8 |
|
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.income (loss).
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Note 7. | Stock-based Compensation Plans
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Note 8. Stock-based Compensation Plans
We have grantedgrant various forms of stock-based compensation, including stock options,market-based restricted stock units (“MRSUs”), restricted stock units, stock options and both cash-settled and stock-settled 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 six months ended March 31, 2022 are as follows: | | | | | | | | | | | | | | | | | |
| Number granted | | Weighted average grant date fair value per instrument | | Total grant date fair value
(in millions) |
| Quarter ended December 31, 2021 | | | | | |
| MRSUs | 230,089 | | | $ | 15.76 | | | $ | 3.6 | |
| Phantom Plan instruments | 199,549 | | | 13.64 | | | 2.7 | |
| Restricted stock units | 135,129 | | | 13.64 | | | 1.8 | |
| Non-qualified stock options | 457,482 | | | 3.43 | | | 1.6 | |
| PRSUs: 2020 award | 57,627 | | | 13.81 | | | 0.8 | |
| Employee stock purchase plan instruments | 38,069 | | | 3.01 | | | 0.1 | |
| | | | | |
| Quarter ended March 31, 2022 | | | | | |
| | | | | |
| | | | | |
| Restricted stock units | 88,250 | | | 13.03 | | | 1.1 | |
| | | | | |
| | | | | |
| Employee stock purchase plan instruments | 38,512 | | | 3.39 | | | 0.1 | |
| | | | | $ | 11.8 | |
A PRSU
An MRSU award represents a target number of units that may be paid out at the end of a multi-yearthree-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 2 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. The assumptions used to determine the grant date fair value are indicated below. | | | | | | | | |
| | November 30, 2021 |
| Variables used in determining grant date fair value: | | |
| Dividend yield | | 1.70 | % |
| Risk-free rate | | 0.76 | % |
| Expected term (in years) | | 2.83 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding.
At March 31, 2022, the outstanding Phantom Plan instruments had a fair value of $12.92 per instrument and our liability for Phantom Plan instruments was $2.1 million and is included within Other current and Other noncurrent liabilities.
Stock options generally vest ratably over three years on each anniversary date. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below. | | | | | |
| November 30, 2021 |
| Dividend yield | 1.62 | % |
| Risk-free rate | 1.33 | % |
| Expected term (in years) | 6.00 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the options are expected to be outstanding.
A PRSU award consists of a number of units that may be paid out at the end of a three-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we determineestablish the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, we consider that portion of a PRSU award to be granted. Thus, each award consists of a grant in the year of award and grants in the designatedtwo following years. SettlementSettlements, in our common shares, will range from zero to two2 times the number of PRSUs granted, depending on our financial performance againstrelative to the targets. As determined at the date of award, PRSUs may settle in cash-value equivalent of, or directly in, shares of our common stock.
We awarded 171,288 stock-settled PRSUs in the quarter ended December 31, 2017 scheduled to settle in three years.
We issued 146,061 shares and 263,410did not issue any shares of common stock to settle PRSUs vested during the quartersthree months ended DecemberMarch 31, 2017 and 2016, respectively,2022; however, we issued 240,412 shares of common stock to settle PRSUs.
In additionPRSUs vested during the six months ended March 31, 2022. Additionally, we issued 104,380 and 235,095 shares of common stock to the PRSU activity, 213,532settle restricted stock units vested during the quarterthree and six months ended DecemberMarch 31, 2017.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At December 31, 2017, the outstanding Phantom Plan instruments had a fair value2022, respectively. Finally, we issued no shares of $12.53 per instrument and our liability for Phantom Plan instruments was $1.2 million.
We granted stock-based compensation awards under the 2006 Stock Plan, the Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan and the Phantom Plancommon stock to settle stock options exercised during the three months ended DecemberMarch 31, 2017 as follows.2022; however, we issued 24,153 shares of common stock to settle stock options exercised during the six months ended March 31, 2022.
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| | | | | | | | | | | |
| | | Number granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
| Restricted stock units | | 171,288 |
| | $ | 12.41 |
| | $ | 2.1 |
|
| Employee stock purchase plan instruments | | 35,099 |
| | 2.28 |
| | 0.1 |
|
| Phantom Plan awards | | 160,672 |
| | 12.41 |
| | 2.0 |
|
| PRSUs: 2018 award | | 57,092 |
| | 12.41 |
| | 0.7 |
|
| 2017 award | | 71,070 |
| | 12.41 |
| | 0.9 |
|
| 2016 award | | 71,072 |
| | 12.41 |
| | 0.9 |
|
| | | | | | | $ | 6.7 |
|
Income from continuing operationsOperating income included stock-based compensation expense of $2.4$2.5 million and $2.7 million duringin each of the three months ended DecemberMarch 31, 20172022 and 2016,2021. Operating income included stock-based compensation expense of $5.1 million and $5.0 million during the six months ended March 31, 2022 and 2021, respectively. At DecemberMarch 31, 2017,2022, there was approximately $8.9$13.3 million of unrecognized compensation expense related to stock-based compensation arrangements and 185,270there were 58,139 PRSUs that have been awarded for the 2019 and 20202022 performance periods,period for which performance goals have not been set.goal achievement cannot yet be determined.
We excluded 70,996944,631 and 323,010 of664,082 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended March 31, 2022 and 2021, respectively, and 563,299 and 447,086 for the quarterssix months ended DecemberMarch 31, 20172022 and 2016,2021, respectively, since their inclusion would have been antidilutive.
Note 9. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below. | | | | | | | | | | | |
| | March 31, | | September 30, |
| | 2022 | | 2021 |
| | | |
| | (in millions) |
| Inventories: | | | |
| Purchased components and raw material | $ | 137.4 | | | $ | 100.9 | |
| Work in process, net | 46.4 | | | 41.6 | |
| Finished goods, net | 45.4 | | | 42.2 | |
| Total inventories | $ | 229.2 | | | $ | 184.7 | |
| | | |
| Other current assets: | | | |
| Prepaid expenses | $ | 13.1 | | | $ | 12.8 | |
| Non-trade receivables | 10.7 | | | 10.7 | |
| Maintenance and repair supplies and tooling | 2.3 | | | 2.9 | |
| Income taxes | 0.2 | | | 0.2 | |
| Workers’compensation reimbursement receivable | 1.7 | | | 0.8 | |
| Other current assets | 3.6 | | | 1.9 | |
| Total other current assets | $ | 31.6 | | | $ | 29.3 | |
| | | |
| Property, plant and equipment: | | | |
| Land | $ | 5.5 | | | $ | 6.1 | |
| Buildings | 86.7 | | | 84.6 | |
| Machinery and equipment | 446.1 | | | 433.3 | |
| Construction in progress | 93.0 | | | 83.7 | |
| Total property, plant and equipment | 631.3 | | | 607.7 | |
| Accumulated depreciation | (339.0) | | | (324.3) | |
| Property, plant and equipment, net | $ | 292.3 | | | $ | 283.4 | |
| | | |
| Other noncurrent assets: | | | |
| Operating lease right-of-use assets | $ | 25.7 | | | $ | 27.1 | |
| Maintenance and repair supplies and tooling | 20.5 | | | 19.3 | |
| Workers’ compensation reimbursement receivable | 5.0 | | | 2.7 | |
| Pension asset | 19.0 | | | 16.8 | |
| Note receivable | 1.8 | | | 1.8 | |
| Deferred financing fees | 1.1 | | | 1.3 | |
| Other noncurrent assets | 3.8 | | | 4.3 | |
| Total other noncurrent assets | $ | 76.9 | | | $ | 73.3 | |
Selected supplemental liability information is presented below. | | | | | | | | | | | |
| | March 31, | | September 30, |
| | 2022 | | 2021 |
| | | |
| | (in millions) |
| Other current liabilities: | | | |
| Compensation and benefits | $ | 32.4 | | | $ | 44.6 | |
| Customer rebates | 7.7 | | | 19.6 | |
| Warranty accrual | 5.9 | | | 6.7 | |
| Deferred revenue | 7.6 | | | 5.4 | |
| Refund liability | 5.2 | | | 6.0 | |
| Taxes other than income taxes | 5.5 | | | 4.4 | |
| Operating lease liabilities | 3.8 | | | 4.0 | |
| Workers’ compensation accrual | 3.1 | | | 2.6 | |
| CARES Act payroll tax liabilities | 3.6 | | | 3.6 | |
| Restructuring liabilities | 2.1 | | | 3.1 | |
| Environmental liabilities | 1.2 | | | 1.2 | |
| Interest payable | 5.3 | | | 6.2 | |
| Income taxes payable | 1.7 | | | 8.5 | |
| Other current liabilities | 7.4 | | | 11.2 | |
| Total other current liabilities | $ | 92.5 | | | $ | 127.1 | |
| | | |
| Other noncurrent liabilities: | | | |
| Operating lease liabilities | $ | 23.0 | | | $ | 24.6 | |
| Warranty accrual | 1.7 | | | 3.0 | |
| Transition tax liability | 4.1 | | | 4.7 | |
| Uncertain tax position liability | 4.7 | | | 4.8 | |
| NMTC liability | 3.9 | | | 3.9 | |
| Workers’ compensation accrual | 10.6 | | | 7.9 | |
| Asset retirement obligation | 3.6 | | | 3.6 | |
| CARES Act payroll tax liabilities | — | | | 3.6 | |
| Deferred development grant | 2.5 | | | 2.5 | |
| Other noncurrent liabilities | 3.0 | | | 3.4 | |
| Total other noncurrent liabilities | $ | 57.1 | | | $ | 62.0 | |
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 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.
The following table summarizes information concerning our goodwill balance in the six months ended March 31, 2022, in millions. | | | | | |
Note 8.Balance at September 30, 2021 | Supplemental Balance Sheet Information
$ |
Selected supplemental balance sheet information is presented below.
|
| | | | | | | |
| | 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 |
|
| 115.1 | |
Note 9.Acquisition adjustments | Segment Information
0.1 | |
| Effects of changes in foreign currency exchange rates | 0.6 | |
| Balance at March 31, 2022 | $ | 115.8 | |
Note 10. Segment Information
We adopted a new management structure effective October 1, 2021 which resulted in a change to our reportable segments. Prior period information has been recast to conform to the current presentation. The recasting has no effect on our previously reported consolidated balance sheets, consolidated statements of operations, or consolidated statements of cash flows. The two newly named business units and reportable segments are Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Summarized financial information for our segments is presented below. | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| March 31, | | March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions) |
| Net sales, excluding intercompany: | | | | | | | |
| Water Flow Solutions | $ | 183.9 | | | $ | 147.1 | | | $ | 338.8 | | | $ | 275.9 | |
| Water Management Solutions | 126.6 | | | 120.4 | | | 244.0 | | | 229.0 | |
| $ | 310.5 | | | $ | 267.5 | | | $ | 582.8 | | | $ | 504.9 | |
| Operating income (loss): | | | | | | | |
| Water Flow Solutions | $ | 35.4 | | | $ | 29.7 | | | $ | 66.7 | | | $ | 52.8 | |
| Water Management Solutions | 11.7 | | | 18.3 | | | 23.2 | | | 35.3 | |
| Corporate | (12.9) | | | (14.6) | | | (26.8) | | | (26.9) | |
| $ | 34.2 | | | $ | 33.4 | | | $ | 63.1 | | | $ | 61.2 | |
| Depreciation and amortization: | | | | | | | |
| Water Flow Solutions | $ | 7.5 | | | $ | 7.5 | | | $ | 14.9 | | | $ | 14.9 | |
| Water Management Solutions | 7.3 | | | 7.2 | | | 15.0 | | | 14.4 | |
| Corporate | — | | | — | | | 0.1 | | | 0.1 | |
| $ | 14.8 | | | $ | 14.7 | | | $ | 30.0 | | | $ | 29.4 | |
| Strategic reorganization and other charges: | | | | | | | |
| Water Flow Solutions | $ | — | | | $ | — | | | $ | — | | | $ | 0.1 | |
| Water Management Solutions | 0.1 | | | (0.7) | | | 0.1 | | | (0.7) | |
| Corporate | 0.5 | | | 1.5 | | | 2.9 | | | 2.8 | |
| $ | 0.6 | | | $ | 0.8 | | | $ | 3.0 | | | $ | 2.2 | |
| Capital expenditures: | | | | | | | |
| Water Flow Solutions | $ | 12.1 | | | $ | 13.8 | | | $ | 21.5 | | | $ | 26.1 | |
| Water Management Solutions | 2.9 | | | 1.7 | | | 4.5 | | | 4.9 | |
| Corporate | — | | | — | | | — | | | 0.1 | |
| $ | 15.0 | | | $ | 15.5 | | | $ | 26.0 | | | $ | 31.1 | |
| Water Flow Solutions disaggregated net revenue: | | | | | | | |
| Central | $ | 50.7 | | | $ | 38.4 | | | $ | 91.2 | | | $ | 73.4 | |
| Northeast | 31.1 | | | 22.4 | | | 61.1 | | | 47.3 | |
| Southeast | 40.7 | | | 29.9 | | | 78.0 | | | 53.0 | |
| West | 45.8 | | | 43.4 | | | 83.9 | | | 79.7 | |
| United States | 168.3 | | | 134.1 | | | 314.2 | | | 253.4 | |
| Canada | 14.0 | | | 11.1 | | | 21.9 | | | 16.8 | |
| Other international locations | 1.6 | | | 1.9 | | | 2.7 | | | 5.7 | |
| $ | 183.9 | | | $ | 147.1 | | | $ | 338.8 | | | $ | 275.9 | |
| Water Management Solutions disaggregated net revenue: | | | | | | | |
| Central | $ | 34.6 | | | $ | 32.3 | | | $ | 63.4 | | | $ | 59.2 | |
| Northeast | 28.4 | | | 24.2 | | | 52.7 | | | 48.6 | |
| Southeast | 26.3 | | | 24.7 | | | 51.8 | | | 47.5 | |
| West | 22.3 | | | 23.1 | | | 47.0 | | | 45.2 | |
| United States | 111.6 | | | 104.3 | | | 214.9 | | | 200.5 | |
| Canada | 8.7 | | | 9.4 | | | 16.3 | | | 16.1 | |
| Other international locations | 6.3 | | | 6.7 | | | 12.8 | | | 12.4 | |
| $ | 126.6 | | | $ | 120.4 | | | $ | 244.0 | | | $ | 229.0 | |
|
| | | | | | | |
| | 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. | Accumulated Other Comprehensive Loss
|
Note 11. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive lossincome (loss) is presented below.as follows: | | | | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Total |
| | | | | |
| (in millions) |
| Balance at September 30, 2021 | $ | (22.2) | | | $ | 17.2 | | | $ | (5.0) | |
| Current period other comprehensive income | 0.7 | | | 2.1 | | | $ | 2.8 | |
| Balance at March 31, 2022 | $ | (21.5) | | | $ | 19.3 | | | $ | (2.2) | |
Note 12. 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. Legal costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a materialmaterially adverse effect on our businessfinancial position, results of operations, cash flows or prospects.liquidity.
Environmental. We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“Tyco”), sold our businesses to a previous owner in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999, including environmental liabilities. The indemnity survives indefinitely. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the Tyco indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such Tyco indemnitors has changed. Should any of these Tyco indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suit against Mueller Canada Ltd. and its directors seeking C$10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. Mueller Canada Ltd. leased the property from 1988 through 2008. We are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification. On December 7, 2011, the Court denied the plaintiff’s motion for summary judgment.
The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“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’sthe 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. Accordingly, becauseSince the amountamounts of such costs cannot be reasonably estimated at this time, no amounts hadhave been accrued for this matter at DecemberMarch 31, 2017.2022.
Walter Energy. Each member
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. We have taken action and continue to counter such disruption, and work to protect the safety of our employees. We are uncertain of the Walter Energy consolidated group, which included us through December 14, 2006, is jointly and severally liable for the federal income tax liability of each other memberpotential full magnitude or duration of the consolidated group for any yearbusiness and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the pandemic affects our results will depend on future developments, the outbreak could result in which it is a member of the group at any time during such year. Accordingly, we could be liable in the event any such federal income tax liability is incurred, and not discharged, by any other member of the Walter Energy consolidated group for any period during which we were included in the Walter Energy consolidated group.
Walter Energy effectively controlled all of our tax decisions for periods during which we were a member of the Walter Energy consolidated group for federal income tax purposes and certain combined, consolidated or unitary state and local income tax groups. Under 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) relatingmaterial effects 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). 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 11 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 proceeding to determine whether we could be liable for all or a portion of this federal income tax 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 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 proceeding in the United States Bankruptcy Court for the Middle District of Florida. In the proof of claim, the IRS included an alternative calculation in the event the alleged settlement of the prior bankruptcy court is found to be non-binding, which provides for a claim by the IRS in an aggregate amount of $860.4 million ($535.3 million of which the IRS claims is entitled 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’sfuture financial position, but such potential difference could be material to its results of operations, cash flows and liquidity.
Mass Shooting Event at our Mueller Co. Facility in Albertville, Alabama. On June 15, 2021, we experienced a future reporting period.
Accordingmass shooting event at our Mueller Co. facility in Albertville, Alabama, in which two employees were killed and two employees were injured. Various claims arising from the event have been filed to 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, 363date and 365 of the Bankruptcy Code. The Walter April 2016 Filing further statedwe anticipate that Walter Energy would have no further material business operations after April 1, 2016additional claims may be made 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 taxthat liability thereunder, remain unresolved.
On February 2, 2017, at the request of Walter Energy, the Bankruptcy Court for the Northern District of Alabama signed an order converting the Chapter 11 Case to a liquidation proceeding 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 outcome of these claims, or legal proceedings, and related effects arising from this event cannot be predicted with certainty.
Indemnifications. We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.
Additionally, in connection with the sale of assets and the divestiture of businesses, such as the divestitures of U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.
Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.
Other Matters. We monitor and analyze our warranty experience and costs periodically and may revise our accruals as necessary. Critical factors in our analyses include warranty terms, specific claim situations, general incurred and projected failure rates, the nature of product failures, product and labor costs, and general business conditions.
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 businessfinancial position, results of operations, cash flows or prospects.liquidity.
| |
Note 12. | Note 13. Subsequent Events |
On January 24, 2018,April 22, 2022, our boardBoard of directorsDirectors declared a dividend of $0.05$0.058 per share on our common stock, payable on or about FebruaryMay 20, 20182022 to stockholders of record at the close of business on February 9, 2018.May 10, 2022.
| |
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. federal securities laws. 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, environmental/sustainability plans, go-to-market strategies, operational excellence, acceleration of new product development, financial or operating performance, litigation outcomes, capital allocation and growth strategy plans, restructuring efficiencies and projected 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 regional, nationalthe future impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections); logistical challenges and supply chain disruptions related to the COVID-19 pandemic, geopolitical conditions, or global political, economic, business, competitive, marketother events; an inability to realize the anticipated benefits from our operational initiatives, including our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois, plant closures, and our reorganization and related strategic realignment activities; an inability to attract or retain a skilled and diverse workforce, increased competition related to the workforce and labor markets; an inability to protect the Company’s information systems against service interruption, misappropriation of data or breaches of security; failure to comply with personal data protection and privacy laws; cyclical and changing demand in core markets such as municipal spending, construction, and natural gas distribution; government monetary or fiscal policies; the impact of adverse weather conditions; the impact of manufacturing and product performance; the impact of wage, commodity and materials price inflation; the impact of warranty claims; an inability to successfully resolve significant legal proceedings or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; climate change and legal or regulatory conditionsresponses thereto; changing regulatory, trade and tariff conditions; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; an inability to achieve some or all of our Environmental, Social and Governance goals; and other factors that are described underin the section entitled “RISK FACTORS” in Item 1A.1A of our annual reportthe Company’s most recent Annual Report on Form 10-K forand later filings on Form 10-Q.
Forward-looking statements do not guarantee future performance and are only as of the year ended September 30, 2017 (“Annual Report”).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. TheYou are advised to review any further disclosures the Company does not have any intention or obligation to update forward-looking statements, except as required by law.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.
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. We manage our businesses and report operations through two business segments, Infrastructure and Technologies, based largely on the products sold and the customers served.
Overview
Organization
On October 3, 2005, 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 the 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, we sold our former Anvil segment. Amounts applicable to Anvil have been classified as discontinued operations.
Business
We expect 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. We expect the residential construction market to grow faster than municipal spending.
Infrastructure
We estimate approximately 60%55-60% of Infrastructure’s 2017our 2021 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 30%30-35% were related to residential construction activity and approximatelyless than 10% were related to natural gas utilities.utilities spending.
Infrastructure announced price increasesWe expect the operating environment during fiscal year 2022 to be very challenging as a result of the uncertainty around the depth and duration of the pandemic which has accelerated and may continue to accelerate, inflation, labor availability and global supply chain disruptions. We anticipate that growth in the residential construction end market will help offset anticipated challenges in the project-related portion of the municipal market. In April 2022, Blue Chip Economic Indicators forecasted housing growth of 3% for calendar 2022 as compared with the prior year on valves, hydrantscontinued robust demand for housing and gas products effective in February 2018low inventories.
We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable manufacturing variances, labor shortages, and additional cleaning, including disinfectants and sanitation materials, for its U.S.our employees and Canadian markets.at our facilities. We believeexpect to continue to incur such costs that some customers may accelerate orders priorbe significant as we continue to respond to the pandemic. All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced due to the pandemic. The last such closure was in August 2020. The pandemic also caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist in the near term and may worsen until the pandemic abates.
We announced a new management structure effective dateOctober 1, 2021. The new structure is designed to increase revenue growth, drive operational excellence, accelerate new product development and enhance profitability. We anticipate the reorganization will strengthen the alignment of the price increases.products, solutions and services with customer needs, accelerate new product introductions and improve product life cycle management. The two newly named business units and reportable segments are Water Flow Solutions and Water Management Solutions.
TechnologiesWater Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Flow Solutions represented 56% of our fiscal 2021 net sales. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Water Management Solutions represented 44% of our fiscal 2021 net sales.
The municipal market is the key end market for Technologies. These businesses 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, and its growth strategy is focused on the AMI segment of the market. Mueller Systems’ 2018 first quarter AMI backlog was lower at December 31, 2017 than at December 31, 2016. Echologics had a greater number of projects under contract at at December 31, 2017 than at December 31, 2016.
Results of Operations
Three Months Ended DecemberMarch 31, 20172022 Compared to Three Months Ended DecemberMarch 31, 2016
|
| | | | | | | | | | | | | | | |
| | Three months ended December 31, 2017 |
| | Infrastructure | | Technologies | | Corporate | | Total |
| | (in millions) |
| Net sales | $ | 160.1 |
| | $ | 18.2 |
| | $ | — |
| | $ | 178.3 |
|
| Gross profit | $ | 52.5 |
| | $ | 2.9 |
| | $ | — |
| | $ | 55.4 |
|
| Operating expenses: | | | | | | | |
| Selling, general and administrative | 24.4 |
| | 7.5 |
| | 7.9 |
| | 39.8 |
|
| Gain on sale of idle property | — |
| | — |
| | (9.0 | ) | | (9.0 | ) |
| Strategic reorganization and other charges | — |
| | 0.1 |
| | 3.8 |
| | 3.9 |
|
| | 24.4 |
| | 7.6 |
| | 2.7 |
| | 34.7 |
|
| Operating income (loss) | $ | 28.1 |
| | $ | (4.7 | ) | | $ | (2.7 | ) | | 20.7 |
|
| Pension costs other than service | | | | | | | 0.2 |
|
| Interest expense, net | | | | | | | 5.2 |
|
| Income before income taxes | | | | | | | 15.3 |
|
| Income tax benefit | | | | | | | (39.8 | ) |
| Income from continuing operations | | | | | | | $ | 55.1 |
|
| | | | | | | | |
| | Three months ended December 31, 2016 |
| | Infrastructure | | Technologies | | Corporate | | Total |
| | (in millions) |
| Net sales | $ | 146.3 |
| | $ | 20.9 |
| | $ | — |
| | $ | 167.2 |
|
| Gross profit | $ | 47.6 |
| | $ | 4.2 |
| | $ | — |
| | $ | 51.8 |
|
| Operating expenses: | | | | | | | |
| Selling, general and administrative | 21.3 |
| | 6.4 |
| | 8.6 |
| | 36.3 |
|
| Other charges | 0.1 |
| | — |
| | 1.2 |
| | 1.3 |
|
| | 21.4 |
| | 6.4 |
| | 9.8 |
| | 37.6 |
|
| Operating income (loss) | $ | 26.2 |
| | $ | (2.2 | ) | | $ | (9.8 | ) | | 14.2 |
|
| Pension costs other than service | | | | | | | 0.3 |
|
| Interest expense, net | | | | | | | 6.4 |
|
| Income before income taxes | | | | | | | 7.5 |
|
| Income tax expense | | | | | | | 2.1 |
|
| Income from continuing operations | | | | | | | $ | 5.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2022 |
| | Water Flow Solutions | | Water Management Solutions | | Corporate | | Total |
| | | | | | | |
| | (in millions) |
| Net sales | $ | 183.9 | | | $ | 126.6 | | | $ | — | | | $ | 310.5 | |
| Gross profit | 57.0 | | | 35.8 | | | — | | | $ | 92.8 | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative | 21.6 | | | 24.0 | | | 12.4 | | | 58.0 | |
| Strategic reorganization and other charges | — | | | 0.1 | | | 0.5 | | | 0.6 | |
| Total operating expenses | 21.6 | | | 24.1 | | | 12.9 | | | 58.6 | |
| Operating income (loss) | $ | 35.4 | | | $ | 11.7 | | | $ | (12.9) | | | 34.2 | |
| Non-operating expenses: | | | | | | | |
| Pension benefit other than service | | | | | | | (1.0) | |
| Interest expense, net | | | | | | | 4.5 | |
| Income before income taxes | | | | | | | 30.7 | |
| Income tax expense | | | | | | | 7.1 | |
| Net income | | | | | | | $ | 23.6 | |
| | | | | | | |
| | Three months ended March 31, 2021 |
| | Water Flow Solutions | | Water Management Solutions | | Corporate | | Total |
| | | | | | | |
| | (in millions) |
| Net sales | $ | 147.1 | | | $ | 120.4 | | | $ | — | | | $ | 267.5 | |
| Gross profit | 49.3 | | | 39.1 | | | — | | | $ | 88.4 | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative | 19.6 | | | 21.5 | | | 13.1 | | | 54.2 | |
| Strategic reorganization and other (credits) charges | — | | | (0.7) | | | 1.5 | | | 0.8 | |
| Total operating expenses | 19.6 | | | 20.8 | | | 14.6 | | | 55.0 | |
| Operating income (loss) | $ | 29.7 | | | $ | 18.3 | | | $ | (14.6) | | | 33.4 | |
| Pension benefit other than service | | | | | | | (0.8) | |
| Interest expense, net | | | | | | | 6.1 | |
| Income before income taxes | | | | | | | 28.1 | |
| Income tax expense | | | | | | | 7.2 | |
| Net income | | | | | | | $ | 20.9 | |
Consolidated Analysis
Net sales forin the quarterthree months ended DecemberMarch 31, 20172022 increased $11.1$43.0 million or 16.1% to $178.3$310.5 million from $167.2as compared with $267.5 million duein the prior period primarily toas a result of higher pricing across most of our product lines and increased shipment volumes, including
volumes. In the additionprior year quarter, net sales benefited as a result of Singer Valve, and improved pricing at Infrastructure, which were partially offset by volume decline at Technologies.$6.0 million of additional Krausz sales from the elimination of the one-month reporting lag.
Gross profit forin the quarterthree months ended DecemberMarch 31, 20172022 increased $3.6$4.4 million to $55.4$92.8 million from $51.8$88.4 million in the prior year period, primarily due toas a result of higher pricing across most of our product lines, and increased shipment volumes improved pricing and Infrastructure's improved operating efficiencies and other manufacturing cost savings,which were partially offset by increased material costs.higher costs of sales associated with inflation, and unfavorable manufacturing performance. Gross margin increased to 31.1% forwas 29.9% in the quarterthree months ended DecemberMarch 31, 20172022 as compared to 31.0%with 33.0% in the prior year period.
Selling, general and administrative expenses (“SG&A”&A”) forin the quarterthree months ended DecemberMarch 31, 20172022 increased to $39.8$58.0 million from $36.3$54.2 million in the prior year period due primarily toas a result of inflation, higher travel and trade show expenditures, investments in engineering and information technology, and the acquisitioninclusion of Singer Valve during the second quarter of last year and higher personnel-related expenses.i2O. SG&A as a percentage of net sales was 22.3%18.7% and 20.3% for the three months ended March 31, 2022 and March 31, 2021, respectively.
Strategic reorganization and other charges in the quarterthree months ended DecemberMarch 31, 20172022 were $0.6 million which primarily consisted of restructuring expenses including costs associated with the closures of our facilities in Aurora, Illinois, and 21.7%Surrey, British Columbia, Canada. Strategic reorganization and other charges for the three months ended March 31, 2021 were $0.8 million, which primarily consisted of termination benefits associated with the announced closures of our facilities in the prior year period.Aurora, Illinois and Surrey, British Columbia, Canada, as well as legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property.
Interest expense, net declined $1.2$1.6 million in the quarterthree months ended DecemberMarch 31, 20172022 as compared towith the prior year period.period primarily as a result of the refinancing of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”) with the 4.0% Senior Notes on May 28, 2021. The components of net interest expense net are provided below. | | | | | | | | | | | |
| Three months ended |
| March 31, |
| 2022 | | 2021 |
| | | |
| | (in millions) |
| 5.5% Senior Notes | $ | — | | | $ | 6.2 | |
| 4.0% Senior Notes | 4.5 | | | — | |
| Deferred financing costs amortization | 0.3 | | | 0.3 | |
| ABL Agreement | 0.2 | | | 0.2 | |
| Capitalized interest | (0.6) | | | (0.6) | |
| Other interest cost | 0.2 | | | 0.1 | |
| Total interest expense | 4.6 | | | 6.2 | |
| Interest income | (0.1) | | | (0.1) | |
| Interest expense, net | $ | 4.5 | | | $ | 6.1 | |
|
| | | | | | | |
| | Three months ended |
| | December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Term Loan | $ | 4.8 |
| | $ | 5.1 |
|
| Interest rate swap contracts | 0.4 |
| | 0.6 |
|
| Deferred financing costs amortization | 0.5 |
| | 0.4 |
|
| ABL Agreement | 0.2 |
| | 0.2 |
|
| Other interest expense | 0.1 |
| | 0.2 |
|
| | 6.0 |
| | 6.5 |
|
| Interest income | (0.8 | ) | | (0.1 | ) |
| | $ | 5.2 |
| | $ | 6.4 |
|
On December 22, 2017, tax legislation was enacted that made significant revisions to federal income tax laws, including lowering the corporate income tax rate to 21 percent from 35 percent, overhauling the taxation of income earned outside the United States and eliminating or limiting certain deductions. Since the effective date of the tax rate change was January 1, 2018, we are subject to a blended federal statutory tax rate of 24.5 percent throughout fiscal 2018.
For the quarter ended December 31, 2017, we reported a net income tax benefit of $39.8 million, which was driven by a benefit of $42.6 million related to remeasurement of our net deferred income tax liabilities using the enacted tax rates in effect when we expect to recognize the related tax expenses or benefits. Other than this remeasurement benefit, income tax expense was $2.8 million, or 18.3 percent of income before income taxes. For the 2017 first quarter, income tax expense was 28.0 percent of income before 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 |
| March 31, |
| 2022 | | 2021 |
| 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 | 3.6 | | | 4.2 | |
| Excess tax benefits related to stock-based compensation | — | | | (0.3) | |
| Tax credits | (1.3) | | | (1.1) | |
| Global Intangible Low-taxed Income | 0.8 | | | 0.6 | |
| Foreign income tax rate differential | (1.4) | | | (0.3) | |
| Valuation allowances | (0.3) | | | (0.6) | |
| Other | 0.7 | | | 2.1 | |
| Effective income tax rate | 23.1 | % | | 25.6 | % |
|
| | | | | |
| | Three months ended |
| | December 31, |
| | 2017 | | 2016 |
| U.S. federal statutory income tax rate | 24.5 | % | | 35.0 | % |
| Adjustments to reconcile to the effective tax rate: | | | |
| State income taxes, net of federal benefit | 4.3 |
| | 3.9 |
|
| Valuation allowance adjustment related to stock compensation | (5.7 | ) | | — |
|
| Excess tax benefits related to stock compensation | (2.8 | ) | | (7.6 | ) |
| Domestic production activities deduction | (1.6 | ) | | (3.3 | ) |
| Tax credits | (0.9 | ) | | (0.8 | ) |
| Other | 0.5 |
| | 0.8 |
|
| | 18.3 | % | | 28.0 | % |
| Remeasurement of deferred taxes for change in rates | (278.4 | )% | | — | % |
| Effective income tax rate | (260.1 | )% | | 28.0 | % |
Also under this legislation, we are subject to a one-time transition tax on undistributed foreign earnings, but the amount of this tax is not reasonably estimable at this time. Accordingly, no provision for this tax has been recorded, but will be recorded later in 2018.
Segment Analysis
InfrastructureWater Flow Solutions
Net sales forin the quarterthree months ended DecemberMarch 31, 20172022 increased 9.4%25.0% to $160.1$183.9 million as compared to $146.3with $147.1 million in the prior year period primarily due to higheras a result of increased shipment volumes and higher pricing across most of the addition of Singer Valve and favorable pricing.segment’s product lines.
Gross profit forin the quarterthree months ended DecemberMarch 31, 20172022 increased 15.6% to $52.5$57.0 million from $47.6 million in the prior year period due to increased shipment volumes, improved operating efficiencies and other manufacturing cost savings. Gross margin increased to 32.8% for the quarter ended December 31, 2017 compared to 32.5% in the prior year period.
SG&A for the quarter ended December 31, 2017 increased to $24.4 million from $21.3 million in the prior year period. SG&A was 15.2% and 14.6% of net sales for the quarters ended December 31, 2017 and 2016, respectively. These increases in SG&A were primarily due to higher personnel-related expenses and the additional SG&A of Singer Valve.
Technologies
Net sales in the quarter ended December 31, 2017 declined to $18.2 million from $20.9$49.3 million in the prior year period primarily due to lower AMIas a result of higher pricing and increased shipment volumes, partially offset by higher costs associated with inflation and unfavorable manufacturing performance. Gross margin was 31.0% in the three months ended March 31, 2022 and 33.5% in the prior year period.
SG&A in the three months ended March 31, 2022 increased leak detection sales.to $21.6 million from $19.6 million in the prior year period primarily as a result of investments in engineering and information technology, increased travel and trade show expenditures, and inflation. SG&A as a percentage of net sales was 11.7% and 13.3% in the three months ended March 31, 2022 and 2021, respectively.
Water Management Solutions
Net sales in the three months ended March 31, 2022 increased 5.1% to $126.6 million as compared with $120.4 million in the prior year period, primarily as a result of higher pricing and increased shipment volumes across most of the segment’s product lines as well as the acquisition of i2O Water. Net sales in the three months ended March 31, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.
Gross profit in the quarterthree months ended DecemberMarch 31, 20172022 was $2.9$35.8 million as compared to $4.2with $39.1 million in the prior year period. Gross margin declined to 15.9%28.3% in the quarterthree months ended DecemberMarch 31, 20172022 as compared to 20.1%with 32.5% in the prior year period. These declinesperiod primarily as a result of unfavorable manufacturing performance, and higher cost of sales associated with inflation, which were primarily due to loweronly partially offset by higher pricing and increased shipment volumes.
SG&A increased to $7.5$24.0 million in the quarter ended December 31, 2017 compared to $6.4from $21.5 million in the prior year period due to personnel-related expenses.primarily as a result of investments in engineering and information technology, the inclusion of i2O Water, inflation, and increased travel and trade show expenditures. SG&A increased to 41.2%as a percentage of net sales was 19.0% and 17.9% in the three months ended March 31, 2022 and 2021, respectively.
Corporate
SG&A decreased to $12.4 million in the three months ended March 31, 2022 as compared with $13.1 million in the three months ended March 31, 2021 primarily as a result of decreased personnel-related expenses and outside services.
Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended March 31, 2022 |
| | Water Flow Solutions | | Water Management Solutions | | Corporate | | Total |
| | | | | | | |
| | (in millions) |
| Net sales | $ | 338.8 | | | $ | 244.0 | | | $ | — | | | $ | 582.8 | |
| Gross profit | 109.1 | | | 71.3 | | | — | | | $ | 180.4 | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative | 42.4 | | | 48.0 | | | 23.9 | | | 114.3 | |
| Strategic reorganization and other charges | — | | | 0.1 | | | 2.9 | | | 3.0 | |
| Total operating expenses | 42.4 | | | 48.1 | | | 26.8 | | | 117.3 | |
| Operating income (loss) | $ | 66.7 | | | $ | 23.2 | | | $ | (26.8) | | | 63.1 | |
| Non-operating expenses: | | | | | | | |
| Pension benefit other than service | | | | | | | (2.0) | |
| Interest expense, net | | | | | | | 8.8 | |
| Income before income taxes | | | | | | | 56.3 | |
| Income tax expense | | | | | | | 13.3 | |
| Net income | | | | | | | $ | 43.0 | |
| | | | | | | |
| | Six months ended March 31, 2021 |
| | Water Flow Solutions | | Water Management Solutions | | Corporate | | Total |
| | | | | | | |
| | (in millions) |
| Net sales | $ | 275.9 | | | $ | 229.0 | | | $ | — | | | $ | 504.9 | |
| Gross profit | 91.2 | | | 75.6 | | | — | | | $ | 166.8 | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative | 38.3 | | | 41.0 | | | 24.1 | | | 103.4 | |
| Strategic reorganization and other charges (credits) | 0.1 | | | (0.7) | | | 2.8 | | | 2.2 | |
| Total operating expenses | 38.4 | | | 40.3 | | | 26.9 | | | 105.6 | |
| Operating income (loss) | $ | 52.8 | | | $ | 35.3 | | | $ | (26.9) | | | 61.2 | |
| Pension benefit other than service | | | | | | | (1.6) | |
| Interest expense, net | | | | | | | 12.2 | |
| Income before income taxes | | | | | | | 50.6 | |
| Income tax expense | | | | | | | 13.0 | |
| Net income | | | | | | | $ | 37.6 | |
Consolidated Analysis
Net sales in the six months ended March 31, 2022 increased $77.9 million or 15.4% to $582.8 million as compared with $504.9 million in the prior period primarily as a result of increased shipment volumes and higher pricing across most of our product lines. Net sales in the six months ended March 31, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.
Gross profit in the quartersix months ended DecemberMarch 31, 20172022 increased $13.6 million to $180.4 million from 30.6%$166.8 million in the prior year period, primarily as a result of nethigher pricing and increased shipment volumes which were partially offset by higher costs of sales associated with inflation, unfavorable manufacturing performance including labor challenges, and supply chain disruptions. Gross margin was 31.0% in the six months ended March 31, 2022 as compared with 33.0% in the prior year period.
SG&A was $7.9 million in the quartersix months ended DecemberMarch 31, 2017 compared2022 increased to $8.6$114.3 million from $103.4 million in the prior year period primarily as a result of higher travel and trade show expenditures, inflation, investments in engineering and information technology and the inclusion of i2O Water. SG&A as a percentage of net sales was 19.6% and 20.5% for the six months ended March 31, 2022 and 2021, respectively.
Strategic reorganization and other charges in the six months ended March 31, 2022 were $3.0 million which primarily consisted of expenses associated with the Albertville tragedy, and our ongoing restructuring activities. Strategic reorganization and other charges in the six months ended March 31, 2021 were $2.2 million and primarily related to restructuring activities, and legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property.
Interest expense, net declined $3.4 million in the six months ended March 31, 2022 as compared with the prior year period primarily as a result of the refinancing of our 5.5% Senior Notes with the 4.0% Senior Notes on May 28, 2021. The components of net interest expense are provided below. | | | | | | | | | | | |
| Six months ended |
| March 31, |
| 2022 | | 2021 |
| | | |
| | (in millions) |
| 5.5% Senior Notes | $ | — | | | $ | 12.4 | |
| 4.0% Senior Notes | 9.0 | | | — | |
| | | |
| Deferred financing costs amortization | 0.5 | | | 0.6 | |
| ABL Agreement | 0.4 | | | 0.4 | |
| Capitalized interest | (1.2) | | | (1.1) | |
| Other interest cost | 0.3 | | | 0.2 | |
| Total interest expense | 9.0 | | | 12.5 | |
| Interest income | (0.2) | | | (0.3) | |
| Interest expense, net | $ | 8.8 | | | $ | 12.2 | |
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below. | | | | | | | | | | | |
| | Six months ended |
| March 31, |
| 2022 | | 2021 |
| 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 | 3.6 | | | 4.2 | |
| Excess tax benefits related to stock-based compensation | (0.2) | | | (0.2) | |
| Tax credits | (1.3) | | | (1.1) | |
| Global Intangible Low-taxed Income | 0.8 | | | 0.6 | |
| Foreign income tax rate differential | (1.4) | | | (0.3) | |
| Valuation allowances | 0.2 | | | (0.2) | |
| Other | 0.9 | | | 1.7 | |
| Effective income tax rate | 23.6 | % | | 25.7 | % |
| | | |
Segment Analysis
Water Flow Solutions
Net sales in the six months ended March 31, 2022 increased 22.8% to $338.8 million as compared with $275.9 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.
Gross profit in the six months ended March 31, 2022 increased 19.6% to $109.1 million from $91.2 million in the prior year period primarily as a result of higher pricing and increased shipment volumes, partially offset by higher costs associated with inflation and unfavorable manufacturing performance. Gross margin was 32.2% in the six months ended March 31, 2022 and 33.1% in the prior year period.
SG&A in the six months ended March 31, 2022 increased to $42.4 million from $38.3 million in the prior year period primarily as a result of increased travel and trade show expenditures, inflation, and investments in engineering and information technology. SG&A as a percentage of net sales was 12.5% and 13.9% in the six months ended March 31, 2022 and 2021, respectively. Water Management Solutions
Net sales in the six months ended March 31, 2022 increased 6.6% to $244.0 million as compared with $229.0 million in the prior year period, primarily as a result of higher pricing across most of the segment’s product lines and increased shipment volumes. Net sales in the six months ended March 31, 2021 benefited by $6.0 million as a result of the elimination of the one-month reporting lag for Krausz.
Gross profit in the six months ended March 31, 2022 was $71.3 million as compared with $75.6 million in the prior year period. Gross margin decreased to 29.2% in the six months ended March 31, 2022 as compared with 33.0% in the prior year period primarily as a result of higher cost of sales associated with inflation and unfavorable manufacturing performance which were partially offset by higher pricing and increased shipment volumes.
SG&A increased to $48.0 million from $41.0 million in the prior year period primarily as a result of investments in engineering, the inclusion of i2O Water, inflation, and increased travel and trade show expenditures. SG&A as a percentage of net sales was 19.7% and 17.9% in the six months ended March 31, 2022 and 2021, respectively.
Corporate
SG&A decreased to $23.9 million in the six months ended March 31, 2022 as compared with $24.1 million in the six months ended March 31, 2021 primarily as a result of lower personnel-related expenses partially offset by inflation.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $348.3$164.1 million at DecemberMarch 31, 20172022 and $96.3$160.1 million of additional borrowing capacity under our ABL Agreement based on DecemberMarch 31, 2017 data, which, along with cash generated by operations, would be our source of incremental liquidity.2022 data. Undistributed earnings from our subsidiaries in Canada, China, and ChinaIsrael are considered to be permanently invested outside the United States. At DecemberMarch 31, 2017,2022, cash and cash equivalents included $12.1$43.1 million, $11.3 million, and $7.2$4.6 million in Israel, Canada, and China, respectively.
We expect the recently enacted tax law changesdeclared a quarterly dividend of $0.058 per share on April 22, 2022, payable on or about May 20, 2022 to benefit our liquidity through reductionholders of record as of May 10, 2022, which will result in overall income tax liability and through provisions allowing immediate deductibility for capital assets placed in service in the next five years. This benefit will be partially offset by payment of the transition tax discussed above. However, the transition tax may be paid over eight years, and we do not expect any payments to have a material liquidity impact in any particular year.an estimated $9.2 million cash outlay.
We repurchased shares$20.0 million of our outstanding common stock for $10 million during the quartersix months ended DecemberMarch 31, 2017,2022 and we had $180$115.0 million remaining onof our share repurchase authorization at that date.authorization.
The ABL Agreement and Term Loan4.0% Senior Notes contain customary representations and warranties, covenants and provisions governing an event of default. The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.
Cash flows from operating activities of continuing operations are categorized below.
|
| | | | | | | |
| | Three months ended |
| | December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Collections from customers | $ | 216.1 |
| | $ | 194.6 |
|
| Disbursements, other than interest and income taxes | (211.3 | ) | | (203.5 | ) |
| Interest payments, net | (4.4 | ) | | (5.6 | ) |
| Income tax refunds (payments), net | 0.1 |
| | (5.4 | ) |
| Cash provided by (used in) operating activities | $ | 0.5 |
| | $ | (19.9 | ) |
Collections from customers were higher during the threesix months ended DecemberMarch 31, 20172022 as compared towith the prior year period primarily due to the timingas a result of cash receipts and net sales growth.
Increased disbursements, other than interest and income taxes,growth between the periods. Inventory purchases increased during the threesix months ended DecemberMarch 31, 2017 reflect higher purchasing activity, higher costs for raw materials,2022 as compared with the six months ended March 31, 2021 as a result of inflation, increased sales volume and differences in the timingsupply change management. Other current liabilities and other noncurrent liabilities decreased as a result of expenditures.
Incomeemployee incentive payouts, income tax payments, were lower during the three months ended December 31, 2017 compared torepayment of the prior year period because we beganCARES Act employer payroll tax deferral and the current year quarter with U.S. federal income taxes prepaid.payment of customer rebates.
Capital expenditures were $6.4$26.0 million in the threesix months ended DecemberMarch 31, 20172022 as compared to $4.2with $31.1 million in the prior year period. We estimate 2018Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period. For fiscal year 2022, we have provided guidance that our capital expenditures willare expected to be between $40$70.0 million and $48 million, although we are also evaluating possibilities for additional capital expenditures in 2018.$75.0 million.
We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through DecemberMarch 31, 2018. However,2023.
We believe that additional borrowings through various financing alternatives remain available if required. The future effects of the pandemic cannot be predicted with certainty and may increase our ability to make these payments will depend partly upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, businessborrowing costs and other factors beyondcosts of capital or otherwise adversely affect our control.financial condition and liquidity, and we cannot guarantee that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues in the future.
ABL Agreement
At DecemberMarch 31, 2017,2022, the ABL Agreement consisted of a $175.0 million revolving credit facility forwhich includes up to $225$25.0 million of revolving credit borrowings, swing line loans and may have up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150$150.0 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR, plus aan applicable margin ranging from 125200 to 150225 basis points, or a base rate, as defined in the ABL Agreement, plus aan applicable margin ranging from 25100 to 50125 basis points. At DecemberMarch 31, 2017,2022, the applicable LIBOR-based margin for LIBOR was 125200 basis points and for base rate loans was 100 basis points.
The ABL Agreement terminates on July 13, 2021. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of 25 basis points per annum.
The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventories or (ii) 85% of the net orderly liquidation value of the value of eligible inventories,inventory, less certain reserves. Prepayments can be made at any time with no penalty.
Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventories, accounts receivable, certain cash and other supporting obligations.related items.
The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million andor 10% of the Loan Cap underas defined in the ABL Agreement. Excess availability based on March 31, 2022 data was $160.1 million, as reduced by $14.7 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.
Term Loan4.0% Senior Unsecured Notes
We had $485.1On May 28, 2021, we privately issued $450.0 million face value outstanding under the Term Loan at December 31, 2017. Term Loan borrowings accrueof 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at a floating rate equal to LIBOR, subject to a floor4.0%, paid semi-annually in June and December. We capitalized $5.5 million of 0.75%, plus 250 basis points. We may voluntarily repay amounts borrowed underfinancing costs, which are being amortized over the Term Loan at any time. The principal amountterm of the Term Loan is required4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand were used to be repaid in quarterly installments of $1.225 million. The Term Loan matures on November 25, 2021. The Term Loan is guaranteed by substantiallyredeem previously existing 5.5% Senior Notes. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL Agreement. Based on quoted market prices the outstanding 4.0% Senior Notes had a fair value of $426.0 million at March 31, 2022.
An indenture governing the 4.0% Senior Notes (“Indenture”) contains customary covenants and secured by essentiallyevents 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 March 31, 2022.
As set forth in the Indenture, we may redeem some or all of our assets, although the ABL Agreement has4.0% Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices. Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices. Upon a senior claimchange in control, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Notes, which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Senior Notes effective June 17, 2021 and settled with proceeds from the issuance of the 4.0% Senior Notes and cash on certain collateral securing borrowings thereunder.hand. As a result, we incurred $16.7 million in loss on extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs associated with the retirement of the 5.5% Senior Notes.
Our corporate credit rating and the credit rating for our debt are presented below. These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agencies. | | | | | | | | | | | | | | | | | | | | | | | |
| | Moody’s | | Standard & Poor’s |
| March 31, | | September 30, | | March 31, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Corporate credit rating | Ba1 | | Ba1 | | BB | | BB |
| ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
| 4.0% Senior Notes | Ba1 | | Ba1 | | BB | | BB |
| Outlook | Stable | | Stable | | Stable | | Stable |
|
| | | | | | | |
| | Moody’s | | Standard & Poor's |
| | December 31, | | September 30, | | December 31, | | September 30, |
| | 2017 | | 2017 | | 2017 | | 2017 |
| Corporate credit rating | Ba3 | | Ba3 | | BB- | | BB- |
| ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
| Term Loan | Ba3 | | Ba3 | | BB | | BB |
| Outlook | Stable | | Stable | | Stable | | Stable |
We enter into a variety of contractual obligations as part of our normal operations in addition to capital expenditures. As of March 31, 2022, we have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include cash interest payments of $18.9 million in 2022 and $18.0 million annually thereafter through 2029, (ii) cash obligations of $35.7 million for operating leases through 2033 and $2.2 million for finance leases through 2026, and (iii) purchase obligations for raw materials and other parts of approximately $148.2 million which we expect to incur during the next 12 months. We expect to fund these cash requirements from cash on hand and cash generated from operations.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance”finance” or “special purpose”purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, at DecemberMarch 31, 20172022 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases. Therefore, we were not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At DecemberMarch 31, 2017,2022, we had $17.5$14.7 million of letters of credit and $35.6$34.0 million of surety bonds outstanding.
Seasonality
Our business is dependent upon the construction industry, which is seasonal due toas a result of the impact of cold weather conditions. Net sales and operating income historically have historically been lowest in the quarterlythree month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
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Item 4. | CONTROLS AND PROCEDURES |
During the quarter ended December 31, 2017, there wereItem 4. CONTROLS AND PROCEDURES
There have been no changes in our internal control over financial reporting thatwhich have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting during the quarter ended March 31, 2022.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer have concluded, based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to the information provided in Note 11.12. to the Notes to the Condensed Consolidated Financial Statements presented in Item 11. of Part I of this report.
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Item 1A. | Item 1A. RISK FACTORS |
Recent changes in U.S. tax law may have a significant impact on our Company
On December 22, 2017, HR-1, formerly referred to as the Tax Cuts and Jobs Act, (“Act”) was signed into law, significantly impacting several sections of the Internal Revenue Code. The Act, among other things, reduces the corporate tax rate to 21% from 35%, limits the deductibility of interest expense and executive compensation and implements a modified territorial tax system which includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Act requires complex computations to be performed that were not previously required in U.S. tax law, judgments to be made in interpretation of the provisions of the Act and estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. We are continuing to examine the impact of the Act, including certain provisions that will become applicable to us in fiscal year 2019 related to base erosion anti-abuse tax (“BEAT”), global intangible low-taxed income (“GILTI”), and other provisions that could adversely affect our effective tax rate in the future. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation. Furthermore, because there may be additional state income tax implications, we will continue to monitor changes in state and local tax laws to determine if state and local taxing authorities intend to conform or deviate from changes to U.S. federal tax legislation as a result of the Act.
In addition to the risk factor above and other information set forth in this report, you should carefully consider the factors discussed in PART I, “Item 1A. RISK FACTORS” in our Annual Report, each of which could materially affect our business, financial condition or operating results. These described risks are not the only risks facing us. Additional risks and uncertainties not known to us or that we deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
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Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quartersix months ended DecemberMarch 31, 2017, we repurchased2022, 131,887 shares of our common stock, including shares repurchased under our existing share repurchase authorization and shareswere surrendered to us to pay the tax withholding obligations of participants in connection with the lapsingvesting of restrictions on restricted stock units, as follows.units.
We repurchased 1,408,274 shares of our common stock during the six months ended March 31, 2022 for $20.0 million under our share repurchase authorization, and we had $115.0 million remaining under this authorization.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum dollar value of shares that may yet be purchased under the plans or programs
(in millions) |
| October 1-31, 2021 | | — | | | $ | — | | | — | | | $ | 135.0 | |
| November 1-30, 2021 | | 618,216 | | | $ | 14.56 | | | 606,400 | | | 126.2 | |
| December 1-31, 2021 | | 914,033 | | | $ | 13.89 | | | 801,874 | | | 115.0 | |
| January 1-31, 2022 | | 329 | | | $ | 13.93 | | | — | | | 115.0 | |
| February 1-28, 2022 | | 7,583 | | | $ | 13.93 | | | — | | | 115.0 | |
| March 1-31, 2022 | | — | | | $ | — | | | — | | | 115.0 | |
| Total | | 1,540,161 | | | $ | 14.16 | | | 1,408,274 | | | |
|
| | | | | | | | | | | | | | |
| Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publically announced plans or programs | | Maximum dollar value of shares that may yet be purchased under the plans or programs (in millions) |
| October 1-31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
| November 1-30, 2017 | | 845,390 |
| | 12.15 |
| | 823,739 |
| | — |
|
| December 1-31, 2017 | | 122,753 |
| | 12.35 |
| | — |
| | — |
|
| Total | | 968,143 |
| | $ | 12.17 |
| | 823,739 |
| | $ | — |
|
Item 6. EXHIBITS |
| | | |
| Exhibit No. | | Document |
3.131.1* | |
|
10.20.5** | |
|
10.22.2** | |
|
10.29.2** | |
|
10.29.3** | |
|
10.30.2** | |
|
31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 32.2* | | |
| 101* | | |
| 104* | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its iXBRL tags are embedded within the Inline XBRL document. |
* Filed with this quarterly report
** Management compensatory plan, contract, or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | | | | | |
| | MUELLER WATER PRODUCTS, INC. |
| Date: | February 8, 2018May 3, 2022 | By: | /s/ Michael S. NancarrowSuzanne G. Smith |
| | | Michael S. NancarrowSuzanne G. Smith |
| | | Chief Accounting Officer |